What Can You Control In Investing? | AWM Insights #121
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Episode Summary
You should be investing, but that doesn’t mean you have to settle for a poor investing experience. The broker selling you the next hot stock or Jim Cramer telling you to “buy, buy, buy” will not deliver the good experience nor the optimal returns you deserve.
Too many investors hear about the newest hot stock on the golf course or in the locker room. They then go out and buy it. This is the worst way to invest because there is no foundational plan.
Actively implementing a sound investing process involves minimizing taxes, reducing expenses, and eliminating frictional costs to your returns. It also keeps emotions in check and reduces anxiety or uncertainty. This is the process of building a bullet-proof financial structure.
The foundation for multi-generational wealth starts with focusing on what is controllable and through this process the value system is created, which can then be repeated generation after generation.
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Episode Highlights
(0:47) Over the past few weeks we’ve gone over the lessons of embracing market pricing, don’t outguess the market, and not chasing past performance. Embrace the power of markets working for us.
(1:18) Don’t pick stocks. The data is proven you will underperform the index.
(1:43) Jim Cramer yelling buy, buy, buy about stock or a Goldman broker pitching the next IPO is all nonsense.
(2:15) What are the things you can actually control in the investing process?
(2:48) Taxes are a huge impact and should be considered in investment decisions.
(3:00) Expenses in the form of expense ratios you pay for mutual funds or ETFs. Keeping these low will help them not to eat into your returns.
(3:55) Putting the focus and emphasis on what you have control over leads to higher confidence of achieving priorities. You don’t have to guess which way the market is going daily, weekly, or even monthly.
(4:10) Financial structure is having a sound in place that provides the foundation for investing. It is what gives the discipline to shoot down the golf course chatter about a hot stock or mutual fund.
(5:21) The right process will give you better expectations of success because of the discipline created in that very same process.
(5:49) Only optimizing for costs won’t result in better returns. Optimizing for the value created should always be the standard.
(6:40) Chasing lower costs is directly correlated with poorer outcomes. Qualified advisors add value far above their costs.
(7:06) Trades are usually “free” but there are still implicit costs like the bid-ask spread. These frictional costs seep out of your returns over time.
(8:00) Expense ratios, trading costs, and taxes are all frictional costs that hurt the growth of your investments. The compounding effects over long periods of time cannot be ignored.
(8:57) Global diversification and discipline must be foundational to your investment philosophy. It’s too easy to wander off track if you don’t establish the discipline.
(9:35) The end client/investor is always in control of their financial structure. You have to be an active participant in this process.
(10:25) Your assets both human capital and financial capital should be managed in a way that gives your the best chance of success to meet your goals. This is the customization and investing experience you should expect.
(11:25) A better investing experience means higher confidence in reaching your goals. It is optimizing for you the individual family, not for standard deviation or market volatility.
(11:47) The foundation for multi-generational wealth starts with focusing on the controllable and establishing a value system that can be repeated generation after generation into the future.
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+ Read the Transcript
Brandon Averill (00:07): All right, Justin. Well, we finally made it. We're at the, let's just say the end, I guess the end of a series. Certainly not the end of some learnings and we're not...
Justin Dyer (00:16): Hold your applause.
Brandon Averill (00:17): Yeah. We're not wrapping up the podcast. Don't cry and go away yet. But we are wrapping up this series and really this topic we've been tackling, which is pursuing a better investment experience. And our hope is over the past few weeks and episodes, hopefully you guys have taken something away. We've gone over a lot. We've gone over really, some of the big lessons, embracing market pricing, don't out guess the market, let's not pretend that we're smarter than we are. Let's actually look at the data. Let's resist chasing past performance. We also know that doesn't work, and let's just gain the rewards, right? Let's let the markets actually work for us. Let those markets continue to build our wealth for us. Consider drivers of returns. Don't just passively close your eyes and throw your money in and say, "Hey, I'm not going to look at it." But really look at the data, find out where those areas are that maybe you can have a little extra exposure and make sure to allocate there.
Justin Dyer (01:18): Don't don't pick stocks though.
Brandon Averill (01:19): Don't pick stocks. Yeah. Very clear. Hopefully this isn't your first episode and took that away. Smart diversification, diversify globally. Those are lessons that we've learned time and time again, not always the easiest to implement, but make sure you're doing that. And then don't let all this noise really creep in, right? The headlines that are going on that Jim Kramer's "Buy, buy, buy. Sell, sell, sell." The Goldman broker that's calling you and saying they got the next hot IPO. It's all nonsense, right? And don't allow those big news headlines, those things that are motivated by capturing your attention and selling you ads or selling you some products, some product driven type sales pitch. Let's stay away from all those. And today's episode, what we want to hit on is somewhat a culmination of those lessons, but then also the big one, right? Focusing on what you can actually control in this process. Maybe start there for us, Justin, maybe just unpack a little bit. When we start to think about the things that we actually can control in this process. What would you point to?
Justin Dyer (02:27): Well, first and foremost, I think it goes back to everything we've talked about, right? That is something you can control. You can make an active decision whether or not to tune out the noise, but really what we're getting at when we say that is a more active component on what you can control, right? I guess, by definition, if you will, taxes, those are a big things. Be aware of the tax impact of your decisions. Expenses. Really, very much related to taxes in certain circumstances, but expenses can come in the form of expense ratios that you pay a mutual funder, an ETF, most products like that have expenses. They're not all bad, but be aware of them, make sure you're keeping those as low as possible, because they eat into your returns.
Justin Dyer (03:19): Your overall financial structure, how you're defining success. These are all really, really important things to think about. And these are things that you can control in your day to day investment experience and really worth taking a step back to properly understand. But in some cases also really properly define, what is success? What is your financial structure? What should your resulting portfolio look like? All of these things get into this idea of what you can control. And the beautiful thing about that is if you focus on that, it gives you more confidence and a greater ability to deal with these things that you just highlighted, Brandon. Don't out guess the market, manage your emotions, because there's this really well rounded foundation. Again, we use the term financial structure, but plan in place too.
Justin Dyer (04:11): You could summarize it as having that sound plan in place that gives you that foundational understanding to say, "Oh, I know why we're doing this because there's an answer on the other side of it, as opposed to just sticking your finger up and say, "Oh, well the market's doing X, Y, Z. I'm going to react to that because of something I read online or heard from a buddy on the golf course, or at a cocktail party," whatever the case may be. Those reactions never... You never say never, don't generally end up as a very sound, repeatable investment process, right? That's really what this culmination of controlling what you control is to take a step back, do the homework, understand what's important, understand what detracts from returns, things that we've hit on throughout this entire series, and then implement actively a process that takes all of this into account and really gives you a more robust, higher expectation of success going forward.
Brandon Averill (05:24): I think those are great points. And I think maybe even framing it one way, I think would be helpful for whoever's listening, Justin, is probably it's an end client listening, or prospect, or somebody hopefully that's working with an advisor to implement these things, but you hit on one thing like low cost. When I'm talking with clients or prospective clients from time to time, the question is, "Okay, so we just optimize for cost." And what goes into that? You hit on expense ratio, but there's trade costs. There's tax efficiency costs, turnover costs, all those types of things, right? It's not always just go pick the lowest cost ETF. There's nuance in that.
Justin Dyer (06:06): There totally is. And it goes back to looking at the data. It's a great question to ask when you're talking about, "Hey, let's just control for cost." The primary reason we do that is because you look at the data and higher cost does not correlate with bringing you higher returns. In fact, the exact opposite is true. Cost, at a minimum, let's talk about expense ratio. That's the manager fee. That is directly correlated with poorer outcomes. It really is. And that's an easy thing for us all to understand, but then we get into things like taxes and you said trading costs, those are costs, those are frictions within a portfolio when you buy and sell things, there is always a cost. Even if, we live in a world now where trade commissions largely are free within most large brokerage firms or online platforms and whatnot, there's still an embedded cost.
Justin Dyer (07:07): There's something called a, "Bid, ask, spread," and I'm not going to get into the weeds too much there, but there's a difference between what someone's buying it for and what someone's selling it for. And that difference is an implicit cost, that doesn't show up in anyone's rate of return. It does get siphoned off as a frictional cost within investing. And the more times you do that, the more you're losing, you're seeping money into the system and not keeping it in your pocket.
Justin Dyer (07:35): Those taxes, that's a more straightforward one, but these things add up over time, especially the more turnover you have. And at the end of the day, you're left with less in your pocket. And even almost more importantly, you're left with less in your portfolio to continue to compound on itself, time and time again, into the future. That's what we mean by cost, it's not one simple metric, although controlling for pure management fees is a pretty, pretty strong signifier of what generally should be a better investment return on a go forward basis, all things being equal, right? But there are these additional things to be aware of, taxes, trading costs and whatnot that really do detract from your overall rate of return.
Brandon Averill (08:21): Yeah. To stick along this theme, I think this is a great, maybe a great thing. If you do have an advisor, you're thinking about hiring an advisor, great question to ask, how do you control for costs?
Justin Dyer (08:32): Yeah.
Brandon Averill (08:32): What goes into that? How do you select positions for the portfolio that are going to be in my best interest from a cost standpoint, from a tax efficiency standpoint, certainly, and to continue down those themes, right? Some other things that you can control for, your advisor certainly should be controlling for is global diversification.
Justin Dyer (08:51): Right.
Brandon Averill (08:52): We hit on that. Making sure that we're disciplined through the ups and downs. We're going through this current, in the current market environment, you want to make sure that your advisor is really sound, right, in understanding there's a lot of noise out there.
Brandon Averill (09:09): They're not going to dial for dollars every time there's a market movement and try to buy the dips and sell the highs and this type of thing. It's a typical wirehouse sales tool that they teach you, but stay away from that stuff. That's within your control to make sure that your advisor is controlling for those as well. But then overall, I think you hit on it, Justin, when we boil, bring all of this and we tie a big bow on it, you as the end client or the end investor always are in control of your financial structure, right? Your advisor can only do so much when it comes to this, implementation, they better be an expert. They better know how to do all these things, but you have to be a real active participant, right, in the financial structure at the end of the day.
Justin Dyer (09:53): Yeah. The way in which we view that is your financial structure is a true, unique representation of who you are. Some people might have dominant human capital, where they're still earning, they're in their earning years, if you will, other people have financial, or realize financial capital that dominates their financial structure. And then making sure that those assets, whether it's realized or unrealized are then built or managed in a way that is unique to you and specific to you and your priorities, your goals. That is how we define success. Building a portfolio that has the most robust, or highest expectation to meet your goals at the end of the day is our benchmark. That's how we define success. And if you can combine that custom portfolio with a really well defined investment experience that we've been talking through this entire series, right?
Justin Dyer (10:57): All of these elements of focusing on what you can control, global diversification, being aware of taxes, managing your emotions, et cetera, et cetera. That's what I was alluding to earlier. All of this brought together is just a really, really powerful outcome that is not sacrificing returns actually at the end of the day. In fact, we feel very strongly and confidently that putting this all together as we've been discussing leads to an overall better investment experience, which is not just some touchy feely statement, it's a more robust, more confident way in which you can go about managing wealth.
Brandon Averill (11:35): Yeah, absolutely. I think when you sit down and what we've designed our company to, and the types of clients that we try to work with, right, are those that think about the potential or have the ability already to have multi-generational wealth, and really frame everything through that context. If you're trying to win the lottery or hit it big, that's probably not the right approach, what we've been talking about for the past few weeks. But if you're trying to maximize your wealth for your lifetime for future generations, I'd challenge you to find a more robust way to go about it and a more sustainable way to go about it. You're not going to have to ride those highs and lows. You're going to have a lot of confidence in your overall financial structure in how things are planned for.
Brandon Averill (12:17): Hopefully this series has been helpful. We'd love to hear from you. As you know, you can shoot us a text. That phone number again is (602) 704-5574. We'd love to hear your feedback. If this series was helpful, if we should do more stuff like this, that'd be awesome. But until next time, own your wealth, make an impact, and always be a pro.