I think everyone can learn how to invest. There is no need for money managers.
I’ll take that back. If you’re the type of person that won’t keep their money in the market when things are going down then maybe having someone to hold your hand and convince you to stay in the market is a good thing. Otherwise, you’re not paying for much.
Maybe there is value in having someone coach you and stay abreast of the best practices for the structures of your investments. What I mean is, what type of investment account do you need? Do you qualify for a SEP IRA or a Solo 401K? Is a self directed IRA best for your needs and how do you set one up? Should you draw on your spouse’s social security payment while allowing yours to continue to defer and grow? This is important knowledge that has value.
But as far as what to invest in within the structures that you have set up, this needs to be on you. If you don’t enjoy studying and learning about the investing world then keep it very simple. Buy yourself a low cost index fund of the S&P 500 and that’s it. Your returns will beat almost everybody else’s. At least the ones who pay advisors to recommend to invest in. Vanguard, Fidelity, Schwab and iShares all have good selections of low cost funds. I’m partial to Vanguard. Every fund company has diversified funds. Cost is the differentiator.
The reason that you will beat them is because they are charging 1% to 3% annual fees on the value of your accounts.
Now, usually the advisor doesn’t get to keep all of it. Much of it goes to the actual managers of the mutual fund, the annuity company or the managers of the advisory program you are in, and of course to the company that the client advisor works for.
But here is the kicker, the advisor is putting the clients into a well diversified basket of investments. And the more diversified a portfolio is the more likely it is to track with the total market average. Guess what that means? They are getting the same investment performance as you, but they are underperforming you by 1% to 3% each year because of the fees they pay.
“But we do it with less risk.” The advisors might say.
At first glance this might appear so. But really what it comes down to is what percentage of your investment is in stocks and what percentage is in bonds. And what percentage is in other categories like real estate or commodities. They are not comparing apples to apples. With an extremely minimal amount of research you can learn what percentage of the funds goes into each category in the advisor’s proposed investment plan and you can buy a low cost index fund for the same categories and in roughly equal proportions. Then, over time, you will outperform that investment plan by at least the same margin of the fees.
What if you want to be more engaged with your investments and not simply take a passive index fund approach? Good news, investing is not nearly as complicated as we’ve been trained to think. Don’t worry about the term “market”. Buying stocks is nothing more than buying businesses. Bonds are nothing more than loaning money to businesses or governments. I’ll throw a 3rd asset class term in there, REITS. REITS are nothing more than buying real estate properties. You want to be the owner of good companies. You only want to loan money to companies that will pay you back and you only want to own real property that will grow in value or pay you steady rents, ideally both.
Don’t mess around with Options, Commodities, Hedge Funds, Art & Collectibles, Foreign Currencies, various forms of leverage. All of that stuff falls into the category of speculation. Don’t speculate with your money, invest your money.
If You Are a Small Business Owner You Have an Advantage.
You are accustomed to analyzing the performance of your own business according to your financial records. Even if you have outsourced your bookkeeping and accounting to a bookkeeping expert, you study the reports and make decisions based off of those reports. Investing in stocks is not different. Don’t listen to anybody who tells you that it is different. You know how to look over the Balance Sheet, the P&L and the Cash Flow Statement. Looking at those, it won’t take you long to say to yourself “Damn, this company is in trouble.” or “This company is on solid financial footing.” From there you can evaluate the company’s value proposition and their product line and decide if you think you want to own some of that company.
One of the greatest things about publicly traded companies is that legally they must publish all of their relevant financial documents at least quarterly for the public to read. Those documents also have to be audited by an independent accounting firm. So by law they have to publish the documents I need to evaluate their worthiness of my investment. Pretty cool, I say.
When deciding if the price is good, just calculate what it would take to buy every share of the company. Is that total a good price based on your evaluation of their books and their prospects? If the answer is yes, then buy some. If not, put it on your list of companies that you’re interested in when the price becomes more fair.
Bonds
I’ll be honest, I’m not a fan of bonds. I don’t particularly want to buy them. I’d rather use the money to buy more stocks. But they’re a true asset class. You can make money with them and you can make money consistently. The best part is that they are a consistent money making vehicle that doesn’t rise and fall at the same time as stocks. But I think you should train yourself to not panic when the stock “market” is falling. Use it to your advantage. There’s no need, in my opinion, of trying to smooth out the dips by putting a significant portion of your money in a steady, but ultimately underperforming asset class.
I think I would rather buy ownership of a bank. Let the bank lend money. I’m also interested in private money lending, but we can talk about that another time.
Startups & Other Small Businesses
The smaller the company the more potential for massive growth. What about investing in startups or companies that are not yet publicly traded?
This is simply just another way to own businesses. They are “stocks” by my definition. They are just not publicly traded. Their values are not published up to the second in any online hub. They’re not on the market. These are the companies that might grow 10x from your original investment in under a decade. You’re not likely to ever 10x your investment on the stock market in such a short time. I’m hoping that my market returns are going to double every 6 or 7 years.
These oportunities are much easier to find when you already have money. They will come looking for you. If you don’t have a lot of money you will probably have to invest in some type of fund with managers to have access to any of these. And you know how I feel about managers.
I like venture capitalism. But that doesn’t mean I want to hand my money over to someone else to let them do it for me. I want to buy into the companies, just me or just me and my close partners. I want to know what companies I’m buying and my particular reasons for buying them. I’m gonna stay away from venture capitalism funds.
I’ve got much more to say on these topics. Stay tuned.