Focusing on What You Can Control | AWM Insights #172
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Episode Summary
The news is usually saturated with events that are out of everyone’s control. This frequently triggers anxiety and panic.
From Government shutdowns to predictions of financial turmoil, we are pulled into being invested in and accepting certain negative situations without looking at the bigger picture and realizing that there are actions we can take to financially prepare for an assortment of situations and outcomes.
A well-diversified portfolio that is structured to meet and protect your critical priorities will shield you from the uncertainties that life and financial markets can throw your way. It’s essential to plan and prepare, instead of sitting back and predicting.
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Episode Highlights:
0:00 Intro
0:49 How do emotions impact financial markets and investing?
4:19 The power of planning and not predicting
6:15 How being a flexible investor and consumer improves your odds for success
8:43 The power of compounding returns and efficient portfolio management
10:40 Control what you can control
12:20 Tuning out the noise and staying consistent with your investment framework and thesis
13:53 Text us!
+ Read the Transcript
Brandon Averill (00:03): Hey, everybody. Welcome back to another episode of AWM Insights. It's Brandon and Justin here. We spent the past couple weeks really digging into what it means to build a multi-generational family, and really walk through the net worth sketch is a great example of what the formula is. And we really had some thoughts on how do we take this kind of another step further and how does this relate to our overall plan and really decided, let's go down a little bit of a path here and talk about life and investing. Life invested is probably what we're going to call this series, but really what are those life principles, those investing principles to tie really all of this together because at the end of the day, we can go back to the facts and figures. Eric always harps on us that you can get into the numbers, you can throw all these things out, but so much of investing is emotional.
(00:58): So much of it is your perception of what's going on. And so how do we tie all these things back together? So we're going to spend a little bit of time doing that today, specifically, we're going to talk through some of the main principles when it comes to investing. This is not an easy process. We can make it sound really easy and really mathematical, which it is at times, but the emotions also control us, control our actions, control our behaviors. And so no matter how familiar you are with investing in different walks of life, we've definitely all navigated different uncertainties. We've weighed risks and rewards. I think there's a lot of parallels back to investing. And so with that, Justin, maybe I'll throw it over to you. I would love you to start walk through what are some of these principles that we can turn back to time and time again to really provide confidence not only that our investment portfolio is allocated the right way, but then how do we start to work through the behavioral side so that way ultimately we do have that really, really good investing experience?
Justin Dyer (02:07): The first place I'd start is almost an encouragement to everyone listening, our clients and anyone outside. You know more about investing than you think you do. I think you were touching on this. There's a lot of similarities in how a lot of, especially high performing individuals live their life that you can take and apply to investing. Getting into the nitty-gritty, you hit on this, uncertainty actually creates opportunity. Everyone listening, everyone who is a mature adult I would hope, understands that there's just inherent uncertainty in life. And really that's the underlying principle of investing or why you should expect to earn a rate of return over and above what you can earn in cash in the stock markets or in your investments that are more at risk than they are if you're just holding a treasury bond as an example, and that is the uncertainty that is present.
(03:09): You're putting your money at risk for an uncertain future. Now, the one way you in which you can handle that or mitigate that effect is diversification. Diversification we often say is your true lunch. But with that, so I'm saying, "Oh well, uncertainty creates opportunity. It's why we expect returns," but it can be uncomfortable. And that's, I think, what we really want to hit on with this series is, there are these fundamental or theoretical aspects, these equations that we can throw out, these logical principles or logical approaches, but we need to acknowledge that there's this behavioral side, there's these feelings that money creates that seeing your portfolio go up and down create. And oftentimes the negative aspects of those feelings really, really overpower the positive aspects. And so bringing this up hopefully at least brings those two things a little bit more into balance.
(04:08): There's plenty of studies that show that's a really, really difficult thing to do, but we want to be there as your partner and really continue to encourage you. Next piece I'd say is plan, don't predict. I have never met, maybe I've met one person, I don't talk to them anymore, who's tried to predict the future. But plan, don't predict. No one listening believes truly that they can predict the future. And when you're talking to somebody about, "Oh, Apple's the next great stock to own," or something along those lines. I'm being very tongue in cheek there. They're inherent in that is some sort of prediction of the future where I think we think strongly that the better approach is to plan for what can happen, which is a wide range of outcomes.
(04:58): See above on uncertainty. We don't know exactly what will happen and we can't predict that. So plan for a wide range of potential outcomes rather than trying to predict the future. Time and time again, actually looking back, that's actually shown to result in better outcomes. The behavioral drive to try and predict the future with the hope that you're going to out guess somebody, it just really is a fool's errand at the end of the day.
Brandon Averill (05:25): Yeah. And I think hitting on that point of plan, don't predict. I mean David Booth has a great... David Booth, founder of Dimensional Fund Advisors, a huge asset management firm. But he has this quote, "Plan for what can happen rather than trying to predict what will happen." And I think when you start to take a step back, you try to remove some of the emotion, you take the deep breath, you count to 10, that whole thing, you start to think about it in a broader sense. It's, "Hey, back to the very first principle of money is a tool." Money is a tool to accomplish your-
Justin Dyer (06:00): [inaudible 00:06:00].
Brandon Averill (06:00): ... priorities. It's not about trying to take so much risk and trying to predict and get the needle in the haystack from a return perspective. That is not what we're trying to do. That is not a successful way to build out your portfolio or your investment experience by any means. So the third principle that I think we're going to touch on is flexibility adds value, being able to have some timing aspects. So how would you say that fits into how we plan for clients?
Justin Dyer (06:31): So great analogy is, if you need to go buy something, especially a big ticket item and you're like, "Oh, I have to have that tomorrow," guess what? You're not going to be able to haggle or wheel and deal on price, so it's going to cost you more. Another way of thinking about this is around the planning side of things. If all of a sudden you need something, you want to buy a new house and we didn't plan for that and you have no flexibility in that, then you are probably going to cost yourself money. Whether that's, "Hey, markets aren't really in a great place, we didn't have the money set aside to plan for this. We have to sell when markets are down," that might or might not happen, but it's a great example that flexibility, being patient and planning, these things are all interwoven, gives you the ability to allow your money to be at work for you as a tool to really, and we're going to hit on it, add compounding or take advantage of the compounding benefit of investing.
(07:33): The great quote David Booth also said this one, "Flexibility adds value because it leaves space for judgment." So you're not in a reactive mode, you're in a proactive mode and really being able to take that deep breath, pause for a day, 10 seconds, whatever it is, and really make sure this is something of true value and where you want your priorities or your resources to go.
Brandon Averill (07:58): And I think flexibility is such a key thing. I mean, especially the proliferation of private market opportunities that have popped up, the access is getting easier.
Justin Dyer (08:08): Not better.
Brandon Averill (08:09): Don't hear me, the best access is getting easier, but access in general to the private markets is getting easier. We see a lot of firms really popping up and they're allocating more and more of client money to these private opportunities. And anybody that's listened to this before, our clients that are listening know how much we love the private markets. However, it's all about flexibility. It's making sure that your financial structure allows for the proper investment into the private markets because, to your point, if you've tied up money, then you turn around and need for whatever reason, it blows up the entire thing. So really the investing principle is don't get ahead of your skis, let's really make sure that we have the right flexibility built into your plan.
(08:54): And then you hit on how many wonders of the world are there, but this is certainly one of the wonders of the world and that's harnessing the power of compounding interest. I think most people have probably heard about this, but it's a concept that your money grows on top of your money. And so when we think about that and we communicate that to clients, how would you address that?
Justin Dyer (09:18): So that's the pure mathematical definition. It's this exponential function, maybe that's giving people some bad dreams of whatever it was, college or high school days, but it's really powerful. It's not just this linear line, it's this line that really starts to accelerate as a good way to think about it. That's the mathematical piece of it. The behavioral side I'd like to reorient people to is the decision. All that we've talked about today, the decisions, the ability to plan, the ability to give flexibility, the ability to really pause and ask yourself, "What is important? What do I want to use my money as a tool for?" All these tiny little decisions add up and can compound on themselves as well to support the actual financial compounding of your wealth. It's really, really important.
(10:07): And we view this when we talk about our own services and, "Hey, we will save a dollar here on taxes, or we'll make a tax loss harvesting trade over here. We'll make a backdoor Roth contribution that's a relatively small dollar amount for the vast majority of our clients." But all of these little decisions, behavioral or absolutely financial, come together to really, really drive substantial long-term value over time. They really all work incredibly well with each other.
Brandon Averill (10:36): No, I think that's a great explanation. And then there's something that certainly all of our clients can resonate with, and that's control what you can control. Whether you're an athlete, you know can't control the outcome, but you can control the focus, the process that you take in that approach. And so you think about the process, you can't predict the future. You may square up a ball, it's still going to get caught. You might hit a bleeding single and everything works out in your favor, but it's more about the process and how you go about building out those building blocks. And I like relating this to the baseball analogy is, in any one given day, I can go to the ballpark, and Mike Trout might punch out four times, and if I walk away on that day, then I may assume that he's not a very good player.
(11:27): But if you focus on the process and you show up every single day, you're going to see over the course of his season that he's a pretty darn good player, so I think it's the same thing. Control what you can control. Don't let these emotions get the better of you. Commit to a really successful process and you're going to have success over time. And that really leads into probably the last principle we'll hit on today, and that's tuning out the noise. The media is fantastic. Their job is to sell ads, it's to grab your attention, and so they're going to amplify whatever news cycle it is. That could be on the positive side, things are unbelievable and-
Justin Dyer (12:05): Very infrequent.
Brandon Averill (12:05): ... yeah, they're doing great. And then the negative side like, the world's falling apart, and it's hard to combat that. We had a client reach out a couple of days ago and he had this feeling like, "Oh my gosh, I just feel like I'm losing money all the time. Is this normal?" And it's taking a step back and you actually go back and you take the broader lens over the last year, he's actually up over 10% in his portfolio, but he feels like he's losing money all the time. And that's because he's watching the rabbit hamster wheel of the media and getting caught up in stuff. So it's an incredibly difficult thing to do, but it's really about tuning out the noise on that [inaudible 00:12:49].
Justin Dyer (12:48): It really is. I mean, there's a great quote I've heard that the future is uncertain, but the quality of your decisions don't have to be. And you can decide to listen and go down the rabbit hole or doom squirrel on whatever social media app you're on, or you can turn that off, or at least just have a healthy separation between those two things. And really we want to, I think, leave you with, if you focus on an important goal, other people's opinions really fall away from importance and you really don't want them to derail what you spent a lot of time, energy and effort on earning and accumulating, but then focusing on, through our conversations, with advisors, really working on what's important to you and your family and making sure that there's a plan in place to accomplish those.
Brandon Averill (13:38): Yeah. I think that's a great way to wrap up this episode. Hopefully what this is doing is resonating with you in the sense of, you actually know more about investing than you think you do. But then also, how do we start to wrestle with this emotional side of investing? Because it is more about just the numbers, it's about having a really high quality investment experience, and ultimately using money as a tool to reach your priorities. So we're going to continue down this path over the next couple of weeks. We'd love to hear your questions. Feel free to shoot us a text, 714-504-7689. And until next time, own your wealth, make an impact and always be a pro.