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Tag: Index Investing

The Two Formative Experiences That Helped Me Grow as an Investor

Written by support@seostats.com on . Posted in Behavioral Finance, Education, Investing.

Who doesn’t like getting insights into the balance sheets and investment portfolios of other people – especially when those other people are successful professionals or financial experts?

CEO and co-founder of Ritholtz Wealth Management, Josh Brown, recently compiled a collection of exactly that in his book, How I Invest My Money, edited by Brian Portnoy and illustrated by New York Times’ columnist Carl Richards.

The book shines a light on 25 financial pros and how they use their own money to invest in capital markets. It’s a great look at how people who often give financial advice actually manage their own assets.

That inspired me to share my own strategy. I recently produced a video about how I invest my money. In telling my story and experience, I realized there were two specific events that helped shape the investor that I am today.

 

Developing My Current Investment Strategy Was a Process

Today, I invest for the long-term using a broad basket of ETFs that track broad market performance. I don’t try to time the market, and I don’t try to pick individual stocks.

Developing this investment strategy didn’t happen overnight. It took time to develop my personal investing style.

It also took two formative experiences that I can credit as the big reasons I am where I am today. In short, I learned the hard way why trading individual stocks is not the best way to grow wealth for the long-term.

 

My Investing Experience with Webvan

If you remember the early 2000s, you likely remember the dot-com bubble. A lot of investors felt overly confident in the futures of tech companies that were riding the wave of growing adoption of the internet and the spreading of personal computers in households all over the U.S.

I believed the hype; I was fully immersed in the boom and believed that it would never end. At the time, I worked as an analyst in Morgan Stanley’s Private Wealth Management division. It seemed like investors were simply printing money by jumping into IPOs.

Anyone could get rich by holding onto anything with a .com after its name. Of course, I wanted to do the same.

The company I got behind was Webvan Group, an online grocer that looked destined for success (but was, in reality, at least two decades before its time).

Webvan had an all-star management team and funding to back it up. At one point, its shares soared 65% over its initial offering price. And then they started to fall.

Justifying that this was just the stock going on sale, I bought in. And I kept buying. I bought shares at $15, $10, and $5. And I held them all the way to the company declaring bankruptcy.

 

Failing to Buy and Hold with Amazon

I made mistakes on the other side of the coin too. Instead of hopping into a bad bet and riding it to the bottom, I bet on a big winner… but didn’t stick around to see it pay off.

I bought shares of Amazon in 2012, when the share price was about $250. Over the next year, Amazon’s stock price shot up to over $300 a share.

I sold my shares in 2013, feeling pleased to get out before anything bad happened – and with a 20% profit to boot.

Fast forward to 2021 and we can clearly see that what seemed like a brilliant move at the time was actually a pretty terrible idea. Amazon now trades at around $3,000 per share.

That’s roughly 1100% higher than when I originally bought it!

 

What My Misadventures in Stock Picking Taught Me About Investment Strategy

These two stories illustrate a clear point: without the benefit of hindsight, it’s almost impossible to tell which individual stocks will turn out to be winners and which will go all the way to $0.

It’s easy to look back and laugh at my investment in Webvan. Clearly, that was doomed to fail as part of the dot-com bubble… right?

The truth is, that’s only obvious today. It’s easy to forget that Amazon was also an internet/tech company of that same era.

The problem with individual stocks is that you must know precisely when to buy. And that’s only half the equation. You also need to know exactly when to sell. Again, you can only know either, with certainty, when you look back with the benefit of hindsight.

This is why I no longer engage in the guessing games that individual stocks require you play. I also invest with intention and a plan, and don’t let emotions (like fear of a stock price dropping) make my decisions for me.

Instead, I rely on sound strategies based on my goals, time horizon, and risk tolerance. I combine those specifics about my own situation with experience and education about market history and new research and data that supports more passive, long-term approaches to investment management.

We use this same facts-based approach for our clients, too, to design investment strategies that meet their needs and take into account unique factors like their individual appetites for risk.

My process for investing will continue to evolve, but it won’t be influenced by randomness, chance, or emotions. Instead, we’ll continue to refine and hone our approach based on the facts and studies that highlight smart ways to grow wealth over time.

What’s the Best Way to Manage an Inheritance or Other Lump Sum of Money?

Written by support@seostats.com on . Posted in Financial Planning, Investing, Saving.

It’s never easy to lose a family member or loved one. The emotional toll this can take on you is significant. If that person left you an inheritance, the situation can become even more difficult to deal with.

Having someone you love pass away and leave you a lump sum of money is not quite the same as stumbling upon a twenty-dollar bill on the ground. You may have a lot of grief, confusion, or even anger that you feel about your loss — and you also have a lot of financial decisions to make now.

The problem? You should never make financial decisions based on emotion, and this is where a lot of people who receive an inheritance go wrong and squander this gifted wealth.

Even if you receive some sort of lump sum payout under happier circumstances, you run the same risks. After all, excitement and joy are still emotions that can sway you from making rational financial choices.

So what should you do — or not do — if you find yourself in this situation? How do you sort out your newly inherited assets?

 

Don’t Rush to Take Action

You might feel a sense of urgency if you receive an inheritance or a lump sum of money. It can burn a hole in your pocket! But this sense of urgency is probably unfounded. Very rarely do you need to do anything immediately.

So don’t rush to any decisions — especially when it comes to using up your newfound wealth. I have unfortunately seen people run out to buy a new car or a new house in cash because they can, or they hurry to pay off an existing loan or mortgage because they want to be debt free.

But this could be a huge, irreversible mistake. Acting on impulse is almost never a good idea when it comes to money. So take a big breath, take a step back, and let yourself feel whatever you’re feeling… but don’t act on those feelings.

Give yourself time and space to process things. Once you’re feeling more grounded, you can look at what to do next.

 

Do Get Professional Support

There’s a reason successful people are not loners; they have teams of mentors, workers, advisors, coaches, and staff that surround them.

Smart people know they need support, expert guidance, and independent, objective perspectives to help them reach the best decisions. You should do the same if you want to enjoy the same success.

If you find yourself with an unexpected lump sum of money, consider sitting down with a financial planner who can help you sort through all the must-do actions (like transferring assets officially into your name) and help you figure out what you’d most like to do next (based on your needs, goals, and priorities).

But don’t just hire any person who calls themselves an advisor! Get educated so you can ensure you hire the right professional who will put your best interests ahead of everything else. That means you’re looking for a fee-only, fiduciary, CFP.

You can learn more about finding the right financial advisor for you here.

 

Don’t Leave Cash Sitting in a Bank Account

Letting cash sit around means racking up big opportunity costs, because it could be earning money elsewhere. Not only will you not earn interest or a return on your cash in a checking account, but you’ll also be more apt to spend it.

It’s just sitting there, ready and waiting — and it probably feels different from money you earned through your paycheck. So remove the temptation and at the very least put this sum into a high-yield savings account.

If the total amount is over $250,000, you need to split the total sum up at different accounts with different banks to ensure you have complete FDIC insurance protection on your money. You can read my article here on how to choose the best savings account for you

 

Do Think About the Future

Once you actually have inherited assets or a lump sum payout in your possession and have given yourself time to process your emotions, you need to make a plan for that money and give it a job.

What is this money for? Do you have immediate pressing needs you need to address? Do you have big goals to fund? Are you looking to secure your own financial freedom — or create an even bigger legacy so this money can continue to support future generations of your family?

There aren’t really any wrong answers here, so long as you focus on your values and what you want your life to look like. It’s probably not a wise long-term move to seek immediate gratification and run out to buy that sports car you always wanted.

(But hey, it could make sense in some situations! This is why it’s important to work with a planner who can help you sort your goals and priorities)

Talk about your goals. Get clear on what’s important to you. Take the time to consider the impact of your choices with this money, and how big purchases now may impact you in the long run so you can make the best possible financial choices with this new wealth you received.

 

Lake Road Advisors, a Fee-Only, independent financial planning firm with offices in Corning, NY, Ithaca, NY and Portland, OR works with clients virtually all across the country. Paul Sydlansky, the founder of Lake Road Advisors LLC, has worked in the financial services industry for 20+ years. Prior to founding Lake Road Advisors, Paul worked at Morgan Stanley in Manhattan for 13 years. While at Morgan Stanley, Paul was a senior-level manager within the Institutional Equities Department. In 2018 he was named to Investopedia’s Top 100 Financial Advisors list. Paul received a Bachelor’s degree in Economics from Marist College and holds an MBA from New York University Leonard N. Stern School of Business. Paul is a CERTIFIED FINANCIAL PLANNER™ and a member of the National Association of Personal Financial Advisors (NAPFA) and the XY Planning Network (XYPN).

Two Arguments Against Indexing & One Fact

Written by support@seostats.com on . Posted in Fees, Investing.

Index investing is a trend on the rise. I have written multiple articles (Why I Believe in Passive Investing and Index Funds and Passive Fund Management: Understanding the Opportunity) on the many benefits of investing in index funds. As with anything that gains popularity and threatens conventional wisdom there are counter arguments as to why index investing may not be the best thing for you or the market.

I strongly recommend a recent Vanguard white paper that effectively addresses some of these claims.

Now before you read on, I know what you’re thinking: “Of course, this article will support Paul’s view of index investing, because it’s leveraging a study by Vanguard, a firm that is synonymous with the index investing movement.”  However, despite Vanguard’s growth in the index investing space, it is also the world’s third largest active manager with over $1.6 trillion under management. While this is roughly half of its passively managed assets, it still represents a significant portion of its business.

Here are two common arguments against index investing:

 

1. “Indexing artificially impacts stock pricing.” 

What does that mean? If everyone buys and sells entire indexes (i.e. buying every stock and bond in the index) then, in fact, the price of each individual stock in the index will rise and fall no matter what. All of the stocks move not based on individual merit but because it is a part of the index. This, in turn, either inflates poor stocks or unfairly depresses the price of worthy stocks.

The Reality: Index trading only makes up 5% of the market. So, this argument becomes moot under the current circumstances. According to Jack Bogle, even if index trading is 80%-90% of the market the remaining actively traded portion would be adequate to efficiently price stocks.

2. “Indexing makes markets more volatile.”

What does that mean? If every investor bought and sold entire indexes, then prices would inevitably move up and down erratically and within a wider range.

The Reality:  While the percentage of assets in indexed strategies has grown, market volatility has risen and fallen in a seemingly random pattern with notable spikes around the tech bubble and the great financial crisis. So, historically speaking, markets are volatile with no evidence to suggest that indexing alone could force the market to swing.

And One Undeniable Fact

The expense ratio, or cost of investing in an index fund is almost always less than the cost of investing in an actively managed account. Lower costs are a positive for investors, and a key reason why active managers don’t particularly like index funds, since it means less money in their own pockets. On page 4 of Vanguard’s report, the authors state, “According to our estimates, without index funds, investors would have paid more than $150 billion in additional investment costs cumulatively since the early 1990s Further, we believe that index funds have introduced competitive price pressure to the industry, at least partially explaining the downward trend in active-fund expense ratios.”

 

Conclusion

We’ve all heard the arguments against index investing. I encourage you to consider whether they are compelling enough to avoid taking a passive approach to investing. Remember, it’s very difficult to beat the market and impossible to predict the future.

As Larry Swedroe writes, “No one has found a way to identify which few active funds will manage to outperform in the future, as there is no evidence of persistence of outperformance beyond the randomly expected. Just like roulette or craps, the surest way to win a loser’s game is to not play.”

What else do you want to know about getting started with index funds? Write to me at Paul@lakeroadadvisors.com.

References

Setting the Record Straight: Truths About Indexing (Vanguard Research, January 2018)

The Index Revolution & What It Means For You

Written by support@seostats.com on . Posted in Behavioral Finance, Investing.

When it comes to investing, a passive (or index) investment strategy makes sense for the majority of people. Here’s why even Charles D. Ellis thinks so.

As discussed in my March blog post, Index Funds and Passive Fund Management: Understanding the Opportunity:

No one knows with certainty where the market is headed on a daily, monthly, or yearly basis, and while you can always find an example of an active investment manager who beat the market for a year or two, it’s nearly impossible to find evidence of any manager doing so on a consistent basis over the decades of time that most people invest.

I recently read The Index Revolution by Charles D. Ellis, a well-known investor who is widely respected for his success in institutional finance. He has authored 16 books and over 100 articles on investing strategies. The Index Revolution offers numerous reasons why Index investing is the best approach, here are three reasons that stood out to me that I wanted to share:

1.      The Stock Markets of the World Have Changed

In Chapter 2, Ellis walks readers through how the World has changed over the last fifty years, especially the stock market. He cites two important facts that impact investors today. The first is the increase in trading volume and the second is who does the actual trading.

Ellis observes that, “Trading Volume on the NYSE has gone from 3 million per day to 5 billion, a change in volume over 1500 times.” He also points out that, “Individual investors did over 90 percent of all NYSE trading 50 years ago. Today institutional trading is over 98 percent. The fifty most active of these professionals do 50 percent of all NYSE trading and spend $100,000,000 annually in fees and commission buying information services from the global securities industry.”

What Does This Mean?

Firstly, the increase in trading volume over the last five decades means that the markets are much more efficient, which reduces arbitrage opportunities (the simultaneous purchase and sale of an asset to profit from a difference in the price). This more buyers and sellers of anything, the less chance for a large mispricing.

Secondly, it means that no one has an elite inside track on the market. Remember, no one can see into the future and predict the market. Therefore, if a local investment firm in your town claims to have a superior investment process and an ability to outperform the market by picking individual stocks, know that they are wrong. The data supports that the bigger and better-funded players will continue to dominate the market.

2.      Indexing Outperforms Active Management

The investment pool has gone global and it’s filled with highly trained sharks. There is no shortage of investor talent, smart individuals who understand the market and know how to play the game. Ellis surmises as much when he claims, “History’s largest, most capable, best informed and most highly competitive professional investors dominate today’s stock market. So almost no one can expect to outperform the others regularly after cost and fees.”

What does this mean?

For you and other investors, it means that a passive investing approach that tracks the market instead of active management that attempts to beat the market is a smart opportunity. It allows regular people, who aren’t investing experts, to participate in investing strategies created by the experts.

Think about it. Because investing is a global game with an abundance of talent, the firms of today are so skilled that their collective abilities are reducing the possible gains. The average investor doesn’t necessarily have the time or expertise to compete at the elite level, but there is still opportunity to gain the market return with indexing. 

3.      You Have Much Better Things to Do with Your Time

The last point the Ellis mentions in his book that I want to be sure to highlight is the reality that most people have other priorities for their time that don’t include active investing.  Ellis reinforces what we all already know. Chasing performance is not only a waste of your monetary resources, but it’s a giant waste of your time, too.

Indexing, or passive investing, is a way for today’s investor to participate in the market without the high expense of your time and money. To prepare for your future and to save toward retirement doesn’t have to be complicated, expensive, or all-consuming. Ellis, a famous institutional investor, takes an entire book to make the case for indexing. If he sees it as a smart opportunity, you know there has to be something to it.

Ellis admits:

Fifty years ago, I thought it was realistic to expect that an experienced team of portfolio managers would ‘beat the market.’ But over a half-century, it has become virtually impossible for all but a very few investment organizations to outperform the market after fees and costs over the long-term future. The past 10 years have accumulated undeniable evidence that almost all investors would do better to rely on indexing for their investment operations and concentrate their time and talent on tailoring investment policies to achieve their own specific objectives.

So, as you consider your own investment strategy, ask yourself these three important questions:

·         Are your investments tailored to your own specific objectives?

·         Is your money focused on your goals and things you can control?

·         Are you paying too much in time and resources to be invested in the market in the first place?

If your answer is yes to any one of these important questions, then it may be time to pause and reconsider how you’re investing. Remember, while no one can predict the market, everyone can control how their money is deployed in the stock market. How you invest can make all the difference, no only in your financial future, but your overall quality of life today and in retirement. The choice is yours. What do you decide?

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Index Funds and Passive Fund Management: Understanding the Opportunity

Written by support@seostats.com on . Posted in Investing.

There is a more cost-effective way to invest your money. Are you taking advantage of it?

In my most recent post, Expense Ratio – The Fee That You Will Never See!, we walked through how you can figure out what you are paying for your mutual funds as well as the total fees paid to have your money invested. To provide an alternative solution to the higher-cost investment options available to you, allow me to introduce (or re-introduce) you to Index Funds.

What is an Index Fund?

An Index Fund can be either a mutual fund or an exchange traded fund. The primary difference between an index fund and a traditional active mutual fund is that it’s designed to track the performance of a market index like the S&P or Dow Jones Industrial Average. For example, if you own an S&P 500 Index Fund like the Charles Schwab S&P 500 Index (SWPPX), and the S&P 500 is up 1% on the day, your holding of SWPPX should also be up 1%.  And what makes index funds particularly attractive to investors are their characteristically low operating costs. In the case of SWPPX, the expense ratio is just .03%.

What is Passive Fund Management?

Passive fund management is a portfolio management style/investment strategy where a manager uses index fund to invest. The manager doesn’t attempt to beat the market through active investing strategies of buying and selling securities within investor portfolios. Instead, passive investing focuses on buying and holding index funds through market fluctuations without attempting to anticipate future market performance.

Understanding the history of Index Funds and Passive Management

The very first Index Fund was created on December 13, 1975, by Jack Bogle of Vanguard. He created this new investment vehicle because he came to realize that the majority of actively managed mutual funds and asset managers were not outperforming the market, despite repeated attempts, and that the costs associated with active management were high.

Traditionally, active money managers sold investors on the idea that they could outperform the market and, in turn, yield their clients a higher return than anyone else. Investment managers believed (incorrectly) that they somehow could predict the market. As an example, if the Dow Jones Industrial Average is up 7 percent for the year, an active manager may believe he or she can pick the best-performing stocks in the index while simultaneously avoiding the under-performing ones, thus earning higher than a 7% return. Since an index like the Dow Jones Industrial Average is just an average of the performance of all the underlying stocks, some stocks will earn higher than 7 percent and some will under less than 7 percent. So active managers are betting that they can predict the winners and losers.

Why Index Funds?

To get Vanguard to adopt the index fund, Bogle presented data to show how $1 million invested with an assumed market return of 10 percent would be worth $17.5 million after 30 years. Meanwhile, a similar investment at 8.5 percent (using the 1.5 percent cost differential) would be worth $11.5 million. The point he illustrated was that the cost-savings resulted in a $6 million payoff that was six times the original amount of the initial investment. Vanguard saw the opportunity and approved the index fund Jack Bogle created.

The Big Idea: The less money spent on fees means more money that can stay invested in the market and grow over the long-term.

Today, many investment managers still follow the active investment philosophy and try and “beat the market” by earning a better return. The wealth of data and research that exists now shows individual investment advisors cannot outperform the market in the long-run.

The truth is, no one knows with certainty where the market is headed on a daily, monthly, or yearly basis. You can always find an example of an active investment manager who beat the market for a year or two. But it’s nearly impossible to find evidence of any manager doing so on a consistent basis over the decades of time that most people invest.

Conclusion

Index funds make up anywhere from 25 to 30 percent of all fund investments. These funds mirror an index at a fraction of the cost of a traditional mutual fund that tries to outperform the index.

If you haven’t yet, it’s time to rethink the high cost and poor performance of actively managed mutual funds. But if the data isn’t enough to convince you, the lower cost of investment management just might. Index funds are an opportunity for every investor. Take a hard look at what you are paying for and ask yourself: Is it worth it?

https://www.vanguard.com/bogle_site/lib/sp19970401.html

S&P Dow Jones Indices, “SPIVA® U.S. Scorecard,” Aye M. Soe, CFA® and Ryan Poirier, FRM, July 2017. http://www.spindices.com/documents/spiva/spiva-us-mid-year-2017.pdf

Why I Believe In Passive Investing

Written by support@seostats.com on . Posted in Investing.

I worked for almost a decade in the Hedge Fund industry. For a majority of my tenure, like most in the field, I was a believer in active management. Active management is the ability for a talented portfolio manager and a room full of analysts to deliver outperformance on a consistent basis.  Outperformance is based on a benchmark index like the S&P 500.  The idea is that the market will return what it does on average every year (6-7% historically) but these managers can beat that number with expertise and skill.

There is much prestige and mystique associated with those that are in the business of beating the market. Some claim that they have to the ability to do it on their own; others, that they are able to pick the individual portfolio manager that can.

I do not believe in investing my client’s hard-earned savings using a philosophy that has proven time and time again to be a losing battle.

A study published by Vanguard examined all 1,540 actively managed US domestic equity mutual funds that were available to investors in 1998. Not only did 45% of the funds not survive a 15 year time-frame (they merged with other funds or were closed due to poor performance), but only 18% of the original funds outperformed their benchmark (the market). In addition, 97% of the funds that outperformed over the 15 year time period had at least 5 years of consecutive underperformance. This shows us that outperformance is rare, and consistent outperformance is even more infrequent.

Intermittent outperformance, high fees, and often additional volatility do not allow us to be in control. While we can’t predict the future we know how markets work; focusing on diversification, minimizing fees and tax efficient investing is how we can maximize returns.

This is done through passive investing.

Passive investing is buying and holding. Acknowledging that the market is efficient gives you the ability to divert all attention towards what you can control: fees, taxes, and most importantly your behavior. Ignoring the constant noise generated by the market, media, and those chasing after the next best thing can allow us to spend the time needed on why you are trying to invest in the first place: to reach your financial goals.

Please feel free to reach out to me directly to learn more about Lake Road Advisor’s investment philosophy.