Pursue the Better Investing Experience | AWM Insights #117

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.