Show Notes
Having a basic understanding of your finances and your overall investment strategy is the first step on the path to FI. The problem is, as time goes on, many investors feel obligated to make adjustments to, or “tinker” with, their plan—often unnecessarily.
The stories Jeff Harrell recounts in this episode may be some of the most relatable because it’s human nature to want to “scratch that itch” now and then by changing things up. The reason this is so prevalent with investing is because by making changes we feel more in control of our investments, when the reality is that none of us can control the financial markets.
Recognizing that success on your path to FI is determined by the decisions you make before you invest any money, will bring you one step closer to achieving it.
(Season 2 Episode 4)
Resource Mentioned in Episode:
Retirement Researcher article, “Why Can’t ‘Winning’ Active Managers Keep on Winning?”
Other Episodes Referenced:
Market Maven Predicts Next Stock Market Crash, Click Here…Nooo! (S1 E11)
If You Are Worried About Running Out of Money…You Probably Won’t (S2 E10)
Podcast produced by Ted Cragg of QuickEditPodcasts.com
Music Credit: Dream Cave / Adventure Awaits / courtesy of www.epidemicsound.com
Transcript
Nobody is ever going to disagree that reviewing your financial situation periodically is a bad idea. There is nothing more important than having a well-thought-out, long-term investment strategy if you are in pursuit of FI. However, I would argue that after you have put this plan in place, consistency and patience are the two most important traits necessary to keep you on track. But after that, the best thing you can do to stay on the path to FI is to review your accounts as little as possible.
Welcome to the second season of Invested Poorly: Sad Tales of FInancial Fails, a short-form podcast designed to help everyday investors make wiser investment decisions by learning what NOT to do with their money. Host Jeff Harrell shares timeless stories from his former life as a financial advisor, about the poor—and irrational—choices he witnessed investors make that disrupted their journey to financial independence, or FI. Your ability to recognize, and avoid, similar mistakes could make all the difference for you along your path to reach FI.
Check out the “Introduction” episode for more background on Jeff, why he created this podcast, and how it can guide you to becoming the hero of your own investing story. Now, on with show.
Over the years, I had a handful of clients that I liked to refer to as my “tinkerers.” They absolutely loved tinkering with their accounts on a regular basis. I always knew, if I hadn’t heard from them in a month or so, it was only a matter of time before I would get a phone call inquiring about something in their portfolio that needed to be changed. I used to play games with myself trying to predict exactly what these clients would want to do before the next phone call.
One client in particular I remember was super easy to predict. He watched the stocks he owned like a hawk. As soon as he called, I would quickly bring up a list of what stocks he owned to see which ones had performed poorly over the past month or two. Without fail, all he ever wanted to talk about was whether or not he should replace his worst performing stocks.
I swear I felt like a broken record during these calls. What I would usually do is look up the stock or two he had called about during our previous conversation to see how it had done since we last spoke. And it was extremely common to see that the stock had gone up since that time. I mean, seriously, it was laughable because obviously this wasn’t what happened every time he called, but it definitely was more likely than not to be the case. The sad part was, it didn’t matter how often I pointed this out to him, he still couldn’t get out of his own way.
Now, I have no doubt this guy is not alone in his desire to constantly tinker with his investments and there is a decent chance I might even be describing you right now. The reason for this is simple. The vast amount of financial news bombarding us on a daily basis creates a sense of urgency that makes a lot of investors think they always have to do something when they hear a breaking news story. I discussed this phenomenon in Episode 11 of Season 1 to help illustrate why following financial news too closely is a bad idea.
But if you still need more convincing, I included an article from Retirement Researcher in the show notes that supports this idea as well. The article pretty much throws active management under the bus with a host of data to support their conclusion. I mean, since active managers tend to be the ones following financial markets closely, and making adjustments accordingly, one would also assume that if the top performing managers really are that good, by continuing to monitor the financial markets closely they should be able to keep that success going. Unfortunately, the results don’t lie, suggesting pretty much what all of us already know. Past performance is no guarantee of future results.
So let me give you a little inside information on what I saw during my time in the financial services industry. Which is that I can say without question, our clients who called us the least often, tended to have the best performing accounts.
It might be hard to believe what I’m about to say, but the best advice I can give you to improve your investing is to stop watching financial news. This is exactly what I have done now that I am FI and living 100% off my investments. I want to make that very clear. I have nearly all of my net worth invested in the financial markets and I don’t watch any financial news on a regular basis. My investment strategy is fully on autopilot and not affected by daily financial news at all.
I can’t begin to tell you how refreshing it is to know that I have a strategy that will adapt to market conditions as they change, not one that tries to predict what is going to happen next. I discuss my withdrawal strategy in Episode 10 of Season 2, which outlines how I determine my annual budget based on my age and net worth. It uses percentages and adjusts my budget based on my net worth. I truly think it is the simplest strategy I have ever seen to follow when you are FI.
With that said, I will add that although these are very infrequent, I will make small adjustments to these percentages if stocks are up or down sharply. Lower stock prices lead to a slight uptick in the withdrawal percentages and vice versa. So I want to make sure you understand exactly what I’m saying here, which is that if stocks have fallen sharply, I feel MORE comfortable taking a slightly higher percentage out of my investment portfolio because future returns are likely to be higher than recent returns. On the other hand, when stocks are in a strong bull market, I will slightly decrease the percentages, since higher stock prices, tend to lead to lower future returns.
Just think about that for a second. Although it seems to me this logic is fairly obvious over long periods of time, most investors have the exact opposite feeling in the middle of a strong bull or bear market because most of us think whatever is happening in the short-term, will keep happening forever.
To combat this, I’m suggesting the time to review your investments closely is not on some arbitrary monthly, quarterly, or yearly basis, but instead when financial markets are in one extreme or the other, and take action that probably will feel contrary to what everyone else is doing. I call this leaning against the market.
A simple rule of thumb I use personally is any time stocks are up 25% or down 10% over the past six to twelve months, I review the percentages to see if any small tweaks need to be made. In general, if stocks are up 25%, I will consider trimming a little and add to my more conservative investments. If they are down 10%, I might sell some of my conservative investments and add to my riskier stocks. It really is that simple.
I hope you can understand the beauty of this strategy because it has a couple huge benefits for long-term investors. The first one is simplicity, since it is purely rules-based. You don’t have to think about anything. All you have to do is stick to the plan which will automatically adjust to market conditions. The other major benefit is it gives you more time to do whatever you want. Knowing that you already have an investment strategy in place that is reactionary to whatever might be going on with the financial markets, should make it easier for you to focus on what is most important to you.
So whether you are still in the accumulation phase or already FI, monitoring your accounts too frequently can be extremely detrimental to your long-term performance. After you have crafted a well-thought-out, long-term investment plan, the best thing you can do is stick with your strategy and try to avoid a pitfall my adorable, yet indecisive, little niece runs into all the time and we hear her say, “I changed my mind.”
I sure hope you enjoyed this episode of Invested Poorly and will be able to take something from it to improve your decision making as you navigate the twists and turns of your personal investing adventure. Be sure to check out my website at AreYouFI.com (that’s A R E Y O U F I dot com) where you can find resources and show notes with the charts and graphs I mention during the episodes. These are like little treasure maps that can help you choose more wisely along your quest to reach FI, or financial independence.
Never forget, in the short-term the stock market is unpredictable, and as my mischievous little nephew likes to say, “things just happen”! So focus on the long-term, by controlling your emotions, simplify your investments, and always… ignore the noise.
I’m your host, Jeff Harrell. Thanks for listening.
Invested Poorly: Sad Tales of FInancial Fails was created for informational purposes only and should not be relied on for specific tax, legal, or investment advice. You should consider consulting a qualified professional to review your situation before engaging in any transactions. Investing involves risk, including loss of principal and past performance is no guarantee of future results.
This podcast was produced by Ted Cragg. Learn more about creating podcast mini-series like this by visiting QuickEditPodcasts.com.