If Video Killed the Radio Star? What will social media kill?

We’re not waiting to see.

Here’s our new channel on YouTube with a new series. Gurus: Before and After.  Prognostications: before and after.  We love to watch the guru.

Did you know guru means ‘teacher’?  So. First? Dr. Doom himself, Nouriel Roubini.

Most people continue to focus on the wrong side of the ledger when it comes to their finances.

The truth is, even with advisors, most people typically underperform the stock market. And frankly, there’s probably a glut of 70-80% too many people in this industry.  No Lie.  It’s the last bastion of how the internet changes the world. Money 2.0. 

Of course, to beat the market is truly an arbitrary benchmark. The true benchmark for success is your personal financial success or failure, but that’s a different post.  So, you hire experts to manage your money thinking this is what will make you successful. And now, most of the energy is spent on how you invest, vs. how you spend and save.

And for all of this guidance and expertise on how to invest, the numbers are telling. According to Dalbar, an industry research firm, over the past 20 years investors in stock mutual funds have underperformed the S&P500 by 6.5% a year.  (8.35% vs. 1.37%.)  Investors did even worse in bonds, underperforming the Barclay’s Aggregate by 6.7% a year (7.43% vs. 0.77%.).  That return doesn’t even keep up with inflation (historically assumed to be 3%–certainly lower lately though). 

This is reality, let it sink in.  You are probably one of these people. Sadly, this story is nothing new. It’s been going on for years, but we keep tackling the same pursuit, higher returns.  Because this is the magic bullet, right?  

We are inundated with ads for better mutual funds with more stars, or sold on the idea that Advisors know about the better money managers.  We do this instead of really delving into how you manage your day-to-day spending and saving.  

And Why? Because 1) Your advisor doesn’t get paid to help you save money or optimize your day-to-day finances and 2)if your advisor told you most of their activity (which is profitable for the firm) is hurting you rather than helping–you’d fire them.  And that my friends is the heart of issue with today’s advice givers, they’d prefer to sell you on performance and the promise of high returns, rather than what you need. 

In fact, when I told an old colleague of my pursuits to deal in this reality– he said, "Scotty, if you do that–why do clients need you?…"

But here’s a simple illustration…(click to enlarge).

 

Assume you were the smart money in the Gravy Years (1985-2008) and invested like Harvard and Yale. You’d outperform the market (S&P 500) by about 3-4% a year.  You’d outperform the conservative 60/40 (60% Stocks/40% Bonds) by .5% more.  But look at your Worst Years, clearly Harvard and Yale look really smart, BUT even the 60/40 portfolio isn’t looking too bad.  The point of this exercise isn’t performance vs. risk (another post), it’s an exercise in the big picture….

 

The ’smart money’ (which most of the investing public clearly is not) doubles the money over the course of your whole investing life (45 year) about 9 times, whereas the market and moderate (60/40) approach double about 8 times.  So, you have to ask yourself a few questions when you see that hot portfolio from your broker.  

1. how many more times is this change going to add to my chance of doubling my money?  
2. How much more risk am I taking for those extra doubles? 
3. Now do this….Take all of the money you have today and double it 8 times, now double it 9 times.  
4. Is that 9th double really making the difference?

It’s the pile of cash that you are dealing with that makes the big difference. As such, I’d argue, your day-to-day interaction with money is a much more powerful fulcrum.  

Be Honest–How much time and energy do you spend on how much you save vs. how your investments are doing?  If you are like most, you are operating almost completely on the wrong side of the ledger.  And frankly, it’s the difference between my successful clients and the ones who make $500k a year and are still looking for the next pay day. Trust me, we’ve got them on a plan now. But others, we don’t.  Not everyone uses our planning service (yikes). 

Here’s a small but illustrative example: assume you save $2500 a year for 40 years at 11.5% a year.  In a compound calculation (which is flawed because investments don’t compound every year) for point of simplification and illustration, you’d be look at numbers in the neighborhood below—

Now, what’s more powerful?  The extra double of your money (and all the extra risk, and probable failure) OR the pile of cash you throw into the mix? 

And the here’s the super awesome part.  Your everyday effort to accumulate wealth is more controllable, more stable. And frankly, it’s something everyone can achieve vs. being & beating the truly smart money. Think about that the next time you want to do something fancy in your portfolio. Now, think about how much money you are leaking….

Of course, this exercise it’s not nearly as exciting; what would CNBC talk about? Something useful? (i kid)

And mostly sadly, it’s not what your current Advisor gets paid to help you with.  Unless of course, you’re at GDP…. 

The truth of the matter is, most of the people in my industry are sales monkeys. I should know, to some that’s what I may seem like.  

I worked for one of the ‘majors’. I spent almost 10 years in the industry. I’ve attended all of the conferences. And I have seen all of the types of people we label a success and failure in this business.  

A couple of my favorites are still the rich boy or girl playing banker with their family and friend’s money.  Then there’s the hard nose, pushy person who argues their way into your wallet, gotta love ‘the street’ in them.  And the truth is, we know this.  Yet, we perpetuate the cycle. Over, and over, and over.

We trick ourselves into thinking that if "so and so" is working at "such and such", then ‘this is what we should do’– this is how it works.   The media perpetuates it with guru worship, because you watch. Hollywood aids in it, with sexy voice overs ’cause it pays the bills. Politicians live by it because it’s easier. And if you really took the time to look, you’d notice– Wall Street is exactly like Amway; top heavy. 

The thing is, we know from behavioral science, the human condition likes to forget. Otherwise, we cannot be so brain-dead to think another $20 million in an ad campaign is going to make us forget.  How many times have we been burned, by the very people who feed us our information? Oh, no…

After much thought and personal debate about where to host such an endeavour to change this lemming movement, I’m starting a new series here at GDP.  

Everything your broker won’t tell you. Are you ready?

I started this firm because I wanted to change and fix what I thought was broken and wrong with Wall Street. Everyday I am closer to that vision, even in this mess.

Seeing markets rise and fall is an emotional trigger.

So. We all know it’s bad. We all know it’s going to get worse. The question is how “worse?” And it’s impossible to really say. I think we can all agree, that we disagree. And that’s the fun part of my job and what makes this country great.

Today, as we revisit November’s lows and look into the great wide open, the major policy that drives us frankly, is not overly compelling but does move the ball forward.

On the policy front, really where our dreams and hopes should be pinned (that’s the point of legislature), we’ve spent a big pile of money on a small pile of infrastructure projects that won’t achieve critical mass in a single area of our economy that needs improvement. Banking management and prudence continues to remain a joke. The specter of Bank Nationalization is passing the lips of those “that matter” on both sides of the isle with methodical (and growing) frequency. The Autos (and the US) better pray Apple wants the Auto industry’s dead carcass, to transform the industry in iPhone fashion. And sadly, while this week’s effort on the mortgage front is at the heart of the matter, it is arguably another miserable legislative failure.

It was on these key issues in the Congress, White House, and with our regulators that we pinned our hope. And as big as the numbers are from them, I truly am not sure it will do the trick (with my economic theorist hat on).

So, where is hope? What is left to see on the horizon from Washington? Probably another round of spending (almost hopefully) to truly check something off the list. The fact is, we’re already broke. At this point, we might as well have something to show for it. And here is more good news…

The market internals, are frankly not compelling. By some measures, the market could drop another 20%. And why risk it? Because if the bottom is only 5% away or 7% (which is where the near term-support exists), this market will quite possibly bounce precipitously again (like it did last Nov-Jan to the tune of 26%).  Any money that is remaining in stock market should arguably have a ten year timeline.  If you’ve not raised cash before this point in time, it would be hard to justify your move in many cases. We are (and remain) at the point of the unknowable. The market is (and has been since November) historically cheap (and getting cheaper).