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….