How to Invest Without Hiring a Professional | Brandon Averill, Justin Dyer | AWM Insights #99
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Episode Summary
Are you a Do it Yourself Investor? Are you ready to handle it all yourself?
Fear and greed drive many of the biases that hurt investor returns. Overconfidence bias and confirmation bias are two others that are proven to cost investors money. Big companies spend millions every year to influence and disrupt the focus of investors simply using human psychology.
You don’t have to play Wall Street’s unfair game. There is another option to achieve your success. Taking compensated risks while controlling expenses and avoiding taxes makes for a better investing experience.
Have questions for an upcoming episode? Want to get free resources, book giveaways, and AWM gear? Want to hear about when we release new episodes? Text “insights” or the lightbulb emoji (💡) to Brandon at (602) 704-5574 to join our new AWM Insights Network. On an iPhone? Click HERE to join.
Episode Highlights
(1:16) What are the options to invest in the public markets?
(2:45) Registered Investment Advisor Firms can give you holistic advice vs every other model.
(4:15) Behavioral finance is the broad psychology of attitudes and biases interacting with decisions around money.
(4:50) We are prone to biases that can make investing even for trained professionals difficult.
(6:15) The most powerful of all biases being fear and it’s cousin, greed.
(6:23) “Fear has a greater grasp on human action than does the impressive weight of historical evidence” - Jeremy Segal.
(7:00) You can get an incredible investment experience with robust results without playing the Wall Street game.
(7:40) Avoiding the hot stock talk or investor bubble turns out to lead to better outcomes.
(8:30) Focus is constantly being influenced by large companies spending thousands of dollars to bring you into their game.
(9:08) The data for investors underperforming is constant, 1984-1995 the S&P 500 was up 15% a year while the average investor only earned 6.3% a year. Why?
(9:37) Investors don’t want to stand by and do nothing. They want to take action and the overconfidence bias is well-established.
(10:31) The overconfidence bias shows up in character studies and when it comes to over-trading their brokerage accounts.
(12:10) Confirmation bias is looking to verify the things we already believe. We ignore what contradicts that.
(15:40) SPIVA active vs passive data is released twice a year. Every year active management is proven to underperform over the long term.
(17:30) Do the outperformers in one year continue to outperform. No, there is no persistence.
(18:30) There is a different game to play. Avoiding taxes, high expenses, and optimization of net worth can provide persistent results.
(20:15) Your disciplined plan will keep you focused on the results that matter. Biases can be managed with the right focus.
(22:00) Markets are extremely competitive. In public markets, information is known by everyone buying and selling the market. Where is the advantage?
(23:20) Many of the gains in crypto are short-term gains which will be wacked by taxes.
(23:51) “The car is going to get to the destination, unless you personally drive it off the cliff” - Peter Mallouk.
(24:30) Submit your questions or feedback by text to 602-704-5574 and join the community.
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Justin Dyer: LinkedIn
Brandon Averill: LinkedIn
+ Read the Transcript
Brandon Averill (00:07):
Hey everybody. Welcome back, Justin and I got a thrilling episode here for you. I know we're at least excited. I think we got 14 pages full of notes for today's episode so we'll try to make it digestible. We're listening to the feedback and we know we got to, dial back our nerdiness a little bit. As we dig into this, we'll try to keep it high level, but still provide the value everybody here is looking for. And last week we talked about what you're actually going to invest in? What are the vehicles? How do you put your money to work? How do you grow it? And where we're going to move today is, okay great, we know we want to invest in ETFs or mutual funds or stocks or the private markets, but how do I actually go buy these things?
Brandon Averill (00:57):
Where do I go buy these things? Who could help me in this process? Should I do it all by myself? We're going to dig into that and really high level, I'll lay out this framework and then Justin, I'll let you dig into some of the details, but there's a couple different ways to go about this. You could do it yourself, this is going on to, for instance, Robin Hood, everybody is probably pretty familiar with Robin hood at this standpoint or you could go to a retail brokerage shop like a Schwab or a TD Ameritrade or Fidelity. And you're going to put the investment plan into place yourself, whether it's buying stocks or mutual funds or ETFs, you're going to be the one making all the decisions of how to actually implement your investment philosophy.
Brandon Averill (01:46):
Then there's this weird little world of some people doing... You want both the ability to get some advice, but at the same time, they're actually really brokers so they can't give you the full comprehensive advice so maybe they're just advising you on an investment portfolio. You're going to find these mostly at your big financial institutions, what we call wirehouses and what they are is brokers. So your Merrill Lynches, Morgan Stanleys, Goldman Sachs. And then there's also the independent hybrid firms. These are people that can take that brokerage hat and have it on and take it off and give you some advice at their willy-nilly choosing. That's another route. And then the last piece is obviously what we're biased in is going the independent route, giving your self the flexibility, somebody that could actually give you advice holistically across your entire net worth.
Brandon Averill (02:50):
And these are registered investment advisory firms, family offices. But today, what we're going to really focus into on my turn over to you Justin, is the do it yourself. What if I just want to do this myself? I don't want to go hire somebody else, I don't want that expense, I just want to implement myself, and so we're going to talk about some of the warnings if you're going to do this, how to do it successfully potentially. And I think this is still applicable, even people that say, "Hey, there's no way I'd touch this doing myself." A lot of the psychology still affects you so today's episodes still for everybody, but we're going to really look at this and start to talk about what if we're doing this alone. Justin, I'll stop there and just talked far too much more than I usually do, but maybe dig in for a little bit like what are some of the considerations as you go at this alone?
Justin Dyer (03:45):
Man, you went easy on the brokers.
Brandon Averill (03:47): I know. [crosstalk 00:03:47] Justin Dyer (03:47): The glorified salesman that's what they are.
Brandon Averill (03:51):
We got episode 100 coming next week, we're going to dig in there, so little teaser.
Justin Dyer (03:55):
All right. Well, what you hit on towards the end on the psychology of all this, is really where we're going to focus a lot. And we touched on that throughout this series, this podcast, and it is really important. Behavioral finance is the broad study of all this stuff, how our minds and psychology interact with finance and decisions around money. And to jump to the conclusion is that, really the data doesn't support trying to go about this your own, even doesn't support professionals doing it in a certain way, but that's again, later down the path here and really the 'why' there is from a psychology standpoint where our minds, our brains are just hardwired.
Justin Dyer (04:51):
Yeah, you can acknowledge we have these biases in place and maybe that helps you gain an edge, but there's a hard wiring that we have in place that makes it really, really, really difficult for us to see what's going on in the markets, take in information from the financial media, log into your brokerage account every single minute if you wanted to. You mentioned Robin hood, Robin hood literally from a business standpoint is trying to gamify the investment experience, which is not necessarily in your best interest, I would say it's likely not in your best interest.
Justin Dyer (05:28):
And all these forces, whether it's external, internal in our own brain, really make this a difficult proposition. And first thing first, you need to set out with a specific goal in mind and then make sure you understand that the key is to not mess things up by recognizing that you have these biases so that you can protect yourself from making mistakes. Really easy sentence there, way easier said than done, and we'll define some of the more common behavioral aspects of what you see time and time again in the markets but really one of the biggest is fear, or fear and greed, you can put those two you things together because I think those are real powerful forces within the market and there's a great quote by Jeremy Siegel, where he said, "Fear has a greater grasp on human action than does the impressive weight of historical evidence." The historical evidence, and will give you some of that. Pointing to the fact that you shouldn't really go and try and pick individual stocks or even hire managers that say they can pick individual stocks.
Justin Dyer (06:43):
And you know what, again, getting to a tagline here or a final point, but we're going to continue unpack it is, the good thing is you don't have to, you can get an incredible investment experience, you can have an incredible investment experience with very positive, robust results, meet your goals, your priorities without playing this game. There is a better way, don't go towards the light so to speak, let's take a step back, let's understand the data in which we hope we're going to really do in this episode. And really at the end, convince that there is a better way to accomplish your goals and do so, which in a way that actually provides better outcomes over the long term.
Justin Dyer (07:34):
You're not as conducive to this silly fads and whatnot, and maybe you can't speak at a cocktail party as much about your large position in Tesla, although you do own it, if you own a diversified portfolio, so you don't have that itch, you can scratch so to speak, but if you take a step back and understand everything, and really appreciate it, you're actually going to likely be better off, so maybe we get into some of these definitions, Brandon I'll stop and you hand it over to you.
Brandon Averill (08:07):
I think it's a fantastic point because what you're talking about is the herd mentality. I was talking with my wife last night about this and just the concept of focus and I think it relates here, but it's also a time in history where we have to give ourselves a break, there are some pretty powerful multi-billion dollar companies that are influencing our focus or influencing us to want to be a part of a herd, owning Tesla, being at that cocktail party. You want to be in that same conversation as all of your friends, whether the data shows up or not, it's a powerful force so also letting yourself off the hook a little bit to know like, Hey, I know that the right... We talked with one of our advisor, Zach about this.
Brandon Averill (08:54):
It's like, he gets so passionate, but it's like, I understand the data and yet I'm still going to make a different decision because there are powerful forces at play. And we see this time and time again. There's a great stat from 1984 to 1995, the S&P 500 was actually up just over 15% per year, but when they took a look at all the average investors, they were actually only up 6.3%. And you got to ask the question why?, the data is so obvious, why in the world would anybody choose to deviate from this? Well, it's because the average investor doesn't want to just sit there and do nothing. And that's oversimplifying it, but they want to be in the hot next thing, they want to have the conversation, they want to believe, it's the same as the lottery effect.
Brandon Averill (09:47):
They want to believe that they're going to be the one that's going to outperform at the end of the day. And in the next behavioral bias that comes to mind off of that herd mentality is over confidence in my mind. It's the idea that we're excellent, that a lot of people are elite athletes listening to this, or are very successful doctors or entrepreneurs that built very fantastic companies. It's like, "Well, shoot investing is not that hard. If I'm great at this, I've got to be great at this." But we all over overestimate our confidence levels. Some of the stuff is really actually hilarious, I thought this was a great one. I read this study that 79% of students said their character was better than the most than most of everybody else but then they went on in the same survey to admit that 27% of them admitted to stealing something from a store.
Brandon Averill (10:47):
So not exactly jiving with the character piece and 60% of them had actually cheated on an exam within the last 12 months, character and cheating it doesn't totally jive. Or if we're going to bring this back to the finance side, there's a study that they actually looked at a bunch of people's trading so they were individual investors looked at their trading activity and men, not surprisingly, were a little bit more overconfident in general to women. They actually traded 45% more than their female counterparts in this study and it actually costs them 2.65% per year on average. At the end of the day, we want to believe we're the best, who in the world says that they're... It's the same thing. Go ask all your friends, are you above average looking or not? There's a reality, some of us aren't that gifted from the face perspective and some like Erik are but [crosstalk 00:11:54] Justin Dyer (11:54):
Well, and then off of that too, not only do we inherently believe that, we also seek out confirmation of that belief. We call that confirmation bias where we have a certain set of beliefs that start with, don't even know where they come from necessarily, although yeah, maybe it's Erik being better looking or whatnot. And then we go and try and confirm that, we will find a fact or disregard other facts that are right in front of our face that contradict that, it's an amazing and really, really powerful behavioral trait that you even as much as you understand that and try and appreciate it, it's incredibly powerful as well and I think that confirmation bias and overconfidence really do go hand in hand. There's all sorts of other things we anchor to certain beliefs as well or affinities, maybe there's a stock you heard that your buddy told you about, and then you bought it. And you anchor to that, regardless of whether or not the facts around that change, you are anchored and you have this affinity great affinity to hold that come Hell or high water in some cases loss aversion.
Justin Dyer (13:16):
That's the feel that a loss provides to us is far more powerful than the feeling or emotions that a gain provide to you and it's not this symmetric rational behavior on that side, mental accounting's another one, recency bias won't really go into all these, you can do quick Google searches on a number of these negativity bias, what is that? The gambler fallacy, so on and so forth, there are so many of these things, a lot of them overlap in some ways in shapes and forms, but it is really, really important just to put an underscore period on all this that, there's very few, if any traits that I've ever seen from a behavioral standpoint that actually support good investment decision making specifically to this conversation.
Justin Dyer (14:10):
There's a lot beyond just investing that are our minds always provide challenge with, but it's important to understand that. And again, I think the piece that I want to hit on a couple times here is that, there's a different way to play this game that removes a lot of these elements from the playing field, in a sense, and still allows you to really participate and have a phenomenal investment experience and really good results. And again we always like to bring it back to your unique priorities, what are you trying to accomplish? Why are you investing? And there is a way to do that. One thing I'll wrap up this piece of the conversation around is it's not just the average person, either. It's incredibly difficult for 'professionals.'
Justin Dyer (15:00):
You can say that tongue in cheek in a sense. And I want to be... We should have clarified this at the outside, we are talking public marketing investing here, and professionals in the public markets are... There's so much data to analyze them and to do your diligence on what they're doing, what their performance is and we have many, many, many, many years, so it's an incredible data set, I guess you could call it. And I find this amazing that I still come across folks in our industry that aren't aware of this particular study, but S&P, Standard and Poor's they've been around for probably 120 years or something like that. They are a data provider, they come out two times a year with something called the S&P index versus active report.
Justin Dyer (15:51):
It's SPVA for short S-P-I-V-A put that into Google and you'll see all this information right there on the homepage it gives you, it looks at all of these managed funds from professionals and gives you the statistics on them versus a number of different indices, just to highlight it for you real quick. This is through June 30th, the numbers through the end of 2021 will probably be out pretty soon here but through June 30th, 2021, 58.2% of large cap funds under underperformed the S&P five 500, that's about what you would expect flipping a coin. It's a little bit less than 50-50 because those funds have expenses as well so that's actually another headwind that detracts from performance that's for the one year period ending June 30th. If you look at five years, the number of funds at underperformed jump to 72.6% over a 10 year period, 82% of funds underperform.
Justin Dyer (16:59):
This trend exists in pretty much every single market around the world. It's not unique just to the US, it goes across large caps, small cap, fixed income or not. And then you could ask, you could take a pause and say, "Well, okay, can we identify that small sliver, depending on the timeframe of 10 to 15 to 20% that outperform?" Well, they actually look at that too, it's called persistence. Do the people that outperform in one year end up in the same bucket of outperformers the following year? And the very short answer is no, they don't it actually drops off. In some studies, you can see that the same people that outperform end up in the very bottom quartile in the following years or the subsequent periods of time and that's something you have to ask yourself too, when you're thinking about this framework.
Justin Dyer (17:53):
Well, okay. It's really difficult for professional investors to do this as well. In fact, it's incredibly likely that they're not going to outperform their given benchmark. Why do I have the overconfidence that I can play at that game, but then again, do you need to play that game? I think is the real important piece of it and are you thinking about your priorities in the right way and structuring your portfolio for the long term and then controlling the things that you can control taxes, expenses, and all that stuff. And that's where we're getting into this different game you can play, the silly game of just trying to play out performance, it's like you guys go over there and do that and we'll do stuff that it actually has a far higher persistence or more robust outcome to meet your priorities, meet your goals, and actually give you better results over the long term.
Brandon Averill (18:48):
Yeah, I think that's a great a point, Justin, and all those stats, the underlying effect of how those manifest themselves are because there's this belief in nobody's immune, whether you're doing it yourself or you're a professional investor, if you think you have this overconfidence that you're influenced by all these biases as well, if you're managing money. And if you allow yourself to have that overconfidence that belief that you can predict the future. At the end of the day, what we do know, again, is there's too many variables to predict short term market movements and anybody that's knowledgeable about markets.
Brandon Averill (19:25):
I don't think they could honestly make those bold short term predictions, but doesn't stop us from falling victim to some of these biases at times. And I would say for anybody, listening to this, think about this the next time that, if you're an athlete, your teammate tells you like, "Oh, the crypto's got to go up." Or your realtor tells you, Hey, this market's going to explode and your home value is going to be worth double in the next year or two years, or the financial media's on there, talking heads saying the market's going to crash this year, or it's going to do fantastic this year. You just have to go back to remembering how hard this is and they're not immune.
Brandon Averill (20:09):
And so back to your point, Justin, on this is it all comes back to your plan. Your discipline plan, what we're not saying is that you can't do this, because it's possible, you can do this on your own. It's just that you have to have a really robust plan, you have to remember that these biases exist and you're susceptible to them. We've gone through a tremendous amount, we're susceptible to them as well. The difference is we've gone through a lot of training to recognize these biases and make sure that they're not impacting the plans that we put into place for clients.
Brandon Averill (20:44):
And when we go through and we put together a detailed discipline plan for a client, or you as an individual go through and put your detailed discipline plan together, when you start to deviate because of one of these biases, that's when you have to reel yourself back in that having a globally diversified portfolio performs over the long term and provides for all of your priorities. And you're at the event with your buddies and they're talking about Bitcoin going to the moon, you have to be able to reverse course and be like, "Great, good for them but my plans solid, my priorities are taken care of. I'm not going to put my financial structure and my family at risk."
Brandon Averill (21:27):
And that's where the challenge comes in and if you're able to do that, you can do this on your own. There are other things around the planning world that we'll talk about in the future. We think you could still optimize beyond that, but at the end of the day, you could overcome this, but you just have to be ready for it. And that's some of the takeaways. Make sure that you just remember our brains, like Justin you started this whole thing, we're hardwired in a certain way. And so we are fighting very powerful forces at times, markets are incredibly competitive. Why do we believe that we're smarter than other people out there to make predictions or to use the same information everybody has access to make better decisions? That's really difficult. How do you even evaluate your returns? That's something we see all the time. Are you looking at the right metrics? Are you talking about pre-tax returns? Are you talking about after tax returns? I think people get totally lost on that.
Justin Dyer (22:31):
Well, especially in those cocktail party conversations too-
Brandon Averill (22:34):
Absolutely.
Justin Dyer (22:34):
Or party conversations where, oh yeah. I bought Bitcoin at whatever or Tesla at X. Yeah. Okay. How much of that is your portfolio, is it a small percentage is a large percentage to your point after tax returns, pre-tax returns. The susceptibility to get caught up in short term noise from the financial media, from social circles whatever, it feeds into this hard to quantify topic that you're hitting on there.
Brandon Averill (23:06):
Yeah. And I think, shoot, 1099s are starting to roll in right now and the Coinbase 1099s that I'm seeing and Robin Hood... It's actually comical because people think they have these big old gains. They're all short-term so they're getting whacked with 50% taxes. When you think about the risk that happened at times, it's a little dicey, but anyways, we're going to wrap up. We've got little long winded, but at the end of the day, what we want to close with is just take a step back, slow yourself down. Remember to follow that discipline plan that you've laid out for you and your family because I thought this was a great quote I read it from another investor out there, Peter Malo, but he said "The car is going to get to its destination unless you personally drive it off the cliff."
Brandon Averill (23:57):
And I just thought that was a fantastic way to end this. Next week, we got episode 100 coming, we'll definitely bring some fireworks for this one. We're going to talk about actually making the decision to get some advice and partner with somebody. We're going to go through some of the pitfalls and how do you evaluate that. And we'll get into all that I know we're already excited about it. In preparation for that, we're also launching a new way to stay in touch our community. We'd love to hear your questions about, "Okay, you know what this whole do it yourself thing, doesn't sound like something I want to bite off." Let us know what you want to hear about, how you select somebody to partner with, how do you evaluate which financial institution you should go with just as some ideas.
Brandon Averill (24:47):
But we'd love to know what's top of mind for you guys. So text 602-704-5574. And that'll be a text message that joins into our community. It's a place where you can send us feedback and questions for future episodes. That text is coming directly to me, Brandon, so you'll get a text back from me. It'll have you join our community and then we can go back and forth and I would just love to hear from you and understand how you're incorporating some of the lessons that Justin I are talking about. So we look forward to hearing from you again, I'll just say the number so you have it, but 602-704-5574. And as always, we're going to close this thing out and I'm going to forget the tagline, but always be a pro.