What Makes A Great Investor?
In my opinion, investing is arguably the most competitive field in the world. So what differentiates a great investor from the rest?
By Investment Associate Bobby Adusumilli, CFA.
In my opinion, investing is arguably the most competitive field in the world. With financial and technological innovations in recent decades, almost anyone in most developed countries with a sum of money can buy and sell public stocks, bonds, mutual funds, ETFs, and other financial instruments. Additionally, regardless of their occupations, many people invest through 401(k)s, 403(b)s, 457 plans, IRAs, taxable accounts, and / or a number of other financial accounts. Even if their primary occupations take up most of their time, these people are also investors.
With billions (or even trillions) of dollars in potential gains at stake, investing has become increasingly competitive as time has gone on. Thousands of investment firms across the country employ smart people and cutting-edge technology, all in the pursuit of achieving higher returns. As a result, investment market prices are constantly adjusting from the buy and sell orders of sophisticated parties, making it very difficult for someone to outperform the market.[1][2]
So what differentiates a great investor from the rest?
Over a series of recent newsletters and articles, financial journalist Jason Zweig (author of Your Money and Your Brain, as well helped Nobel Prize-winning psychologist Daniel Kahneman write the bestselling book Thinking, Fast and Slow) details what he believes are the seven virtues of great investors.[3] We share these virtues below, providing our own experiences with each.
Discipline
Discipline is about creating a well-thought-out investment process appropriate for you, and then following your rules.[4] Discipline also helps you get out of your own way, particularly in the tough times. In our experience, the more disciplined an investor is, the better their investment returns tend to be. As John Bogle writes in his book Bogle On Mutual Funds: New Perspectives For The Intelligent Investor, “Successful investing involves doing just a few things right and avoiding serious mistakes.“[5]
Curiosity
Curiosity is driven by wanting to understand the world, wanting to get closer to what is true.[6] By being curious enough to understand what investment strategies work and why, you can potentially help yourself become a better investor.
Skepticism
Skepticism requires focusing on your foundational principles, and questioning arguments that differ from these principles.[7] For example, research demonstrates that most stock market investors underperform total stock market index funds, particularly over the long-term.[1] If someone tries to pitch you an investment that they say will outperform the stock market, and there is not enough good theory and evidence to back up their claim, then we would strongly caution you against purchasing that investment.
However, skepticism is not the same as pessimism. Skepticism also calls for open-mindedness when theory and evidence support a particular argument. As Howard Marks writes in his book The Most Important Thing, “Skepticism calls for pessimism when optimism is excessive. But it also calls for optimism when pessimism is excessive.“[8]
Independence
Independence means doing the right thing.[9] If others are doing the right thing, then independence doesn’t mean that you have to be alone. But if others around you are doing something that doesn’t align with your principles and investment strategy, then being independent means having the courage to stick with your investment plan, even if that means going against the crowd.
Humility
Humility means understanding the reality of your situation, not deceiving yourself.[10] Humility recognizes that you don’t control and know everything. As an investor, there will be times when you underperform others around you, and there will be times when you outperform. In our experience, performance is always subject to some degree of luck. Humility also means that there will be someone more successful at investing than you, and recognizing that that is okay as long as you have a sound investment strategy in place and you are making progress towards your goals.
Patience
The longer you invest, the more time you are giving your investments to potentially grow, as the graph at the bottom of this article demonstrates.[11] While each investor has different circumstances and goals, in our experience, many of the best investors give themselves as much time as possible to grow their money; they have the patience to have the longest view in the room.
Courage
It is hard to be a great or even good investor. It is hard to continue investing when the market is going down, and it is hard to be disciplined enough to stick with your investment strategy when other strategies are booming.[3] If you create a well-thought-out investment plan backed by theory and evidence, then in our experience, having the courage to stick to your investment plan in both good times and bad tends to work out for people in the long run.
So What Can You Do To Become A Great Investor?
Research shows that the vast majority of stock market investors underperform the stock market, with greater underperformance as the period of time studied is lengthened.[1] While there are some people who outperform for a period of time, it is very hard to know who these people are in advance. Even if you know who they are, as the period of time increases, some of these great investors no longer achieve the same level of outperformance.
So what can you do to become a great investor? One strategy is to aim to be an above-average investor each year for a very long period of time. For example, research shows that just owning the stock market through an index fund will help you outperform most investors in most years as well as over time.[1] For example, if you had been able to own the global stock market as measured by the MSCI ACWI Index from 1988 (the index inception) through April 2022 (assuming reinvestment of all distributions; no other expenses or taxes considered), an initial investment of $100,000 would have grown to over $1,400,000. While the definition of a great investor is ambiguous, this performance seems like a great outcome to me.
Source: Dimensional Returns Web. See Important Disclosure Information.[12]
While future performance will differ from past performance, and while it was more difficult to invest in global investment strategies in the past, investors today have the ability to nearly match many global stock and bond indices even after considering fees.[13] Therefore, we believe that investing in low-cost, low-turnover, broadly-diversified global mutual funds and ETFs is a sound investment strategy that can potentially help a lot of people over the long-term.[14] And if you stick with a sound investment strategy long enough, you may become a great investor yourself.
Important Disclosure Information & Sources:
[1] “2022 Quantitative Analysis of Investment Behavior Report”. DALBAR, 2022, dalbar.com.
[2] “Why Do Investors Underperform?“ Bobby Adusumilli, 24-Jun-2021, sjsinvest.com.
[3] “The Secret to Braving a Wild Market“. Jason Zweig, 02-Mar-2022, wsj.com.
[4] “2020: The Sequel?“ Jason Zweig, 12-Jan-2022, The Intelligent Investor Newsletter - wsj.com.
[5] “Bogle On Mutual Funds: New Perspectives For The Intelligent Investor“. John Bogle, 2015, Wiley Investment Classics.
[6] “'The First Great Investing Virtue“. Jason Zweig, 19-Jan-2022, The Intelligent Investor Newsletter - wsj.com.
[7] “A New Month, A New Market?“ Jason Zweig, 08-Feb-2022, The Intelligent Investor Newsletter - wsj.com.
[8] “The Most Important Thing: Uncommon Sense for the Thoughtful Investor“. Howard Marks, 2011, Columbia Business School Publishing.
[9] “Stepping Away from the Herd“. Jason Zweig, 15-Feb-2022, The Intelligent Investor Newsletter - wsj.com.
[10] “On Humility and Independence“. Jason Zweig, 22-Feb-2022, The Intelligent Investor Newsletter - wsj.com.
[11] “Patience Amid Turbulence“. Jason Zweig, 02-Mar-2022, The Intelligent Investor Newsletter - wsj.com.
[12] The MSCI ACWI Index is a free float-adjusted market capitalization weighted index designed to measure the equity market performance of developed and emerging markets, consisting of 47 country indices comprising 23 developed and 24 emerging market country indices. Indices are not available for direct investment. Index performance does not reflect the expenses associated with management of an actual portfolio. Index performance is measured in US dollars. The index performance figures assume the reinvestment of all income, including dividends and capital gains. The performance of the indices was obtained from published sources believed to be reliable but which are not warranted as to accuracy or completeness.
[13] “Index funds“. Vanguard, vanguard.com.
[14] “MarketPlus Investing“. SJS Investment Services, sjsinvest.com.
There is no guarantee investment strategies will be successful. Past performance is no guarantee of future results. Diversification neither assures a profit nor guarantees against a loss in a declining market.
Statements contained in this article that are not statements of historical fact are intended to be and are forward looking statements. All forward looking statements are inherently uncertain as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties which could cause actual events or results to differ materially from those projected.
Advisory services are provided by SJS Investment Services, a registered investment advisor (RIA) with the SEC. Registration does not imply a certain level of skill or training. SJS Investment Services does not provide legal or tax advice. Please consult your legal or tax professionals for specific advice.
Hyperlinks to third-party information are provided as a convenience and we disclaim any responsibility for information, services or products found on websites or other information linked hereto.
Bitcoin & Cryptocurrencies: Do They Have A Place In Your Portfolio?
To help you better understand cryptocurrencies, we provide a short history, potential benefits, concerns, and how your portfolio can potentially benefit from cryptocurrencies.
By Founder & CEO Scott Savage.
Increasingly, this is a question that is posed to the SJS Team: Should I buy bitcoin?
While bitcoin and other cryptocurrencies have risen dramatically in price over the past ten years, most of the ideas underlying cryptocurrencies are not all that new, and cryptocurrencies are not as complicated as they may appear to be.[1] To help you better understand cryptocurrencies, we provide a short history, potential benefits, concerns, and how your portfolio can possibly benefit from cryptocurrencies.
History Of Cryptocurrencies
The idea behind a digital currency is not new. Starting around the 1980s, many individuals have attempted to create a digital currency, with each breakthrough building on top of past breakthroughs.[2] For example, in its early years, PayPal (which also now owns Venmo) was driven by the “idea of creating a new digital currency to replace the U.S. dollar.”[3] Technology and the internet have allowed for transactions to become faster, more secure, and lower cost. Many people in the US today don’t even use paper cash today, meaning the U.S. dollar already feels like a digital currency for them.
In 2008, another breakthrough occurred: an unknown person or team named Satoshi Nakamoto outlined a new cryptocurrency called bitcoin in a white paper, calling bitcoin, “A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.“[4] Simply put, bitcoin is digital money that securely allows people to transact over the internet, without needing a bank or traditional financial intermediary involved.
Bitcoin’s single biggest innovation is the blockchain, which is the technology underlying bitcoin that allows for all historical transactions to be recorded for anyone around the world to access at any time. The blockchain also allows for transactions to happen almost instantaneously, securely, in a relatively low-cost manner, and be verified by anyone around the world.
21 million bitcoin is the maximum number of bitcoin that will ever be created.[4] Today, there are roughly 19 million bitcoin outstanding, and the remaining 2 million will be “mined” over the next 100+ years to compensate people for ensuring the accuracy of the blockchain.[4][5] You can own fractional interest of one bitcoin. In 2011, the price of one bitcoin exceeded $1 US dollar; by April 2022, the price of bitcoin is around $40,000 US dollars, meaning the total value of all bitcoin in existence today is roughly $750 billion.[5]
As with any lucrative technology, bitcoin and the blockchain have given risen to thousands of other cryptocurrencies and related digital assets. While we believe the vast majority of these digital assets won’t have value over the long-term, another cryptocurrency called Ethereum has made significant innovations building off of bitcoin, which is why it has become the second most valuable cryptocurrency behind bitcoin.[6]
If you would like more information on the history of bitcoin and cryptocurrencies, we recommend the book Digital Gold: Bitcoin and the Inside Story of the Misfits and Millionaires Trying to Reinvent Money by Nathaniel Popper.
Potential Benefits Of Cryptocurrencies
Transparency: Bitcoin is designed to be transparent, in efforts to limit the ability for a group of people or institutions to manipulate both bitcoin and the blockchain.
Limited amount of currency: Bitcoin and some other cryptocurrencies limit the amount of currency that will exist in the future. Many supporters believe this will help these cryptocurrencies serve as a store of value (this is why bitcoin is sometimes referred to as “digital gold”) as well as protection from inflation.[6] This is a major positive factor for people who are worried about governments printing money to pay off debts, which would devalue those currencies.[6]
Ability to hold around the world: Particularly for people who live in countries with volatile currencies or who move around the world, owning cryptocurrencies can be significantly more stable and secure for them compared to holding the local currencies.
Lower transaction costs: Cryptocurrencies may be able to help lower financial transaction fees over time. For example, many individuals in developing countries have to pay significant transaction fees in order to wire money to the US. Bitcoin can potentially reduce these transaction fees. Additionally, many people hope that the blockchain will help to lower (or even eliminate) credit card fees over time.
Privacy: Each bitcoin has a public key and a private key. Someone needs to use their private key (a long string of numbers and letters) in order to initiate a transaction. During a transaction, the public key is used by others on the blockchain to verify transactions. Both public and private keys are not associated with a person’s name, so as long as people don’t know that you own the private key and public key, then this can help to limit the chances that they will learn that you own that bitcoin.
Increasing adoption: Both individuals as well as institutions have been increasingly adopting the two largest cryptocurrencies (bitcoin and Ethereum) over the last few years.[7]
Concerns Of Cryptocurrencies
Volatility: Historically, even the largest cryptocurrencies have been highly volatile in price.[5] While this volatility is expected to decrease with increasing adoption, the volatility limits usefulness as an actual day-to-day currency.
Technological vulnerabilities: Cryptocurrencies and exchanges are subject to security risks, operational shutdowns, and hackers. For example, the Wall Street Journal estimates that approximately $3.2 billion worth of cryptocurrency was stolen in 2021.[8] However, the largest risks often impact newer and less-adopted cryptocurrencies and exchanges. In the coming years, the technology and infrastructure for the largest cryptocurrencies such as Bitcoin and Ethereum will become more robust, and hackings may become less common as a result.
Can lose your cryptocurrency: If you have a private wallet not affiliated with a major exchange, then if you lose your private key, you may potentially lose your cryptocurrency forever. For example, the New York Times recently estimated that nearly 20% of the total Bitcoin outstanding has been lost or is in stranded wallets.[9]
Increasing use of financial intermediaries: People and institutions are increasingly using financial intermediaries to store their cryptocurrencies.[7] This trend is in contrast to the initial vision for bitcoin.[4]
Less privacy than expected: Some people and institutions may not be able to achieve the level of privacy that they are hoping for with cryptocurrencies. For example, due to Russia’s war with Ukraine in 2022, Coinbase announced that it would block nearly 25,000 Russian-linked accounts (addresses) believed to be engaging in illicit activity, and governments around the world are also trying to seize Russian-linked cryptoassets.[10][11]
Limited current regulation, and potential for cumbersome regulation in the future: So far, regulation in countries around the world has lagged the growth of cryptocurrencies. However, governments are increasingly prioritizing regulation for cryptocurrencies, which could lead to uncertain effects. For example, China (which is expected to become the largest economy in the world by around 2030) has banned citizens from transacting in cryptocurrencies.[12] Additionally, the United States has not allowed for cryptocurrencies to be held directly in mutual funds and ETFs.[13] How will future regulation impact the value of cryptocurrencies?
How Can Your Portfolio Potentially Benefit From Bitcoin?
Market prices are driven by supply and demand. There is large and increasing demand for cryptocurrencies, and therefore we believe that cryptocurrencies are here to stay.
However, we don’t know what the aggregate market capitalization of cryptocurrencies will be, nor do we know how quickly cryptocurrencies will grow or decline, nor which ones will flourish and which ones will cease to exist. Bitcoin doesn’t have any earnings and doesn’t pay dividends, so we can’t value it like stocks.
What we do know is that cryptocurrencies have been quite volatile, and many clients are not comfortable investing in them. Additionally, for people who don’t do their homework, we view their buying of bitcoin as speculation, not investing.
Therefore, we do not invest client assets directly into cryptocurrencies. However, there are other ways to benefit from potential growth in cryptocurrencies. For example, there is an expansive options market for bitcoin where people and institutions do everything from speculating to hedging to achieving indirect exposure. In alignment with our view that cryptocurrencies are here to stay, we believe there are positive expected returns available in providing capital to the bitcoin options market. It is very complicated; we rely on an investment manager who has extensive experience with this market as part of a diversified alternatives mutual fund.[14] Additionally, due to their exposures to cryptocurrencies, some of the underlying stocks in the mutual funds and ETFs that we recommend may benefit from potential growth in cryptocurrencies.
The Ancient Chinese proverb famously says, “The best time to plant a tree was 20 years ago. The second best time is now.” When it comes to speculating in bitcoin, I would urge caution when applying this proverb to anything other than trees!
Important Disclosure Information & Sources:
[1] “Total Cryptocurrency Market Cap“. CoinMarketCap, 22-Apr-2022, coinmarketcap.com.
[2] “Cryptocurrency“. Wikipedia, wikipedia.org.
[3] Zero to One: Notes on Startups, or How to Build the Future. Peter Thiel & Blake Masters, 2014, Currency.
[4] “Bitcoin: A Peer-to-Peer Electronic Cash System“. Satoshi Nakamoto, 2008, bitcoin.org/en.
[5] “Total Circulating Bitcoin“. Blockchain, 22-Apr-2022, blockchain.com.
[6] Digital Gold: Bitcoin and the Inside Story of the Misfits and Millionaires Trying to Reinvent Money. Nathaniel Popper, 2016, Harper Paperbacks.
[7] “Our Thoughts on Bitcoin“. Ray Dalio & Rebecca Patterson, 28-Jan-2021, bridgewater.com.
[8] “Cryptocurrency-Based Crime Hit a Record $14 Billion in 2021“. Mengqi Sun & David Smagalla, 06-Jan-2022, wsj.com.
[9] “Lost Passwords Lock Millionaires Out of Their Bitcoin Fortunes”. Nathaniel Popper, 14-Jan-2021, nytimes.com.
[10] “Using Crypto Tech to Promote Sanctions Compliance“. Paul Grewal, 06-Mar-2022, coinbase.com.
[11] “The hunt for Russian crypto is on“. Benjamin Pimentel, 08-Mar-2022, protocol.com.
[12] “What's behind China’s cryptocurrency ban?“ Francis Shin, 31-Jan-2022, weforum.org.
[13] “SEC Delays Decision on Bitcoin ETFs Again“. Chitra Somayaji, 23-Jun-2021, wsj.com.
[14] “Stone Ridge 2020 Shareholder Letter“. Ross Stevens, 2020, stoneridgefunds.com/?tab=srdax.
Other resources that influenced this blog post.
“Cryptoassets: The Guide to Bitcoin, Blockchain, and Cryptocurrency for Investment Professionals“. Matt Hougan & David Lawant, 07-Jan-2021, cfainstitute.org/en.
“Why Bitcoin Matters“. Marc Andreesen, 11-Jan-2014, nytimes.com.
There is no guarantee investment strategies will be successful. Past performance is no guarantee of future results. Diversification neither assures a profit nor guarantees against a loss in a declining market.
MarketPlus Investing® models consist of institutional quality registered investment companies. Investment values will fluctuate, and shares, when redeemed, may be worth more or less than original cost.
Statements contained in this article that are not statements of historical fact are intended to be and are forward looking statements. All forward looking statements are inherently uncertain as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties which could cause actual events or results to differ materially from those projected.
Advisory services are provided by SJS Investment Services, a registered investment advisor (RIA) with the SEC. Registration does not imply a certain level of skill or training. SJS Investment Services does not provide legal or tax advice. Please consult your legal or tax professionals for specific advice. This material has been prepared for informational purposes only.
Hyperlinks to third-party information are provided as a convenience and we disclaim any responsibility for information, services or products found on websites or other information linked hereto.
Four Investment Accounts Young Investors Should Know About
Knowing which investment accounts to store your money can be challenging. We detail four investment accounts that can aid you in growing your wealth over time.
By SJS Investment Services Intern Jake Matthews.
You probably remember working your first job. The feeling after receiving your first paycheck is both rewarding and refreshing. But now, how do you store your hard-earned money? How do you protect your money from inflation? What steps should you take now to save for retirement?
Knowing which investment accounts to store your money can be challenging. Yet, the rewards to investing can be tremendous over your lifetime. Choosing the right investment accounts to use at a young age can be the first step in building generational wealth. Below, we detail four investment accounts that can aid you in growing your wealth over time.
IRA: Roth & Traditional
One of the most popular investment accounts is the Individual Retirement Account (IRA), which offers tax advantages to encourage U.S. workers to save and invest for retirement. There are two types of IRAs available to most income-earning U.S. workers: Roth IRA and Traditional IRA.
Roth IRAs and Traditional IRAs are subject to many of the same rules. In any given year, as long as you have enough taxable income, you can contribute up to $6,000 ($7,000 if age 50 or older) to a Roth IRA and / or a Traditional IRA. You can open a Roth IRA or Traditional IRA at many large brokerage firms in the U.S. (such as Schwab, Vanguard, and Fidelity), and can invest in a very broad range of investments including mutual funds, ETFs, stocks, and bonds. While the money is held in your Roth IRA or Traditional IRA, you do not pay taxes on any dividends or realized gains on your investments. Any money you withdraw before age 59 1/2 may be subject to income taxes and a 10% penalty.[1]
There are important differences between a Roth IRA and Traditional IRA. For a Roth IRA, you contribute after-income tax money, and any investment gains that you withdraw after age 59 1/2 are not taxed. If you are a single tax filer, your contribution limit starts declining once you earn $125,000 in a year, and you cannot contribute if you earn more than $140,000.[2]
For a Traditional IRA, you contribute pre-income tax money, and money (both what you contributed and any gains) that you withdraw after age 59 1/2 are subject to income taxes. If you are a single tax filer and have an employer-sponsored retirement plan, you gradually lose the tax advantages of a Traditional IRA once you earn over $66,000 in a year, and lose nearly all of the tax advantages after you earn more than $76,000.[3]
Particularly for young investors, we believe that a Roth IRA is generally more beneficial over the long-term than a Traditional IRA.
401(k): Traditional And Roth
Another popular investment account for young investors is the 401(k), a retirement account sponsored by your employer. While all employers with a 401(k) offer the Traditional option, only some offer the Roth option. 401(k)s are subject to many of the same rules as IRAs.
Unlike IRAs, no matter how much you earn, you can contribute up to $19,500 ($26,000 if age 50 or older) of your income per year to a 401(k). Because 401(k)s are employer-sponsored accounts, many employers will match their employees contributions up to a specified amount. 401(k)s usually have limited investment options (typically a lineup of mutual funds), and are often subject to higher annual expenses than IRAs. Instead of a 401(k), certain employers may offer a 403(b), which has similar rules.[4]
Many investors retire with their 401(k) as their single largest investment account.
Health Savings Account (HSA)
Some employer-sponsored health insurance plans offer for employees to contribute to a Health Savings Accounts (HSA), which allows you to save pre-tax dollars to pay for future medical expenses. Some employers also contribute to the HSA. For an individual, the total employee and employer contributions cannot exceed $3,600 ($7,200 for a family) per year. Some HSA plans allow you to invest in a limited lineup of mutual funds, and any dividends and gains are not taxed as long as they are used for future medical expenses.[5]
Because of the tax advantages, many young investors use their HSA as an investment account for the long-term.
529 Plan
If you plan to go back to school one day or have other qualified education expenses, you can consider contributing to a 529 Plan. You contribute after-income tax money to a 529 account, which can be invested in a limited number of investments. Any money you withdraw from the 529 account is tax-free as long as the money is used for qualified education expenses.[6]
Each state offers a different 529 plan, and you are able to participate in whichever state’s plan is most beneficial to you. Each state offers a different investment lineup, contribution limit, state income tax benefits for residents, and expenses. If you do not use all of the money in your 529 account, you can change the beneficiary to a qualifying family member with no penalty, subject to gift tax rules.[7]
Overall, a 529 account can be a great way to start saving for future education expenses for you or your family.
Benefits Of Compounding Returns
Albert Einstein reportedly said, “Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.”[8] By using these four investment accounts, you can invest to potentially allow your wealth to compound for the long-term while paying less in taxes.
To demonstrate this, the below graph shows what would happen if you contribute the maximum to your Roth IRA ($6,000 in 2021, expected to grow 2.00% annually due to inflation) at the beginning of each year, and invest the Roth IRA in a portfolio that earns a 5.00% annual expected return.
Graph created by Jake Matthews, and reflects hypothetical information based on the assumptions above. Actual investment results may be materially different than hypothetical returns. See Important Disclosure Information.
After 50 years, the above Roth IRA grows to over $1,842,920.47. That’s the power of compounding.
Conclusion
As a young investor, knowing which investment accounts are available to you as well as the associated benefits & tradeoffs can dramatically help you grow your net worth over your lifetime. We believe these four accounts provide a very strong foundation for any investor to begin the journey of saving for their future.
About The Author:
Jake Matthews is a rising fourth-year undergraduate student at Miami University, majoring in Economics & Finance. Jake is a member of Miami University’s Track Team, running the 200-meter and 400-meter. Jake enjoys learning about a wide variety of industries, particularly about alternative investments including real estate, collectibles, and cryptocurrencies.
Jake spent the last ten weeks interning at SJS, helping with client portfolio analyses, investment recommendations, and improving financial planning processes. We are very grateful to have gotten to know and work with Jake this summer, and we wish him all the best as he heads back to college!
Important Disclosure Information & Sources:
[1] “Individual Retirement Arrangements (IRAs)“. IRS, irs.gov.
[2] “Amount of Roth IRA Contributions That You Can Make For 2021“. IRS, irs.gov.
[3] “IRA Deduction Limits“. IRS, irs.gov.
[4] “401(k) Plans“. IRS, irs.gov.
[5] “Health Savings Account (HSA)“. Julia Kagan, 01-Mar-2021, investopedia.com.
[6] “An Introduction to 529 Plans“. U.S. Securities and Exchange Commission, 29-May-2018, sec.gov.
[7] “Complete Guide to 529 Plans“. Julia Kagan, 07-Jul-2021, investopedia.com.
[8] “Why Einstein Considered Compound Interest the Most Powerful Force in the Universe“. Jim Schleckser, 21-Jan-2020, inc.com.
There is no guarantee investment strategies will be successful. Past performance is no guarantee of future results. Diversification neither assures a profit nor guarantees against a loss in a declining market.
Statements contained in this report that are not statements of historical fact are intended to be and are forward looking statements. All forward looking statements are inherently uncertain as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties which could cause actual events or results to differ materially from those projected.
Advisory services are provided by SJS Investment Services, a registered investment advisor (RIA) with the SEC. Registration does not imply a certain level of skill or training. SJS Investment Services does not provide legal or tax advice. Please consult your legal or tax professionals for specific advice. This material has been prepared for informational purposes only.
Hyperlinks to third-party information are provided as a convenience and we disclaim any responsibility for information, services or products found on websites or other information linked hereto.
Suggested Reading
Why Do Investors Underperform?
We want to emphasize six aspects of investor psychology - also known as cognitive biases - that tend to hurt investor performance, and what investors can do to address these biases.
By SJS Investment Services Investment Associate Bobby Adusumilli, CFA.
Over the past 40 years, advances in investment offerings and technology have provided investors with far more opportunities to invest in stocks and bonds compared to the past. From their laptops, people can now invest in markets all around the world. Mutual fund and ETF expense ratios have been decreasing, with many index mutual funds and ETFs approaching a 0.00% expense ratio.[1] Congress has created tax-advantaged accounts such as IRAs, 401(k)s, 529 plans, and HSAs to encourage people to invest while saving on taxes over time.[2] And more recently, many brokerage firms no longer charge trading commissions on stock and bond trades.[3]
Given all of these advances, you would think that investors have gotten better at earning their fair share of investment returns. However, you may be surprised to learn that most stock and bond investors in the US still significantly underperform the market averages.
For example, as of 31-Dec-2019, DALBAR found that the average equity mutual fund investor underperformed the S&P 500 (a benchmark for the US stock market) by nearly 5% annually over a 30-year span.[8] For a $100,000 initial investment, that’s a 30-year ending portfolio balance of $437,161 for the average equity mutual fund investor compared to $1,726,004 for the S&P 500.[4]
What explains this underperformance? We think that part of the explanation is that many investors trade too much, as well as pay too much in transaction fees (including bid-ask spreads), high expense ratios, and unnecessary taxes. However, we think a bigger part of the explanation relates to investor psychology. In particular, we want to emphasize six aspects of investor psychology - also known as cognitive biases - that tend to hurt investor performance, and what investors can do to address these biases.[5]
Overconfidence
Overestimating our skills or circumstances, which interferes with our ability to make good decisions. For example, when evaluating a particular investment, an investor may feel really confident that they have a much better analysis than the general market.
Loss Aversion
The tendency to be driven more strongly to avoid losses than to achieve gains. For example, even when presented with better investment opportunities, an investor may decide to keep holding a stock that has declined in value until it can be sold at a gain.
Confirmation Bias
The tendency to seek out and interpret information that confirms or strengthens our existing beliefs. For example, after making an investment in a particular stock, an investor may actively search for news and analyses that support the decision to invest, as opposed to considering other news or alternative analyses.
Recency Bias
Believing that recent events are more likely to occur than they actually are. For example, a year after a major stock market downturn, many investors still avoid investing because they believe that another major downturn is likely to happen in the short-term.
Endowment Effect
The tendency to place more value on an investment that you own compared to the price it can be purchased / sold at on the open market. For example, particularly for an inherited stock or stock in the family business, an investor may value their shares more than the current market price.
Optimism Bias
The belief that our chances of experiencing negative events are lower and our chances of experiencing positive events are higher than the averages. For example, many investors believe that if they just have good returns over the short-term, they will be much happier and better off in the future.
What Can You Do About Your Cognitive Biases?
Cognitive biases are easy to write about, but hard to actually prevent from negatively impacting our investment returns. Based on our years working with clients, we find that the below actions tend to help investors achieve better investment returns:
Define Your Circle Of Competence, And Don’t Stray Beyond That
There are many different investment styles that have helped people become wealthy over time. However, because there are so many investors competing to find the best investments, many top investors only focus on one particular style of investing that they understand really well, and don’t even consider other potential investments. This frees them to focus on what they do best, and ignore everything else.
Create Strategies And Systems That Do The Work For You
Instead of making a new decision each time you have money to invest (which is often stressful and time-consuming), you can instead create a strategy and system that automatically makes the decision for you. For example, many of our clients benefit from the below investment process:
Invest in broadly-diversified, low-cost, tax-efficient global mutual funds and ETFs.
Maximize contributions to tax-advantaged accounts, such as IRAs, 401(k)s, and HSAs.
Dollar-cost average: every time you have money to invest, immediately invest according to your pre-specified asset allocation.
Have a pre-specified and largely automated rebalancing strategy.
Cap Your Downside Risks
As investor Warren Buffett says about investing: “Rule Number 1: Never lose money. Rule Number 2: Don’t forget Rule Number 1.“ When deviating from a well-crafted and implemented investment strategy, much more can go wrong than can go right. We generally advise for investors to limit all of their niche investments to less than 10% of their overall portfolio. Additionally, we encourage investors to have an emergency fund with six months' worth of expenses, as well as all appropriate insurance coverage, in order to protect themselves in case something happens to them or their investments.
Respect The Averages, And Only Deviate From Your Plan If You Actually Have An Advantage
Many studies have found that investors who buy and hold broadly-diversified, low-cost, global index mutual funds and ETFs outperform the vast majority of investors over the long-term.[6] Investing in stocks and bonds is extremely competitive. As a result, if you don’t have a particular competitive advantage, or if you are not able to spend the necessary hours to do thorough research on a regular basis, then you probably won’t benefit from attempting to time the market or investing in niche investments.
More Money Probably Won’t Make You Much Happier
Through his research, Nobel-Prize-winning psychologist Daniel Kahneman has found that while being poor makes people miserable, for most people with a basic level of wealth, more wealth does not significantly increase day-to-day well-being.[7] Once an investor has a good investment strategy in place and reviews this strategy periodically, spending more time analyzing investments is unlikely to significantly improve investment returns or make someone happier over time.[4][6][7]
Summary
As the data shows for the majority of people, investing well over the long-term is tough.[4][6] By understanding ourselves better and creating well-thought-out & systematic investment processes, we think that investors are more likely to earn their fair share of investment returns over time.
Important Disclosure Information & Sources:
[1] “Pay Attention to Your Fund’s Expense Ratio“. Jean Folger, 27-Oct-2020, investopedia.com.
[2] “The Basics of a 401(k) Retirement Plan“. Mark Cussen, 29-Mar-2021, investopedia.com.
[3] “In the race to zero-fee broker commissions, here’s who the big winner is“. James Royal, 04-Oct-2019, bankrate.com.
[4] “2020 QAIB Report”. DALBAR, 2020, wealthwatchadvisors.com.
[5] How to Decide. Annie Duke, 2020, Portfolio / Penguin.
[6] Unconventional Success: A Fundamental Approach to Personal Investment. David Swensen, 2005, Free Press.
[7] Thinking, Fast and Slow. Daniel Kahneman, 2013, Farrar, Straus and Giroux.
There is no guarantee investment strategies will be successful. Past performance is no guarantee of future results. Diversification neither assures a profit nor guarantees against a loss in a declining market.
Statements contained in this post that are not statements of historical fact are intended to be and are forward looking statements. Forward looking statements include expressed expectations of future events and the assumptions on which the expressed expectations are based. All forward looking statements are inherently uncertain as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties which could cause actual events or results to differ materially from those projected.
MarketPlus Investing® models consist of institutional quality registered investment companies. Investment values will fluctuate, and shares, when redeemed, may be worth more or less than original cost.
Advisory services are provided by SJS Investment Services, a registered investment advisor with the SEC. Registration does not imply a certain level of skill or training. SJS Investment Services does not provide legal or tax advice. Please consult your legal or tax professionals for specific advice. This material has been prepared for informational purposes only.
Certain advisors of SJS may recommend the purchase of insurance-related products. Certain advisors of SJS are licensed insurance agents with various insurance companies and may receive additional compensation for such transactions.
Indices are not available for direct investment. Their performance does not reflect the expenses associated with management of an actual portfolio.
The S&P 500 Index is a free float-adjusted market-capitalization-weighted index of 500 of the largest publicly traded companies in the United States.
Bloomberg Barclays US Aggregate Bond TR USD Index measures the performance of investment grade, U.S. dollar-denominated, fixed-rate taxable bond market, including Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM passthroughs), ABS, and CMBS.
Inflation represented by the US Bureau of Labor Statistics Consumer Price Index All Urban Seasonally Adjusted, which is a measure of the average monthly change in the price for goods and services paid by urban consumers between any two time periods. It can also represent the buying habits of urban consumers. This particular index includes roughly 88 percent of the total population, accounting for wage earners, clerical workers, technical workers, self-employed, short-term workers, unemployed, retirees, and those not in the labor force.
Hyperlinks to third-party information are provided as a convenience and we disclaim any responsibility for information, services or products found on websites or other information linked hereto.
Suggested Reading
Are Stocks Riskier Than Bonds?
You have probably heard the saying, “Stocks are riskier than bonds.” While the logic makes sense, are stocks actually riskier than bonds?
By SJS Investment Services Investment Associate Bobby Adusumilli, CFA.
You have probably heard the saying, “Stocks are riskier than bonds.” The idea is that if investors take greater risk, they should get rewarded with a higher return over time; therefore, since stocks are riskier than bonds, then stocks should have higher returns over time. While the logic seems to make sense, we wanted to look at the historical data to answer the question: are stocks actually riskier than bonds?
The answer is: it depends on how you define risk. If you define risk as portfolio fluctuations over the short-term, then stocks have generally been riskier than bonds. However, if you define risk as loss of wealth over the long-term, or as lost opportunity to grow wealth over the long-term, then you may be surprised to learn that stocks may not actually be much riskier than bonds.
We want to illustrate these points via graphs. We use the S&P 500 Index as representative of the U.S. stock market, and the Bloomberg Barclays U.S. Aggregate Bond Index as representative of the U.S. bond market.[1][2] We want to focus on increases in purchasing power, so we use the U.S. Consumer Price Index (CPI) to calculate real (inflation-adjusted) returns.[3] Additionally, in order to use as much reliable historical data as we can, we chose the S&P 500 Index that has available data since 1926, while the Bloomberg Barclays U.S. Aggregate Bond Index has data since 1976.
It’s important to emphasize that indices are not directly investable. Before the last few decades, it was difficult for an individual to invest similar to a broadly-diversified index in a low-cost, tax-efficient, trading-efficient way. Therefore, it is unreasonable to expect that any investor could have matched the index returns below. However, with the increasing popularity of index funds over the past 25 years, an individual investor has a much greater ability to achieve returns similar to a well-known index in a low-cost, tax-efficient, trading-efficient way going forward.[4]
Risk: Portfolio Fluctuations Over The Short-Term
The U.S. stock market tends to fluctuate a lot from year-to-year. Since 1926 using end-of-year data, yearly real returns have ranged from -38% to +58%, rarely staying flat.
![Source: Dimensional Returns Web. See “Important Disclosure Information” below.[1]](https://images.squarespace-cdn.com/content/v1/5ee8ee8eb4fb337e3b806c1e/1620415191588-HMRZRCBNT9WB2VWZR882/2021.05.14+One-Year+Real+Returns+-+S%26P+500+Index.png)
Source: Dimensional Returns Web. See “Important Disclosure Information” below.[1]
Comparatively, the U.S. fixed income market has been much more steady. Since 1976, yearly real returns have ranged from -10% to 27%, with most returns within the range of -7% to 7%.
![Source: Dimensional Returns Web. See “Important Disclosure Information” below.[2]](https://images.squarespace-cdn.com/content/v1/5ee8ee8eb4fb337e3b806c1e/1620415588202-8XV9W7OOGHZUL4L3AOR5/2021.05.14+One-Year+Real+Returns+-+Bloomberg+Barclays+U.S.+Aggregate+Bond+Index.png)
Source: Dimensional Returns Web. See “Important Disclosure Information” below.[2]
These graphs above support the argument that stocks are riskier than bonds, if you define risk as fluctuations in value over the short-term.
Risk: Loss Of Wealth Over The Long-Term
Since 1945 based on end-of-year data, the U.S. stock market has not had a negative 20-year real return. The annualized 20-year real returns have ranged from 1% to 15%.
![Source: Dimensional Returns Web. See “Important Disclosure Information” below.[1]](https://images.squarespace-cdn.com/content/v1/5ee8ee8eb4fb337e3b806c1e/1620415659708-E17JQW7W4UU8USDJY8RF/2021.05.14+Rolling+20-Year+Real+Annualized+Returns+-+S%26P+500+Index.png)
Source: Dimensional Returns Web. See “Important Disclosure Information” below.[1]
Similarly since 1995, the U.S. bond market 20-year real return has never been negative. The annualized 20-year real returns have ranged from 3% to 7%, and have generally been steadier than the U.S. stock market.
![Source: Dimensional Returns Web. See “Important Disclosure Information” below.[2]](https://images.squarespace-cdn.com/content/v1/5ee8ee8eb4fb337e3b806c1e/1620415710802-QJP1FYOGKXTQ4N5A9763/2021.05.14+Rolling+20-Year+Real+Annualized+Returns+-+Bloomberg+Barclays+U.S.+Aggregate+Bond+Index.png)
Source: Dimensional Returns Web. See “Important Disclosure Information” below.[2]
It’s surprising, but if you define risk as loss of wealth over the long-term, then U.S. stocks have not actually been much riskier than U.S. bonds over longer-term periods.
Why This Matters
You may be wondering why the definition of risk matters. To demonstrate, this graph below shows the real growth of $100 for both the U.S. stock market and U.S bond market since 1976. Although U.S. stocks had significantly greater short-term fluctuations than U.S. bonds, $100 grew to $3,184 for the U.S. stock market, compared to $510 for the U.S bond market. A big difference.
![Source: Dimensional Returns Web. See “Important Disclosure Information” below.[1][2]](https://images.squarespace-cdn.com/content/v1/5ee8ee8eb4fb337e3b806c1e/1620415766061-MAZSITG7UIK5VMBBF5JD/2021.05.14+Real+Growth+of+100+Dollars+-+S%26P+500+Index+and+Bloomberg+Barclays+U.S.+Aggregate+Bond+Index.JPG)
Source: Dimensional Returns Web. See “Important Disclosure Information” below.[1][2]
If you define risk as short-term fluctuations in value, then you may be tempted to invest more in bonds than in stocks. Conversely, if you define risk as long-term loss of wealth or lost opportunity to grow wealth, then you may be able to better withstand the yearly fluctuations in favor of more stocks. As Jeremy Siegel wrote in his best-selling book, you may be able to commit yourself to “stocks for the long run”.[5]
Considerations
Because of evolving needs, many investors use different definitions of risk at different periods of time as well as for different accounts. There are many legitimate reasons to focus on short-term portfolio fluctuations - and thus potentially invest more in bonds - including:
Cash flow needs in the short-term and / or intermediate-term
Potential expected return benefits through diversification and rebalancing
Belief that the stock market will not continue to provide positive returns in the future
Ability to psychologically withstand large market fluctuations
Focusing more on current self compared to future self
If you have varying goals and time horizons for your wealth, then you can consider the following:
For shorter-term (<5 years) cash flow needs, you can define risk as short-term portfolio fluctuations, and focus more on bonds.
For longer-term (10+ years) investing (e.g., 401(k), IRA, savings for future children / grandchildren), you can define risk as long-term loss of wealth, and focus more on stocks.
For intermediate-term (5-10 years) cash flow needs, you can combine the definitions of risk, and use a balanced portfolio of stocks and bonds.
Conclusion
Many investors have greatly benefitted from investment markets historically (particularly stocks), and we expect investors to continue to benefit going forward.[6] Defining how you think about risk can significantly impact your future returns. If you have any questions or want to talk about your situation, please feel free to reach out to us.
Important Disclosure Information & Sources:
[1] The S&P 500 Index is a free float-adjusted market-capitalization-weighted index of 500 of the largest publicly traded companies in the United States.
[2] The Bloomberg Barclays US Aggregate Bond TR USD Index measures the performance of investment grade, U.S. dollar-denominated, fixed-rate taxable bond market, including Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM passthroughs), ABS, and CMBS.
[3] The US Bureau of Labor Statistics Consumer Price Index (CPI) All Urban Seasonally Adjusted is a measure of the average monthly change in the price for goods and services paid by urban consumers between any two time periods. It can also represent the buying habits of urban consumers. This particular index includes roughly 88 percent of the total population, accounting for wage earners, clerical workers, technical workers, self-employed, short-term workers, unemployed, retirees, and those not in the labor force.
[4] “Index Funds Are the New Kings of Wall Street“. Dawn Lim, 28-Sep-2019, wsj.com.
[5] “Stocks for the Long Run 5/E: The Definitive Guide to Financial Market Returns & Long-Term Investment Strategies“. Jeremy Siegel, 2014, McGraw-Hill Education.
[6] “SJS 2021 Capital Markets Expectations: Making Sense Of The Future“. SJS Investment Services, 04-Feb-2021, sjsinvest.com/blog.
There is no guarantee investment strategies will be successful. Past performance is no guarantee of future results. Diversification neither assures a profit nor guarantees against a loss in a declining market.
Indices are not available for direct investment. Index performance does not reflect the expenses associated with management of an actual portfolio. Index performance is measured in US dollars. The index performance figures assume the reinvestment of all income, including dividends and capital gains. The performance of the indices was obtained from published sources believed to be reliable but which are not warranted as to accuracy or completeness.
Statements contained in this report that are not statements of historical fact are intended to be and are forward looking statements. Forward looking statements include expressed expectations of future events and the assumptions on which the expressed expectations are based. All forward looking statements are inherently uncertain as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties which could cause actual events or results to differ materially from those projected.
Hyperlinks to third-party information are provided as a convenience and we disclaim any responsibility for information, services or products found on websites or other information linked hereto.
Suggested Reading
What Do Millionaires Do Differently?
The typical millionaire may surprise you. I think these characteristics and actions tend to help people grow their wealth over time.
By SJS Investment Services Founder & CEO Scott Savage.
When you hear the word “millionaire“, what pops into your head? It may be a picture of Elon Musk. Or maybe an upward stock market chart. Or even a Wall Street trading floor.
And yet, the typical millionaire may surprise you. In the book The Millionaire Next Door: The Surprising Secrets Of America’s Wealthy, first written in 1996 and updated in 2010, authors Thomas Stanley and William Danko studied who are the millionaires within the United States and how they have become millionaires. They identify seven common denominators among people who successfully build wealth:[1]
None of these traits surprises me. I have repeatedly seen our clients exhibit these traits over the past 25+ years. We work with people from all sorts of different backgrounds with all sorts of experiences. In addition to the traits above, I think the below characteristics and actions tend to help clients grow their wealth over time:
They adjust their lifestyle to save money each year.
They come from all sorts of occupations, and many don’t make make large salaries, yet they almost always figure out a way to save some money each year.
They prepare for adversity.
Most have an emergency fund that gives them the confidence to survive unexpected job loss, health problems, or financial adversity. They have necessary insurance - such as health, disability, umbrella, and life insurance - to protect themselves and their families in case of unexpected events. Additionally, they ensure their important life documents are updated - including wills, trust documents, healthcare POA, and advance directives.
They have a larger goal for their wealth.
They are motivated to do something meaningful with their wealth, such as providing for their family as well as donating to charitable causes.
They focus on the long-term.
They know it may take decades for them to become millionaires. They create an investment plan that will allow them to not have to focus too much on their investments over the short-term. They know the power of compounding over the long-term, and control what they can while letting markets do the work.
They invest in what they understand.
Most invest in low-cost, broadly-diversified stock and bond mutual funds & ETFs. However, many invest in their businesses, or in certain niches of investing that they know a lot about. They know that if they don’t feel comfortable with their investments, they will probably not stick with the plan.
They don’t pay too much for their investments.
While there isn’t one right way to invest, there are many ways to lose wealth. Paying more than you need to for investments is one of them.
They continuously learn about the world.
They know the world is always changing, and they need to continuously learn and evolve to keep up.
They rely on advisors when they need to.
When they don’t know something or can’t put in the time, they work with advisors - such as accountants, financial advisors, and estate-planning experts - to accomplish their goals.
More than 90% of high net-worth families lose the family wealth after three generations.[2] My hope is that if we can better listen, understand, create strategies, and implement plans to help people invest better, then more people will be able to achieve their goals, and pay it forward by helping others along the way.
So the next time you hear the word “millionaire“, I hope the image that pops into your head is your modest, hard-working neighbor.
Important Disclosure Information And Sources:
[1] The Millionaire Next Door: The Surprising Secrets Of America’s Wealthy. Thomas Stanley & William Danko, 2010, Taylor Trade Publishing.
[2] “5 lies you’ve been told about generational wealth.” Pavithra Mohan, 18-Jul-2019, fastcompany.com.
There is no guarantee investment strategies will be successful. Past performance is no guarantee of future results. Diversification neither assures a profit nor guarantees against a loss in a declining market.
Advisory services are provided by SJS Investment Services, a registered investment advisor with the SEC. Registration does not imply a certain level of skill or training. SJS Investment Services does not provide legal or tax advice. Please consult your legal or tax professionals for specific advice. This material has been prepared for informational purposes only.
Statements contained in this report that are not statements of historical fact are intended to be and are forward looking statements. Forward looking statements include expressed expectations of future events and the assumptions on which the expressed expectations are based. All forward looking statements are inherently uncertain as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties which could cause actual events or results to differ materially from those projected.
Hyperlinks to third-party information are provided as a convenience and we disclaim any responsibility for information, services or products found on websites or other information linked hereto.
Suggested Reading
GameStop Mania: Another Lesson On Short-Term Speculation
We don’t think that growing revenue, growing profits, or undervaluation can adequately explain GameStop’s valuation growth. Instead, we think short-term price speculation explains the majority of the dramatic growth.
By SJS Senior Advisor Andrew Schaetzke, CFP®.
If you invested in GameStop Corporation (Ticker: GME) five years ago, your holding’s growth would probably look something like the below.
Source: Google Finance, as of 29-Jan-2021.
What usually causes such growth? It could be that the company’s revenue has dramatically increased in recent years, and thus people want to invest now in the hopes of significant profits in the future. It may be that the company has become significantly more profitable, either via growing revenue, shrinking costs, or both. It could also be that the company was significantly undervalued in the past, and now the stock price is finally realizing the company’s intrinsic value.
In the case of GameStop, we don’t think that any of these explanations fit. From fiscal years (FY) 2015-2019, GameStop’s net revenue has decreased by roughly 28%.[1] GameStop went from a $379.2 million net profit from continuing operations in FY 2015 to $(464.4) million in net losses from continuing operations in FY 2019.[1] Additionally, GameStop has less total assets, as well as similar liabilities, in FY 2019 relative to FY 2015.[1] Preliminary financial data from GameStop suggests these trends are continuing for FY 2020.[2]
Source: GameStop 2019 Annual Report, Page 22.
If growing revenue, growing profits, or undervaluation cannot adequately explain GameStop’s dramatic valuation growth, what else can explain it?
We think the explanation is short-term price speculation. Price speculation is not new: it has happened many times in the past, and it has many names. For example, in 1936, John Maynard Keynes defined The Castle-In-The-Air Theory.[3] In the book A Random Walk Down Wall Street, Burton Malkiel explains The Castle-In-The-Air Theory as follows:[4]
This price speculation strategy has worked for GameStop stock over the past few years.[5] Famous investors such as Michael Burry (of “The Big Short“ fame) made significant investments into GameStop, while smaller individual investors have collaborated via Reddit and Robinhood to drive up the price.[6] Contrarily, some investors have decided to short the stock (profiting when the stock declines), and have declared their actions quite publicly.[7] Particularly for smaller stocks, in our anecdotal experience, when strong vocal investors publicly argue with strong vocal short sellers, short-term stock price volatility often follows. So far, this volatility has benefitted GameStop investors.
This recent GameStop situation shows the upside of price speculation. However, we do not believe that price speculation works for the vast majority of investors over the long-term. For example, as of 31-Dec-2019, DALBAR found that the average equity mutual fund investor underperformed the S&P 500 (a benchmark for the US stock market) by nearly 5% annually over a 30-year span.[8] For a $100,000 initial investment, that’s a 30-year ending portfolio balance of $437,161 for the average equity mutual fund investor compared to $1,726,004 for the S&P 500.[8] DALBAR argues that price speculation partially contributes to the average investor equity fund investor underperformance relative to the S&P 500.[9]
Other studies have also found significant underperformance for the average investor who invests in individual stocks as well as who engages in short-term price speculation.[10][11] If most investors underperform broad market indices by so much, why do these investors continue to price speculate? We think it’s a combination of psychology - such as not wanting to miss out on big opportunities, wanting to follow others, and not wanting to regret decisions (further defined below) - combined with significant investment costs such as transaction fees (including bid-ask spreads), expense ratios, and unnecessary taxes.
We think that investing well over the long-term is tough, but we think price speculating over the long-term is even harder. As hard as it is to watch stocks such as GameStop go up, we think the evidence is clear: investing in low-cost, tax-efficient, broadly-diversified mutual funds and ETFS will help our clients outperform the vast majority of investors over the long-term.
Important Disclosure Information and Sources:
[1] “GameStop Corp. - 2019 Annual Report“. GameStop, 2020, news.gamestop.com.
[2] “GameStop Corp. - Form 10Q”. GameStop, December 2020, news.gamestop.com.
[3] “The General Theory of Employment, Interest, and Money“. John Maynard Keynes, 1936.
[4] “A Random Walk Down Wall Street: The Time-tested Strategy for Successful Investing”. Burton Malkiel, 2016, W. W. Norton & Company.
[5] “GameStop Shares Fall as Some Brokers Curb Trades.“ The Wall Street Journal, 28-Jan-2021, wsj.com.
[6] “'Big Short' investor Michael Burry made a 1,500% gain on GameStop during its Reddit-fueled rally“. Theron Mohamed, 26-Jan-2021, businessinsider.com.
[7] “The GameStop Short Squeeze Shows an Ugly Side of the Investing World“. Gregory Zuckerman and Geoffrey Rogow, 28-Jan-2021, wsj.com.
[8] “2020 QAIB Report”. DALBAR, 2020, wealthwatchadvisors.com.
[9] “2019 QAIB Study“. DALBAR, 2019, cswadvisors.org.
[10] “Unconventional Success: A Fundamental Approach to Personal Investment“. David Swensen, 2005, Free Press.
[11] “Money: Master The Game“. Tony Robbins, 2016, Simon & Schuster.
There is no guarantee investment strategies will be successful. Past performance is no guarantee of future results. Diversification neither assures a profit nor guarantees against a loss in a declining market.
MarketPlus Investing® models consist of institutional quality registered investment companies. Investment values will fluctuate, and shares, when redeemed, may be worth more or less than original cost.
Advisory services are provided by SJS Investment Services, a registered investment advisor with the SEC. Registration does not imply a certain level of skill or training. SJS Investment Services does not provide legal or tax advice. Please consult your legal or tax professionals for specific advice. This material has been prepared for informational purposes only.
Indices are not available for direct investment. Their performance does not reflect the expenses associated with management of an actual portfolio.
The S&P 500 Index is a free float-adjusted market-capitalization-weighted index of 500 of the largest publicly traded companies in the United States.
Hyperlinks to third-party information are provided as a convenience and we disclaim any responsibility for information, services or products found on websites or other information linked hereto.
Suggested Reading
Saving as a Young Professional: Give Yourself Options
Wise decisions and actions today can often give you more options tomorrow. To that end, we will revisit some strategies behind a solid investment plan.
By SJS Associate Advisor Catherine Stanley and SJS Managing Director & Senior Advisor Jennifer Smiljanich, CFP®.
Never in a thousand years could we have imagined what it would be like to personally live through the upheaval of this 2020 global pandemic! While there are some silver linings, to be sure, many of us, to some degree, have been affected by feelings of fear, isolation, disruption, limitation, and boredom. Some of us are left feeling a little vulnerable, and it might not feel good.
But sometimes, uncomfortable feelings can serve as a catalyst, and can move us to take action that might not occur during times of “business as usual,” when we may feel happy and at ease. The uncertainty of our world today can open us up to thinking about how we can make our life a little safer, better, or a bit more comfortable in the future. Ironically, one of the greatest things we can do in an attempt to ensure a better future is to acknowledge that something should be done, and to start as young as possible with a plan to make it happen.
The something referred to here is saving and investing for your future. For young professionals in their 20s and 30s, the future, and the idea of retirement can seem very far off and too hard to predict. Not knowing where to start can seem overwhelming, to the point where doing nothing is an easy default.
Although we never know what tomorrow will bring, we do know that our future self will want to be able to choose from options. One of the ways for this to happen is for young professionals to start a savings and investing plan today, so that the power of time and compounding may work on your side. Wise decisions and actions today can often give you more options tomorrow. We hope the uncertainty of this pandemic, and knowing you have someone at SJS to talk to, may nudge you to start your savings and retirement plan. If you’ve already started, well done!
To that end, we will revisit some of the tried and true strategies behind a solid investment plan.
Live within your means
Simply put, spend less than you earn. By doing so, you can save to take care of future YOU! There are many thoughts on how much you should save, but according to George S. Clason, author of The Richest Man in Babylon, at least 10%. Mr. Clason states, “A part of all you earn is yours to keep. It should be not less than a tenth no matter how little you earn. It can be as much more as you can afford.”[1]
There are many good budgeting tools available to help you track how much you are spending to live within your means.[2] If you don’t know how much you spend, this is a good place to start!
Automate your savings / investing so it has priority
For every paycheck, set up an automatic transfer to your savings or brokerage account. Making YOU important enough to come first is very affirming!
Start young, start early, start now!
I mentioned the power of compounding before, and I cannot explain it any better than this powerful graphic. Take a look, and trust that you are doing yourself a huge favor by acknowledging its power and harnessing it for your own good. Save as soon as you can, as much as you can, and let time and interest on interest help build your nest egg!
Be prepared
By doing some pre-planning and using the tools available to you, you can increase the likelihood of staying on track.
Have a Plan B. Set aside funds in case of an emergency. Ideally, your emergency fund should be between 3-6 months of living expenses, kept in a safe, liquid vehicle such as a savings account or money market account.[3] So when your next “uh, oh” moment comes along, you will be ready.
Don’t just save. Invest for retirement. With investing, you will need to learn about the trade-off between risk and reward. Investments that give you higher returns may potentially get you to your retirement goal sooner, but they inherently come with greater risk. On the other hand, the safest of investment vehicles, such as a US Treasury bill, probably won’t earn enough return to outpace inflation over time. Find the right balance for you! Seek out a CFP® professional or trusted investment adviser to help you set a plan that meets your needs and stay the course. If you have a long-term plan and stick with it, then the daily volatility in the market may be just noise.
Maximize your resources. If your employer has a 401(k)-matching plan, take advantage of it to the greatest extent that you can…matching funds are free money! Consider making IRA contributions if you can. Pre-tax contributions to retirement plans and IRAs may decrease the amount of tax you pay on your income each year, and the funds will grow tax-deferred, compounding over the 30+ years you have until retirement.
Start a 529 education savings plan as a way to use compounding to help pay for your child’s college education. There is often a state tax deduction or credit available for 529 plan contributions, varying by state.
Starting your savings and investment journey today means you’ll have to balance today’s current enjoyment with tomorrow’s future enjoyment. Decisions or circumstances along the way may create diversions from the path, but if you have a strategy, you can always come back to it. The goal is to stay on track so that over time, future You will appreciate that you gave yourself options to choose from. At SJS, we are happy to have these conversations with you, and to help guide you to an investment plan for the long-term that you can stick with.
Important Disclosure Information and Sources:
[1] The Richest Man in Babylon. George Clason, 1926, Berkley.
[2] “10 Simple and Free Budgeting Tools.” Maryalene LaPonsie and Lars Peterson, 21-Jun-2019, money.usnews.com.
[3] “Emergency Fund: What it Is and Why It Matters.” Margarette Burnette, 20-Mar-2020, nerdwallet.com.
Advisory services are provided by SJS Investment Services, Inc.., a registered investment advisor with the SEC. Registration does not imply a certain level of skill or training. SJS Investment Services does not provide tax advice. Please consult your tax professional for specific advice. This material has been prepared for informational purposes only. There is no guarantee investment strategies will be successful. Past performance is no guarantee of future results. Diversification neither assures a profit nor guarantees against a loss in a declining market.