Pursue the Better Investing Experience | AWM Insights #117
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Episode Summary
Results are what matter at the end of the day. We want to play the game that gets us the best results. The evidence presented in the last several podcasts has made it clear what you should focus on as an investor if you want the best results.
Average returns in capital markets have produced phenomenal results. Allowing the market to work for you in the long term can generate shocking results.
Do you have a strong financial structure? Are your short term priorities protected from bad markets, acute distress, or high inflation? Are you underinvesting for your long-term priorities? Do you hold too much cash? A clear and quality financial structure addresses every single of these concerns and increases financial wellness. This is how you build a better investing experience.
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Episode Highlights
(0:27) Play the game that gets the best results. Picking stocks and attempting to time the market does not have the odds in your favor.
(0:58) What do you get by allowing the market to work for you?
(1:29) What’s the data show? A single dollar invested in the S&P 500 in 1926 and let it ride until 2021 (95 years) would have grown into $14,076.
(1:49) This is a phenomenal rate of return so the question becomes why don’t we just accept that?
(2:06) There are ways that can target higher expected returns than just the average but the key is to make sure they’re evidence-based. Most strategies don’t have any evidence to back them up.
(2:25) Picking stocks and market timing don’t have any evidence to generate reliably better returns.
(3:01) Everyone should work with an advisor. The reason most investors don’t receive good returns is because of behavioral issues. They panic and sell at market bottoms, fear losing money so hold too much cash, and get emotionally attached to their positions.
(3:14) Professional athletes have coaches, executives have coaches, and it makes sense to have an advisor that serves as an investment coach.
(4:03) A lot has happened over the last 95 years including wars, crises, and revolutionary inventions but if you stayed a long-term investor in the capital markets it was a really good thing for you.
(4:25) Inflation fears are elevated right now but to put inflation in perspective, inflation turns the one dollar into $16. That is a tremendous loss of purchasing power if you don’t invest in the capital markets to outpace it.
(5:12) Fearing inflation and pulling your money out of the market is the worse thing you could do. Even just putting it into T-bills or short-term treasuries would have allowed you to narrowly outpace inflation.
(5:33) One of the best places to put your money to beat inflation is the capital markets. The data and evidence show you are rewarded over the long term for taking risks.
(6:17) Markets don’t always go up and to the right. Investors must understand markets will go down and accept the risks and volatility to get the higher expected returns.
(7:15) Capital must be put at risk to get the higher expected returns. Smaller caps are riskier and so should be expected to produce higher returns over the long term.
(7:49) Markets climb a wall of worry. If you appreciate the data and the opportunity of bear markets you will be rewarded in the long term.
(8:16) A coach (advisor) can reframe what’s important and why you’re investing in times of adversity.
(9:12) Markets rarely ever deliver close to average returns. Only 7 times in the past 96 years has the market returned between 8-12%. Annual returns are always very different than average.
(10:19) For our clients, market volatility does not worry us because we put the right financial structure in place that has been planned for these market periods.
(11:15) Not having the money or liquidity when you need it is poor financial structure. That is a big risk that isn’t necessary.
(11:52) Protecting essential spending or an adequate protective reserve is crucial to a strong financial structure. When you have this you can put the rest of your money at risk in private and public markets to target the better expected returns.
(13:15) An adequate protective reserve allows you to stay disciplined and put money to work efficiently and deliver a better investing experience for the long run.
(13:55) Are we trying to generate the absolute largest return and ignoring priorities?
(14:34) Establishing a strong financial structure allows you to take on more opportunities in the capital markets.
(15:02) Sitting on a ton of cash usually doesn’t align with priorities. Tying priorities to financial resources eliminates much of the fear of losing money in the short term.
(15:45) It is a powerful thing to reduce the risk of meeting short-term priorities and increase the odds of achieving long-term priorities. This is building a strong financial structure.
(16:20) Sitting on cash for too long can be a huge risk to priorities and usually indicates a lack of building the financial structure of the family.
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Justin Dyer: LinkedIn
Brandon Averill: LinkedIn
+ Read the Transcript
Brandon Averill (00:07): All right, Justin, we're back. We're going to continue the series here, pursuing a better investment experience, really stick on this train of just trying to help people to look at the data, find a better way, play different game. Quite frankly, we know that's what really matters at the end of the day is, are the results. And we want to play the game that gets us the best results over a period of time. And so last week we really hit on trying... We talked about why we don't want to try to out guess the market, whether that's picking individual equities, trying to figure out which companies are going to perform best, or even taking a look at the entire market and figuring out when to get in, when to get out and kind of play that whole mess, or which segments of the market to get in and out of and how that can be costly.
Brandon Averill (00:52): What we're going to turn to this week is really the exciting stuff. What do you actually get when you allow the market to work for you? And I think it's pretty astounding when you start to look at the numbers. Why don't, I mean, jump in there. I'd love to hear from you. I know you got some data to this, but every time I hear it, I'm just shocked. Maybe dig in, well,
Justin Dyer (01:13): The data point I'll start with, and it's long term, so I'll acknowledge that. However, it shows up from time and time again, over shorter period of time. But if you invested a single dollar in the S&P 500, starting in 1926 and let that ride over however many years that would've been to the end of last year, 2021. What is that? 95 years?
Brandon Averill (01:35): Right.
Justin Dyer (01:36): That one single dollar would've grown to be $14,076. That is an astounding rate of return for just staying in the market, for letting the market work for you. I mean, it really is. And it begs a question and I kind of say this tongue in cheek, but that's phenomenal. Why don't we all just accept that? No, I get it right. You want to try and outperform, there are some evidence backed ways in which you can outperform.
Justin Dyer (02:07): We've touched on that a little bit. And the key there is evidence, a lot of the evidence and what you were alluding to at the intro here at the outset of this conversation, that stuff is not backed up by any sound evidence, picking stocks, timing the market, et cetera, et cetera. There is a different game to play here. And that's what we're really trying to unpack within this series, but it's an astounding rate of return on an annualized basis. That's around 10% and we'll get into this a little bit. There's no free lunch. It's actually a... There's been a number of very, very, very stressful event over that period of time, which we'll get into.
Brandon Averill (02:50): Yeah, I think that's it right. A lot of it is behavioral and I can't fault to anybody for getting caught up in the behavioral side. I think it is one big argument for why everybody should work with an advisor. I mean, as professional athletes, we all work with coaches.
Justin Dyer (03:05): Totally.
Brandon Averill (03:05): As executives, we work with coaches, musicians, we work with coaches. Why we think that we can succeed at this game without coaches is kind of astounding, but we won't go on that tangent today. It's not the point of today's episode, but I do think it's an important point that if you had let the capital markets work over that 95 year period, I mean, you saw some pretty dramatic things. You saw world wars, planes flying into buildings.
Justin Dyer (03:33): Oh yeah.
Brandon Averill (03:33): You saw a recent, the COVID crisis that shut down the entire world.
Justin Dyer (03:39): Yeah.
Brandon Averill (03:39): Didn't just happen to the US. I think, we've seen these events negatively pop up. We have also seen a lot of, really the invention of the internet for God's sakes. I mean...
Justin Dyer (03:51): That little thing.
Brandon Averill (03:51): Yeah, just absolutely blew our world up positively in a lot of ways, negatively, probably in some people's viewpoints. But the point being is there has been a lot that has happened over that 95 years. And what we've seen is that if you were a long term investor and you allocated your capital to the capital markets, it was a really good thing for you. And I think, especially when you start to think about you highlighted that number of your $1 turning into a little over 14,000, a lot of people are getting caught up with the inflation game right now. Like, "Oh my gosh, what do I do?"
Brandon Averill (04:28): My purchasing power is going down. Over that same 95 period that $1 turned into 16.
Justin Dyer (04:36): Ouch.
Brandon Averill (04:36): Inflation went up pretty dramatically, but where would you have gotten the bank for your buck to combat inflation? Probably the capital markets. Your dollar turns into 14,000. That difference is pretty dramatic. And I guess just for the point of people that are a little fearful, when inflation kicks up or interest rates go up, where do you... They get panicked and they pull their money and they want to hold onto cash and they want bury it in their backyard and they don't want to lose it, et cetera. I mean, if you even did the small little benefit of investing in T-bills, treasury bills, you would've barely outpaced inflation over that period of time. I think at the end of the day, what we're trying to get across here is even through times that are scary, even through times of difficulty, the best place to put your money. Ultimately, or one of the best places I should qualify that is in the capital markets. There are other places, private markets, et cetera. That's beyond this podcast today.
Justin Dyer (05:38): Totally. And I would say too, there's also evidence in the numbers that, and I kind of was alluding to this. We're talking with that $14,000 number with the S&P 500 that's large cap stocks. You're even more rewarded if you look at small cap stocks so that these smaller capital market capitalization companies, same period of time, a dollar there would've turned into 37,000 and changed 37,400 to be specific. But the reason why I bring that up is because it's not a free lunch. It's not like, everything just goes up into the right. I mean, the last two years, although this year has definitely been the exception to that, which is good. It's actually healthy. And I don't say that lightly, but it's expected that markets correct that. In order to get these really strong, healthy rates of return, that reward patients, reward putting your money into the capital markets, you are taking risk, what's commonly referred to as risk and risk is most commonly understood to be volatility.
Justin Dyer (06:47): And without that, without what we're seeing right now, we wouldn't expect these long. We shouldn't expect these long term rates of return. And to your earlier point, what you were alluding to is over that 95 year period of time, we've seen all sorts of global events of adversity, also very positive things. But within that markets have gone up and down and there's been recessions. And the same general theory applies that in order to earn that rate of return, we put the capital at risk over that period of time, it goes up, it goes down and even more so in the small caps, it's one reason why small caps have a higher expected return because there is greater perceived risk there or real risk. They're smaller companies. They potentially go out of business easier. And so you should, as an investor, expect a higher rate of return to put your capital in there.
Justin Dyer (07:43): The adage I'll stop with is markets climb a wall of worry. I mean, it's one of those things that I love bringing up, especially in times like this, where yeah, it's difficult. It's a difficult time to be an investor, if you don't have this idea of pursuing a better investment experience using the data. But if you are able to use the data and appreciate what we're going through here, it actually is really... It should... It's not easy. You always have to come back to it. You need that coach to reframe, "Hey, what you're doing? What's the purpose here? What is important?" And we'll talk a little bit about financial structure, which I think really is the keystone to this, a cornerstone to all this, but it's always good to reframe this conversation in times of adversity.
Brandon Averill (08:30): Yeah. I think that's a fantastic point, Justin. I think, the thing I always try to remind clients about when I'm talking to them and our advisors try to do as well, but is that, we talk about this fantastic compounding of growth over this period of time and being a long term investor. And there's the talking heads out there that we'll talk about, "Oh, Dave Ramsey for one of them 10% returned in the markets." What he always forgets to give the advice out is, "Hey, you're never actually going to get 10% in a year."
Justin Dyer (09:04): Right.
Brandon Averill (09:05): This may be wrong, but I think there's actually never been a 10% exactly. What I do know is that because we had looked this up was only seven times in the last 96 years has the market actually returned between eight and 12% when the average is 10, that means we've had this disparity of returns year in and year out. In fact, they've been as high as 54% and as low as negative, 43%, those are pretty big swings.
Justin Dyer (09:34): Yep.
Brandon Averill (09:34): And so you're going to have to get rewarded with that long term rate of return, you're going to have to go through these periods of what we call volatility and be okay with that. And I think that's what you were hitting on Justin is the financial structure. I mean over the weekend, I got that question from a guy that I met was, "Man, are aren't you guys just stressed right now at the market." And it's uncomfortable. It's even uncomfortable for us. And fortunately we have the training to be able to look bigger picture and guide our clients through these periods. And that's in large part, what we're here for is to comfort our clients, to help reassure them, help look at the data and put the right financial structure in place.
Brandon Averill (10:16): And my answer is always, "You know what? For our clients, no." It's not a big worry point because we focus so much on putting the financial structure in place to protect them. I think during these periods where people really start to panic is because they're taking money, that they shouldn't be allocating to the markets that they shouldn't be allocating really to anything with any risk because they're counting on that money to fulfill some of their priorities in the short term. We were just chatting about this before we hit record. And we have a... This is a side tangent, but we have one of our private investments going on and somebody, we were talking to a perspective client, he wanted to commit a certain amount of capital. But then when we said, "Okay, you got to write the check." He was like, "Oh wait, I thought I had a few years to put this in."
Brandon Averill (11:05): Yeah. I mean the fact that you can't actually... You need to be able to actually put the money in that you're going to commit to right. Not bet on some future bonus or whatever it might be. That is a very poor financial structure. That is risk. And so hopefully when you're starting to allocate your capital, you're sitting down and figuring out, "Okay, over this short period of time, what are the essential priorities I have to meet? What are things that are really important to me that I want to make sure that those get fulfilled and then allow the excess of that really to be the, what drives your capital market allocations. I think that's, that's a key point to hit on.
Justin Dyer (11:42): Oh, it totally is. And just to add a different layer to that or a different provides more color to that. It's having that protective reserve as we call it or if you're spending... If you're no longer working and realizing your human capital, we call that essential spending and protecting essential spending. What that allows you to do to your point is the excess money that is not going to fund those important priorities over the short term or maybe it's a little bit longer if you're living off your portfolio, but having that protection allows you to put the excess at "risk" into the markets. If everything qualifies, you go into the public markets and then have a private market allocation as well, venture capital we love. But that also requires a significant lockup of liquidity.
Justin Dyer (12:38): And so it's bringing all of these factors into the equation to say, "Hey, okay, here's what you should have in really short or inflation protected positions to fulfill your important priorities." And guess what, because that you have enough to meet those priorities, to meet what that target is, the excess, whatever that may be, it's all custom and unique to each and every individual investor. The rest of that gets to be put into the market. Again, whether it's public or private depends on client situations and scenarios. But by having that proper financial structure in place, you are able to remain disciplined to take this series that we've been discussing over the last few episodes and really put that into practice. And what that allows you to do is then to realize over the long term, these really, really healthy, meaningful rates of return within the public markets specifically, at least that's what we're quoting today. And you should, if allocated properly to the private markets, you should be exposing yourself to the ability or chance to get very nice returns on that side as well.
Brandon Averill (13:46): And I think it's a good point just to kind of take a step back to what are we actually trying to accomplish here. Are we just trying to generate the absolute highest returns without giving any care to the risk, of actually achieving my priorities? I sure as heck hope not right. What we're trying to do is figure out what's really important to all of us. And then we're trying to design portfolios to make sure that we can achieve those priorities in the best possible way that we can. And so having that financial structure in place allows you to start to isolate that and build the portfolio that allows you the best opportunity to do that, and ultimately have the best investment experience that you possibly can in a lot of ways, establishing that financial structure actually allows you to take on more opportunity with the capital markets, because you start to realize, "Oh shoot, it's actually just a fear thing that I'm not going to hit these priorities. I actually have enough of an allocation set aside."
Brandon Averill (14:47): And when we see it all the time, we just met with a brand new client. They've done a fantastic job, saved a ton of money, very reasonable lifestyle. And they are sitting on a ton of cash just because they're afraid. They're afraid that things are... When we sat down with them and unpacked their priorities. We went through that process and really tied their priorities to their financial resources.
Brandon Averill (15:13): We are able to show them that, "Hey, you could cut this in half. We can use treasuries in some other ways, but we can cut this in half and actually make sure almost bulletproof, you make sure you can achieve all these priorities you want. On top of that, what that's going to allow you to do is to allow the capital markets to work for you, and more than likely grow your wealth over time and achieve your longer term priorities of passing this wealth on to your next generations and hopefully generations beyond that as well." It's a pretty powerful thing on both sides of the spectrum. Not only to reduce the risk that you can't meet your immediate priorities, but enhance the opportunity to meet longer term priorities.
Justin Dyer (15:53): Oh yeah. And I would just add insert there. Guess what that cash, that large sum of cash is not doing? It's not keeping up with inflation. Right now or otherwise. I mean, to your earlier point, you made that comment about what cash is, has earned over the long term. And unfortunately it's pretty low. There is a purpose for cash in some cases, if it matches with your priorities and your financial structure needs, but sitting on cash generally cost you and reframing it to match your priorities and building that financial structure that's custom to those priorities is just such a powerful way to think about it.
Brandon Averill (16:31): Yeah. And I think, we can start to dig in the next couple weeks just about the nuances of how we actually implement this. When we talk about the capital markets, there are, you've hinted at it. There are drivers at returns. There are some things that we can do to once we've figured out how much we can actually allocate to those capital markets, how to allocate them in the most effective way possible, based on the data, based on the driver of returns, not where we're predicting anything or we're moving money in and out, but really just making sure that we are allocated where we should be. And so we'll close out for this week, but again, reminder, shoot us a text. We want to hear from you guys, 602-704-5574. That text will come directly to me. We'll make sure to get back to you. And we would love to address your questions and topics on the future episodes, but until next time own your wealth, make an impact and always be a pro.