Never Waste a Perfectly Good Mistake

In a sobering coaching moment, I recently explained to a client that their investing decisions have cost them handily. They asked me how much we're talking about, so I did some calculations. Though it's a rough estimation, it's safe to say they've lost at least $25,000 so far. They were livid. Worse, their financial advisor is a family member. What this family member did to them wasn't explicitly immoral, but rather "normal." Normal in the sense it's what most people are doing.....which is terrible. They were sick about it, and rightfully so.

But as I love to say, let's not waste a perfectly good mistake. Yes, they lost out on +/- $25,000. There's no way to reverse that. However, that pales in comparison to what they will potentially lose in the future. By my estimation, they will lose a minimum of $1M in the decades to come if they stay on this same path. It's an expensive mistake, but that singular mistake will ironically be the springboard to them doing so much better. That mistake was transformational......in the best way.

I also think back to my own journey. Specifically, when I received the humbling of a lifetime when the Great Financial Crisis struck us. I was $236,000 in debt, on the verge of losing my job, and had limited options. I was blessed with the opportunity to keep my job (by moving states), which gave me a second chance to do this financial stuff right. That mistake was costly, but it was ironically the springboard to a better life. That mistake was transformational.....in the best way. I still carry some of that pain, but I also carry a ton of gratitude with it.

I don't know what mistakes you've made, are making, or will make in the future, but I know they are coming. Some of them will be mild, but others will be costly. I hope they don't cost you as much as they cost this young couple or the younger version of me, but whatever they are, I hope you use it for good. Learn from it. Be humbled by it. Grow from it. Let it shift your perspective. See it through a different lens. Share it with others. Be better as a result of it. Regardless of how bad the mistake was, more good can come from it than bad......if we allow it.

We can't avoid mistakes altogether, but we can use them as a force for good. Never waste a perfectly good mistake!

You Wouldn’t Pay a Doctor to Hurt You

A friend, who is now a reader of this blog, recently asked me to do a quick assessment of their investments. After reading several posts where I ranted about how most people unknowingly have terrible investment portfolios, he had a growing suspicion that his portfolio probably fell into the same camp. His story is similar to most. In an effort to help their grown children, their parents gave them a referral to the financial advisor they've been using for many years. After all, this is a person they trust. It's a long-standing relationship, and their portfolios have increased over time. And in their parents' defense, when they started investing, this was the ONLY way to invest. It's the traditional way to do it. 

I dug into their funds, took into account their weightings, and this is what I found. Over the last ten years, their investment composition had a return of 8.97% per year (we'll call it 9%). Pretty good, eh? After all, the stock market's historical average is around 9% per year for 150+ years. One problem, though. The total US stock market, over the same period of time, had an 11.50% annual return. This means their portfolio underperformed the stock market by 2.5% per year.....wow! Oh yeah, and they paid their financial advisor 1.25% per year for the privilege of getting their butts kicked by the market. 

So after factoring in sub-par returns and the manager fees on top of it, they performed 3.75% less than they could have performed by simply pushing a few buttons on their phones: 7.75% vs. the market's 11.50%. You wouldn't pay a doctor to hurt you, but this is the financial equivalent of doing just that. 

Let me illustrate it for you. This couple is 30 years old and has approximately $20,000 invested. Let's assume these same returns persist between now and age 65. Here's what would happen:

• Their current portfolio would end up at $270,000

• A simple investment in a total stock market index would be $900,000.

That's a $630,000 difference! Their returns would be 3.3x more.....triple!! And this doesn't even account for additional investments into their account between now and 65. This is ONLY the original $20,000 investment. 

Now I doubt these same returns will repeat themselves over 35 years. Let's pretend the market returns 9% per year instead. And let's also assume their financial advisor will pull a rabbit out of his hat and tie the market (but they still have to pay their 1.25% fee for the privilege). Here's what would happen:

• Their current portfolio would end up with $273,000. 

• A simple investment in the total stock market would end up with $408,000.

That one decision made them $135,000....not accounting for additional investments!

Epilogue: After this conversation, the husband independently set up an account to invest in the total stock market index. The entire process took him 15 minutes. Those 15 minutes just made them more than $1M! That's what I call a great return on investment!

The Deceit of Cultural Narratives

A friend recently reached out to ask a few financial questions. During the conversation, he made a comment that stopped me in my tracks: "It's surprising that you're such a big advocate for the stock market when it's doing so poorly." I didn't quite understand where he was going with this thought, so I asked him to explain. He shared that the stock market has been beaten up badly, and it's "only getting worse." He went on to draw into question the practicality of investing in the stock market, and stressed the notion of "too much risk." 

While it's true the stock market dropped by approximately 20% in 2022 (which I would indeed classify as "beaten up"), he doesn't see the whole picture. It's a truth, but a half-truth. Er, a quarter-truth. Please allow me to fill in a few gaps:

• In the first 11 months of 2023, the stock market (S&P 500) is up approximately 19% (not including dividends).

• Over the past five years (including the 20% fall in 2022 and a 32% tanking in early 2020), the stock market has increased by more than 11% per year. 

• The stock market only needs to increase by 4.3% from today's value to hit an all-time 153-year high. 

• Over those 153 years, the market has increased by an average of just over 9% (including the reinvestment of dividends). The average is 11% per year for the past 40 years. 

If all that isn't crazy enough, here's one more fun fact that may blow your mind. The WORST (yes, worst!) the stock market has done over a 30-year period is go up by 4.4x. Crazy, eh? The worst possible outcome during any 30-year window in US stock market history is quadrupling your money (plus a little more). Considering you can't even legally touch your retirement funds (without penalties/taxes) until age 59.5, if you're under the age of 30, you have at least 30 years before you'll even think about withdrawing those funds anyway. Context matters. 

Ok, investment rant over. Here's the bigger takeaway. My friend is the victim of what many of us fall prey to. We're sucked into cultural narratives that feed us enough half-truths until it becomes THE truth. Investing is a big one, but far from the only one. Here are a few others that I frequently see:

• It's impossible to attend college without student loans.

• Buying a house is always a smart financial decision. 

• You need to use a credit card. 

• Groceries must cost your family $1,000+ per month.

• We need to seek out the job with the highest possible income. 

• Having a car payment is inevitable. 

• ____________ (insert yours here).

All of these are cultural narratives woven into the fabric of our society. Also, they are deceitful at best, and destructive at worst. If we just believe the narrative at face value, we concede it is our reality. Then, we casually float downstream toward an impaired reality. 

Always question the narrative. Challenge the narrative. Seek the truth.

Inquiring Minds Want to Know

A few days ago, I wrote about how most of us believe our investments are doing well, but that may not always be true. I used the example of a family who may unknowingly end up with $1.7M LESS. We don't know what we don't know.

In the last few days, I received dozens of messages from people asking what's actually good. Most of them perceive their investments as "doing good," but doubt started to creep in after reading that post. To figure it out, they dug into their investments in one of two ways: 1) look at what the trailing annual returns were for the last 5, 10, 15, or 20 years (which you can often find on your statements.....especially if you've been investing for a while), or 2) look at each fund in their portfolio to see what that specific fund has done over those periods (and use the proportions to run some averages). 

Results were all across the board. Examples include 6% per year, 7% per year, and even 8% per year (and everywhere in between). There was even a 9%ish number in there! Most people felt these numbers were solid. But the question attached to each inquiry was what to compare it to. Was it actually good? Were these numbers up to par? Were they unknowingly underperforming?

Here are a few numbers to consider. The following is the performance of a popular total stock market index fund containing approximately 3,800 U.S. companies of all shapes and sizes, wrapped up in one inexpensive and accessible investment. We can view this as the barometer for the entirety of the U.S. stock market. These numbers represent an average annual return over the designated period:

• Last 5 years: 10.2% per year

• Last 10 years: 10.7% per year

• Last 15 years: 12.7% per year

Through the lens of these numbers, the results submitted to me by readers look really sad. As a reminder, in the illustration I ran the other day, a 2% difference resulted in a $1.7M worse result for the family in the example. Based on our reader's numbers, we're talking about 3%, 4%, 5%, and even 6% difference between what they are getting and what the market is getting. This can be the make or break between having enough down the road....or not. This discrepancy gets magnified the younger the investor is. 

Ouch! Here's the good news. What's in front of us is more important than what's behind us. Let's say we're 40 years old and have been investing for 15 years. Sure, it would have been nice to have better returns for the first 15 years. However, you still have 40+ years ahead of you......with a higher base to start with. 

Let me end with this. Yes, it feels scary. Nobody wants to take risks. In the 153-year history of the U.S. stock market, there's never been a 15-year period where the market lost money Ever. The worst was +1.15% per year from 1929-1943. While past performance never dictates future results, that doesn't feel overly risky.

This post is a lot more about money than meaning, but it’s important we handle our finances with confidence. When we do, we worry a lot less and can focus on what’s really important….the meaning!

*This post does not constitute formal financial advice. It is meant to provide general insight without the full context of each person's financial situation. 

Sometimes, "Pretty Good" Sucks

I recently had a conversation that I repeat multiple times per week. I was meeting with a friend, and the topic of investing came up. They mentioned they use a financial planner who does a "pretty good job." This comment always sets off my red flag and warning sirens. What is the definition of a pretty good job? How do we know our investments are performing well? Because they are going up? Because they are being watched? Because they are spread across a few dozen funds that sound like some sort of twisted alphabet soup? Because they are being managed by someone we know and trust? 

I asked them what company they use for their investments. In my head, all I could think was, "please don't say xyz, please don't say xyz, please don't say xyz." "We work with xyz." Nooooooo! That's the moment I knew they were in a tough spot. For what it's worth, xyz is a very prominent, highly respected, broadly welcomed financial advising company. Before I go on, please let me clarify that nothing this company does is inherently immoral, illegal, or ill-intentioned. Rather, they do things the old way. By "the old way," I mean the way things used to be done before they didn't need to be done that way anymore. In today's world, we have access to the very best funds in the world, at the tip of our fingers (er, screen), at little to no cost. 

Knowing what company they are working with, I know the general lay of the land. They are most likely paying around 1.25% for management fees and have a portfolio that will, over a long period of time, perform at least 0.75% worse than the overall stock market. Therefore, this person is likely invested in a portfolio that will perpetually perform 2% less than the overall stock market. If the stock market performs at a long-term 9% (just below its historical average), this person may receive 7%. This doesn't seem like a meaningful difference, but let's look at the math:

Here are the assumptions:

• Current age: 42

• Ending age: 65

• Current balance: $500,000

• Annual contributions: $25,000

• These are very simple, rough numbers for illustrative purposes.

At age 65, their current strategy would result in a balance of approximately $3,700,000. See, that's pretty good! That's a lot of money! Their person did a great job! 

But wait, what about the other way? If this person were to simply invest in the overall market (readily accessible to each of us at practically no cost), they would have approximately $5,400,000 instead. That's a $1,700,000 difference!!! I don't know the definition of "pretty good," but in my book, ending up $1,700,000 worse off fails my smell test. 

This isn't my friend's fault. After all, nobody teaches us this stuff! Here's the beautiful part, though. All it takes is one simple tweak. It seems too good to be true, but it's not.