It’s been a little while since I put up a new blog post, so it was about time I got my act together! For those of you that enjoy the light reading, I apologize. Getting back in the swing of things, we’re kicking this one off with a little reference to a well-known children’s story, Alice in Wonderland. As a father of a 3 ½ year old, clearly this story came to mind, particularly a short exchange between Alice and the Cheshire Cat that seemed relevant to the world of financial planning and investments, right?! Have I captured your attention??
This is from Alice in Wonderland:
“Would you tell me, please, which way I ought to go from here?”
“That depends a good deal on where you want to get to,” said the Cat.
“I don’t much care where–” said Alice.
“Then it doesn’t matter which way you go,” said the Cat.
“–so long as I get SOMEWHERE,” Alice added as an explanation.
“Oh, you’re sure to do that,” said the Cat, “if you only walk long enough.”
What does that mean?
Well, the paraphrasing that is so often quoted, is a pretty good summary the exchange between Alice and the Cheshire Cat. How can you pick a road to somewhere when you don’t know where you are going? How do you get “there” when you don’t know where “there” is?
The meaning of this exchange can absolutely apply to your investments and your financial life planning. Not having a goal in mind when you set out to start saving, not knowing where you’re going or any direction at all, its all the same. Just like any good road trip, you can’t possibly plot a specific course if you don’t know where “there” is. Furthermore, without a proper investment strategy and goal in mind, what’s to keep average investor psychology from making a poor decision that could end up diverting you from wherever “there” is.
Just like in building a proper financial plan, the same concepts should apply to your investment strategy, because they are interconnected!
Let’s take a look at a study that’s done every year by Dalbar, this one from 2015. Dalbar is the financial community’s leading independent expert for evaluating, auditing and rating business practices, customer performance, product quality and service. From their website: “The 24th Annual Quantitative Analysis of Investor Behavior (“QAIB”) examines real investor returns in equity, fixed income and asset allocation funds. The analysis covers the 30-year period ending December 31, 2017, encompassing the recovery from the crash of 1987, the drop at the turn of the millennium, the crash of 2008, recovery from the 2008 recession, and the bull market leading up to today. No matter what the state of the mutual fund industry, boom or bust: Investment results are more dependent on investor behavior than on fund performance. Mutual fund investors who hold on to their investments are more successful than those who try to time the market.”
What seems to be the biggest takeaway from their annual report every year is the average investor is their own worst enemy. What you’ll see from this study is the average investor underperforms the benchmark by a considerable amount. What’s the biggest contributor? The study shows the biggest contributor to be human emotion, which is causing investors to sell when the market falls due to worry and overreaction, and to buy once the market goes back up. Most investors know this is the opposite of what you should be doing, yet it continues to happen.
For example, the following chart shows the last two major market drawdowns. According to data from Thompson Reuters Datastream, this illustrates the percentage of money market assets versus total mutual fund assets, blue line, tended to increase as the market declined and slowly was reinvested as the market improved. This highlights very dramatically the type of behavior that causes poor returns over time, as risk adverse investors pull money from equity markets after they’ve already declined significantly and reinvest after the market has recovered!
So, the question goes back to, why do investors keep letting their emotions control their investment decisions? I believe the likely reason is because they don’t have a plan in place that drives their investment decisions, besides not losing money! As such, they’re relegated to making emotional decisions that have detrimental impacts on their long-term goals. Would you try to build your home without a blueprint? Would you want a surgeon to blindly start cutting without planning out the surgery? If not, then why build your wealth and long term financial well-being without a plan?
Let’s look at another study, this one done by Vanguard in 2016. This study titled, “Putting A Value On Your Value: Quantifying Vanguard Advisors Alpha.” In this study, Vanguard outlined how advisors can add “alpha” (a fancy word meaning added investment value) through providing thoughtful wealth management through financial planning, discipline and guidance rather than simply trying to outperform the market. What they found was a good advisor could add as much as 3% to client’s net returns!! Below is a table outlining where this added “alpha” would come from:
My point in sharing these studies with you is to outline a few facts. The fact that working with a good advisor absolutely brings value, but it’s a value that is too often overlooked. Too often investors only ask themselves what the cost is of working with an advisor. Don’t get me wrong, this is a very important question and one that should absolutely be asked, understood, and not overlooked because it does matter. But the question that is seldom asked is, “what is the cost of NOT working with an advisor?” If you take the crux of these studies, and apply them together, you can start to understand how an advisor brings value in a way that is not typically thought of. The value really is in helping create and manage a financial plan. Its about helping clients prioritize goals and figure out where “there” is. It’s about creating and managing a savings and investment strategy and acting as a guide along your journey to your destination, and it’s about keeping emotions in check, and applying a disciplined approach to building and managing wealth!
Ask yourself this question, are you more comfortable and confident with less anxiety in your journey to a brand-new destination when you know the route and have google maps guiding you? Or maybe a Lyft driver driving you? You’re probably less likely to make wrong turns that could cost you time or gas. Think about that analogy when considering a relationship with a good fiduciary advisor.
As you think about your own situation or your family’s financial future, consider how you’ll approach managing and building your wealth and investments. Take some time to create a plan for your finances and investments. Consider working with a fiduciary financial planner, who puts your best interests first. Whatever you do, don’t be Alice and ignore your financial future in the hopes to simply get “somewhere.” If you walk long enough, you’ll get “somewhere,” but why not make a strategy and get to where you really want to go!
Does any of this bring up any additional questions? Things you hadn’t considered? Consider it an opportunity to reach out as I’m here to help!
Do you want to bring a new level of attention to your financial decisions? Reach out to me at email@example.com or schedule a complimentary consultation here.
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Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation.
About the Author
Ryan Mohr is a Certified Financial Planner (CFP®) serving the financial planning and investment needs of clients through his firm, Clarity Capital Management, LLC. He has over a decade of financial planning and investment management experience and is committed to helping people realize the full potential of their financial resources.