Afraid to Invest? Here’s How To Get Over Fear of Investing

Plunking money into the stock market is a weird psychological trick.  No matter how much evidence is out there, about ‘time in the market’ being valuable, there’s a bit of fear putting a bit in — even for myself who’s well studied the market extensively.

Nobody wants to loose money. Nobody wants to see the value of their investment go down.  How would you feel if you’re portfolio lost 10%?  What if it were 50% as we seen in 08/09?  It would hurt.  And that’s why investors block exists.  No one wants the pain.  No one want’s to feel like they made a bad decision.  But the risk we assume by investing is part of what makes the future returns possible.

So how do you get over the fear block?

Dollar.  Cost.  Average.  That’s the secret.  Invest little chunks of money consistently.  If you’ve got a large sum, say $100,000 (or whatever large is to you), invest $4,000 per week for 25 weeks (about 6 months).  By doing this, you’ll largely avoid the anchoring effect of investing a lump sum.  In other words, you’re not going to look at your portfolio that started off as $100,000 and see if it went up or down.  You’re not going say point to compare to and deal with the ‘pain’ of investing at the wrong time.

You’re going to buy in on some ups, and some downs.  Once you’re in you won’t have a psychological starting point. If you’re not working with a lump sum, just systematically invest a little bit every week, or month.  As with the example above, you’ll lose track of the starting point and it won’t be painful.

Know this, even if you are ‘world’s worst market time’, and invest at market peaks, but are in it for the ‘long haul’, you still would’ve done rather well as explained on A Wealth Of Common Sense (an awesome blog btw).

Also Read this: What If You Invested $1,000 Per Month For The Last 10 Years.

What If Mark Cuban Wasn’t a Venture Capitalist-3.psd

What If Mark Cuban Wasn’t a Venture Capitalist?

We all know who Mark Cuban is, the billionaire investor from Shark Tank known for aggressive deal making.  He’s arguably the most popular venture capitalist on earth.

In a recent post, i discussed why venture capital works for Cuban and the other sharks, and the ability they have to shape an investment that we (little investors) do not.  That got me thinking, what if…. Mark Cuban was never a venture capitalist.  What if, after he cashed out from his dot com windfall of he just invested into a passive boring portfolio, shut his mouth (something that we know is hard for him to do) and rode his wave into the sunset?  How much would he be worth today?

Lets Take A Look At It

Forbes had his net worth in 2002 at 1,300,000,000. That’s a starting point.

Today (10/21/2017) Forbes has his net worth at 3,300,000,000.  That’s a notable gain, all attributable to venture capital.

Now let’s look for a passive option.  Venture capital is essentially equity in very tiny companies; although not publicly traded they’re the equivalent of micro-cap stocks.  A micro-cap index, would be the best comparison, however it isn’t practically possible as the index doesn’t have the capacity to handle his billions of inflow.  The next best comparison would be a small cap index, which has actually underperformed the micro-cap index.  So we’ll see how Cuban would’ve performed had he just invested in Vanguard’s Small Cap Index fund (Mutual fund symbol: NAESX) way back in 2002.

Of course, a billionaire isn’t going to just stick their money in the bank and go get a job.  They need money to live on…. In other words, they need to spend a part of their portfolio.  Typical financial advice would guide them to spend spend 2-4% of their portfolio annually.  This would let them outpace inflation, maintain or increase their standard of living, and let their kids and grandkids live among the 1%.  For this lets just roll down the middle, and assume an annual spending of 3%.  Spending 3% of his worth in 2002 would’ve been $39 million, today it would be $99,000,000.  Personally, I believe he lives on less money than this (which actually doesn’t help his case as you’ll see here) — maybe he’ll chime in personally and let us know.

The Analysis

Plugging in all the numbers; an initial investment of $1,300,000,000 in a Small Cap Index in 2002, withdrawing 3% annually, would leave him with a current net worth of….


That’s right, slightly higher than his current net worth estimate by Forbes at $3,300,000,000.  At that, all he had to was absolutely nothing.  Just sit back and coast.  He didn’t have to take the reigns of fledgling companies from disappointed founders.  Didn’t have work around the clock to keep the company’s growing, or seek out new deals.  Didn’t have to rely on his connections to make things thrive.

Let that sink in before you invest in these attractive, crowdfunded venture capital deals.  Cuban himself, with his deal making prowess, privliged knowledge, resources, and access to the best deals in Silicon Valley hasn’t even ‘beat the index’.

Why Venture Capital Works For The Sharks But Won’t For You

Back in August of 2009, the show Shark Tank debuted and suddenly everyone became an armchair venture capitalist. The idea of investing some money in a brilliant idea, with some determined founders, earning huge returns captivated the attention of anyone with half a business hubris.

And now 8 years since the first investments were made, we can easily see the positive results and success each investor is having.

But Silicon valley caught on too and everyone with a checkbook is a venture capitalist and the cash is flowing freely. Goldman sachs reports a record 121 billion of ‘Dry powder’ (aka cash ready to be invested) in venture capital funds. Meanwhile the total annual value of all venture capital deals closed in the US since 2008 has more than doubled from just under $30 billion to just over $61 billion.

Infographic: Venture Capital: More Money, Fewer Deals | Statista You will find more statistics at Statista

Perpetuating it all is solid growth in the US stock market as a whole which has risen by 202.97% (S & P 500 total return 8/9/2009 – 10/21/2017) since the launch of Sharktank, and kept optimism high in the VC world

And now venture capital comes to the masses with companies like Seedinvest, and Republic. No need to even step foot in the valley. No Mark Cuban size wallet need to get started. All you got to do is open an account on either of those platforms, spend a few minutes inputting your information and you’re free to start picking great idea’s and making winning investments for as little as $1,000 (I think it might even be less for some opportunities). Seedinvest will even make it easy to diversify your bets and passively invest you into 25 start-ups for as little as $200 each.

I have to admit, the concept wowed me. I’m a business guy. I’m an investor. I’ve always been an armchair VC and now’s my time to get in on the action. Here’s one company caught my attention: Keenhome, a company that makes air vents that you to control temperature by room. It solves a problem I’m personally familiar with. Sometimes one room in my house is hotter than another. Fortunately I live alone, so climate control is at my sole discretion, but in a household with multiple people the thermostat can cause wars. Keenhome’s product solves it. It’s also in the smart home category which is trending right now, with an expected revenue growth rate of 21.8%. I own a home service company which has done rather well, and a friend of mine owns a wildly successful HVAC business which is very closely related to this product niche. They’ve also done $2,600,000+ in sales and have a slew other pitch facts indicating success. Certainly it must be a good investment.

But I’m not convinced any of these investments on crowd capital platforms are going to work quite as well for you and me as they have for the sharks. Here’s why:

    1. Why do they need crowdfunding?

      As I mention above cash is flowing right into the venture capital world. Seemingly anyone with an idea, a little business acumen, and a little charisma can easily get a deal. There are large scale venture capitalists following all the funding syndicates… reserved for accredited investors. They aren’t idiots, and they aren’t short on cash.

      If a business is truly a good ‘opportunity’, there’s no reason why they need to go to the little fish in crowdfunding. Established venture capitalists bring more to the table than just cash (more on that below), and there’s less headache dealing with a few large professional investors than dealing with the masses.

    2. The sharks invest more than financial capital?

      Mark Cuban, Kevin O’leary, Daymond John, Laurie Greiner, Rob Herjavec, Barbara Corcoran, all the other sharks, and all the other sharks, and all the professional venture capitals swinging 8 figure bankrolls bring more to the table than just their wallets. They’re bringing copious amounts of personal capital, and sweat equity. They’ve got the experience, resources, and connections to make businesses happen.

      Sure you might have a ton of business experience, but does your few thousand dollar investment get you a seat on the board of advisors — nope. Don’t even bother making a squeak. If you’re Cuban or anyone else with an amount of capital and credibility your voice gets heard.

      What if the company has a great marketing campaign but just can’t pull it off in operations? What if the company needs an effective website live in 12 hours? Every venture capitalist has a team behind them they can call to make things happen. No searching , no hoping, just action. In many cases the founders, become little more than faces of the company while the venture capitalists use their resources behind the scenes to make things happen.

      Connections…. Lets just ask how many business journalists follow established venture capitalists? One twitter post is all it takes to get the company featured in a forbes article about how “XYZ Company is going to reshape an industry?” Can you get that poole?
      While the Sharks and other Venture capitalists can make things happen, you’ve just got to sit with your fingers crossed.

    3. What happens when the market tanks?

      Seriously. We’ve been in a long bull run now. Rags to riches stories are abound. If there’s a bear market blue chip equities will take a hit, but venture capital will go to 0. Venture capital funding will slow and that bottomless pool of money many startups are relying on to grow will dry up.

      While not optimal that works out for the venture capitalists who are able to plunk in more of their personal equity, sweat equity, or personal capital to keep these ventures afloat.

A Better Choice

If you have the capital, look for a venture capital fund that you can invest in alongside, well known venture capitalists. These funds exist, but they do require minimum investments of generally, at least $100,000 and are illiquid. That’s a far step above the $1,000 minimum investments in a single company on SeedInvest. BUT they do provide a better shot at likely returns as you get access to the premium deals that would never make considering taking on million peon investors from crowdfunding. You also ride on the coattails of investors who have the personal capital to make businesses happen. On that note, make sure the investor has a significant amount of their own capital in the fund. I should probably write a whole nother post on that relative to venture capital, but for now just checkout my post on manager investment in mutual funds.

Now if you don’t have $100,000 to piss away, and you’re practical enough to not get into gambling with your money, a small cap index fund would be your next logical choice. Small cap stocks have been shown to have a premium over market beta (market cap weighting significantly tilted to large caps). From 1926 – 2012 small caps returned a 1.8% annual premium over large caps (that 1.8% over a couple decades is huge). You can get into small cap exposure for nearly nothing by opening an account with vanguard and buying their Small Cap Index Fund ETF (VB) or the mutual fund that tracks it. Just set it to reinvest dividends and dollar cost average into investment.

Follow Up Post 10/25/2017: What if Mark Cuban was never a venture capitalist and just invested in index funds?

It Still Seems Fun

Yes it does. That investment in Keenhome seems like a good idea. I think it can beat the small cap index. I want a horse in the race. I want a company to cheer for. I want to be part of the cool kids. Maybe I will invest in it, for the same reasons I go to casinos (for the record I don’t go to casinos).

I Don’t Give A Fuck Because I’m A Systematic Investor

With one finger swipe on my Facebook feed I see an attention grabbing headline of either doom and gloom or gold and boom in the market. Sometimes I’ll even get one of each, from the same publisher back to back,  When I turn on the TV I’ve got some loud mouth telling me to buy or sell.  Every day you and I are plastered with this stuff from the latest Guru or some intern who landeda gig as a freelancer.  Who’s right?  Guru or intern, it doesn’t matter.  It’s all bullshit anyways.  No one know what the market is going to do.  The numbers don’t lie, most guru insight is worse than a coin toss.

Despite the evidence I’m shocked at how many people fall for it and make trades based on what ‘they’ or some ‘expert’ says to do.

I truly don’t give a fuck what the talking heads are saying today, or where that article told me to invest my next dollar because I’m systematic investor.  A hunch is

bull shit.  So is a tip.  Those things can’t be measured, or quantified.  I only act on systems — things that can be tested time and time again and shown to be reliable over the years.  This takes the emotion out of it and keeps focused only on what works consistently over the long run.

Factually speaking, the average equity investor does quite poorly.  Horribly.  For the 20 years ending 12/31/2015 the S&P 500 Index averaged 9.85%.  The average equity investor did just 5.19%.  Anyone with a basic understanding of compounding returns know just how horrible that is.  And it’s largely the result of emotion.  Just think back to not even 2 years ago.  2015 was a go no where year for the stock market with 2 drops.  After that year, bearish investor sentiment was over 45%, at one of its highest points ever.  Bullish sentiment was below 25%. The consensus was the that the 7 year bull run had come to an end and things were head down.  Here’s just one headline from December 2015.


… In the roughly 20 months since the fear of 2015, the S & P 500 has gone on to return 23%.

Back to systems; they don’t need to complicated.  Simple is better in many aspects of decision making and just the same in investing. Simple, systematic investing takes the emotions out of it.

Here’s the deal, systematic investors and strategies don’t make the headlines.  They don’t make it to your Facebook feed.  They’re boring.  Can you imagine how much attention a systematic investor would get on TV?  Here’s something they would say:

Investors should keep investing right now… because erm, thats what you should do based on the simple rules that have been shown to get the risk adjusted return we’re looking for.

… and cut.  Career as a pundit ended.


Here’s a systematic investing strategy:

It will keep you from wasting time reading pointless articles and worry about how your portfolio is doing.

Dollar Cost Average Into A Diverse Portfolio (preferably low cost).

Just take a percentage of your monthly take home pay and contribute it to a diverse portfolio and never look back.  That’s it.  When investing systematically like this you’d be surprised at how quickly you set your emotions aside, as the dollar cost averaging avoids a psychological anchoring to a lump sum investment.

Many will advocate a low cost index portfolio through Betterment or a Vanguard Life Strategy fund, and quite frankly that is statistically likely to outperform most alternatives, but a mutual fund portfolio will work (just make sure the manager has over $1,000,000 personally invested), or a smart beta portfolio.  Either option you go with will have have you substantially outperforming the average equity investor.


Want To Avoid Market Bear Markets & Volatility?


Trend Follow Using A Simple Moving Average.

My investing life hasn’t been long enough to have me ride through a 50% drawdown as we seen in the the late 2000s, but I know I don’t want to.  For that reason I’m a trend follower.  It’s real simple… just use a simple moving average.  10 month, 12 month, 200 day, no matter which of these time frames you use you’ll get similar results.  If the market is above the is above the simple moving average I am invested.    If it’s below I go to a low risk asset such as cash, Tbills or bonds.  That’s it, 2 rules.  There’s no emotion involved.  No need to read the headlines.  No need to listen to the bullshit.  No need to play guessing games.

A study of trend following in 235 markets, has shown that trend following over the long term results in near market returns (sometimes a little above, sometimes a little below) applied to near.  Net of taxes and trading fee’s, you’ll probably underperform market beta a slight bit, but if it keep you money in the market, and keeps you investing systematically, its a win for your portfolio.

Now do yourself a favor, and stop reading the headlines.  Turn off the TV.  Start investing systematically.  Don’t use fancy verbiage as your system.  Keep it simple, quantifiable, and non emotional.  Your future self will thank you.


Quantitative Wealth Protection

Intro To Trend Following: Quantitative Wealth Protection

Learn how to avoid the downside of the market with simple, time tested, quantitative trend following. You don’t need to be a genius.

Using the S&P 500 as an example I explain:
-The problems With buy & hold investing
-How trend following can protect your wealth (from drawdowns and volatility)
-How simple trend following works.

My Blog Post which covers the lost decade between 1965 and 1975

Portfolio Visualizer for Trend Following Backtest

Worlds Longest Trend Following Backtest by Alpha Architect

Avoiding The Big Drawdown by Alpha Architect

Peter Schiff Radio

Nikkei 225 Index Chart

Meb Faber’s S&P 500 Chart With 10sma

Hey everyone what I got open on my screen right here is the last decade of the 2000’s particularly the S&P 500 as represented by Vanguard’s S&P 500 mutual fund that tracks the index. Through the 2000’s, the decade where stocks went nowhere horrible decade for investors you started out with a $10,000 investment in 2000 January first it was ten years later at the end of 2009. You’d lost basically 10%t of your money as you can see right there. So not a fun time to be a you know an investor and you had some big drawdowns, you went you know from having 10,000 down to 6000 then back up and then you lost 50% of your money in the financial crisis and then you kind of started rebounding.

So I started my investing career as an investor in the early 2010’s right after this happened. So you know I was looking at asset allocations and no matter which asset allocation you ultimately see something like this you know. 10 year period things gone nowhere lots of drawdowns if it doesn’t look appealing, I wouldn’t want to be an investor and I still don’t so I refuse to be an investor that is you know investing right here and then losing 40% of my money. That’s got to get painful feeling, I haven’t gone through that yet and I hope I don’t and I plan on avoiding it quantitatively as I’m going to explain here nor would I want to be you know up here with 12,000 in my brokerage account and then get down there below 6000. Got to be a horrible feeling you know this volatility in the drawdown is just not something that most people can sit through and I think a lot of investors say yeah no problem you know I can ride out the drawdowns, I’m in it for the long term but when push comes to shove it just doesn’t work out for them. They can’t do it or they don’t, they might stay invested but they might not be investing more money in for buy and hold the work you have to be investing money you know at the drawdown periods. But for many of us you know our income goes down when we’re in this periods.

So what can we do to avoid the drawdown? Now I’m going to bring up you know a couple of the profits as I call them of the investing world, and I don’t believe any other you know any other garbage one of which is Peter Schiff. Peter Schiff is one of those guys that believes the market is going to collapse, the economy is going to go to shit and only he knows how to protect you from it Now that stuff is junk I don’t think Peter Schiff knows anything more than anyone else, in fact I say that he knows a lot less than anyone else you know but these guys try to pump you into buying gold or some special foreign stock. Usually through some high priced, overpriced investment and they kind of have this following that of people that believe they’re like a god of some sort. That’s just ridiculous, I don’t want to go down that road. I did follow Peter Schiff for a couple of years you know way back you know before I even started investing but the one thing about him is he’s consistently wrong he doesn’t rely on any data he is just a talking head making noise you know and publishing books and market news and all kinds of commentary.
Ultimately his end goal is just to get you into his funds and his investments to make money. So I knew that that wasn’t something I wanted to get into so I researched and kept looking for ways of quantitatively avoiding periods you know like the lost decade here and that led to Trend Following. So trend following basically means that you go with you know the market, so when the market’s going down you stay out of it when it’s going up you get back in and you can do this with a simple moving average. You see the 10 month simple moving averages is the red line here, so if the S&P 500 is above its 10 month simple moving average you’re in it you’re invested. When it goes below its simple moving average and it’s in a down trend you get out and you go to cash. It’s very simple to do, it only requires you know trading once a month you can just look once a month S&P 500 up the very first day of the month. S&P 500 above its moving average you stay in, S&P 500 below it you go to cash or an alternative asset as I will explain.

So you know here you see a period from 1990 to 2012 and this is you know by Med Faber. Med Faber had done a lot of research on Trend Following and has published quite a few papers but let’s see what it looks like in practice. So first we’re going to remove that. Time period I’ve got set from 2000 to 2017, so if the 10 month simple moving average. Or excuse me if the S&P 500 is above its 10 months simple moving average you’re invested as you would be here. One in the 10 month simple moving averages below it you’re out of it you’re invested in cash and you can see that from a time period of 2000 to present the try to follow it started use absolutely kick the ass of buy and hold. You know buy and hold out a cumulative or compound annual return of four point seven nine percent timing portfolio up at nearly eight percent.  Not to mention the draw down much lower only a 16.7% drawdown versus nearly 51% drawdown for buy and hold and sharp ratio which measures basically risk adjusted return is much higher than buy and hold.

Now for some people sitting in cash is an optimal you know you can get some return in our asset classes that do get returns particularly those that have a low or negative correlation to stocks and that would be bonds. Particularly Treasury bonds but for the sake of this I’m just going to show it with a total bond market index by Vanguard.  So you know when you’re looking at it let’s go back to the morning star right here.  Through the last decade bonds pretty much went up, they had a little bit more momentum as things were going down that’s to be expected with a lower correlation. So rather than going into catch you could go into bonds and get a little bit of you know kind of extra returns, little bit of extra returns instead of sitting in cash. So a plug in the you know Vanguard Total Bond Market Index and we’ll redo this and you’ll notice that the annual growth rate goes up a little bit, not a lot just a little bit. Up just over one and a half percent gets you some more returns rather than sitting in cash you sit in a relatively stable asset so you know investing in the stocks when they’re above the simple moving average and then going to bonds when you’re below it has done pretty well. It’s gotten you nearly a 10% return, we’ll call it nine and a half that is what it is you know for the last 17 years or so and minimize your drawdown.

But I don’t want you to think that this trend following strategy is some holy grail, it doesn’t. It’s not here to help you beat the market you know the reason why I’m showing this period from 2000 to 2017 is because there’s a lot of kind of up and down with the market sideways going. When you go into a bull market the trend following the lags behind it so if we go from the period of 2010 to present you’ll notice that the buy and hold portfolio is four and a half, five percent above an annual return above the trend following portfolio. So it’s doing well, it’s a bull market buy and hold is working. So the trend following strategies really work when the market isn’t a bear market and that’s when they shine. Over the long term they equal out, you’re going to get about the same return you know over a long period of time just without the drawdown and volatility. So to illustrate that we’ll set this back as far as this thing can go which is 90’s or, late 8’s excuse me based on the data available for the S&P 500 mutual fund. And you’ll see you know during the bare run of the 80’s and 90’s into the dot com bubble the buy and hold you know index of the S&P 500 just absolutely kicked the trend of followings ass. There are times here when people are probably saying trying to follow him doesn’t work but when the skies go grey and the bears came to town the trend following strategy started to shine and as a buy and hold you know dropped the trend following took off and you know through the end of the 2000 with the financial crisis it still you know went on.

Now we don’t know where our current bear, excuse me bull market is going but it could catch up to the trend following strategy. Trend following isn’t a 100% of the time a winning strategy but it gives you some protection so that you have money when things go south you know. Some of the big things with buy and hold investing is that you’re supposed to be continually investing money but the reality is when we’re in these bear markets your income is lower. Psychologically you don’t want to invest, you want to hold on to cash. So it doesn’t work, you’re not investing when the market is down as you should be you know through buy and hold strategy. The trend following works because it keeps your sanity together, you don’t have to live through the drawdowns I tend to think of it like insurance. When there’s a bull market you’re spending a little bit of money in the terms of percentage annual return to avoid losing money later. That’s how I see it, it’s like an insurance policy to me. When the market goes down I know I’ll have money there to use for whatever I need to use it for or just for my own sanity.  And that’s something I’m willing to trade and I think many investors are, I think that the current trend of flocking towards buying old investments is going to go south once we run into a bear market here because many investors are just. Overestimating their risk tolerance they say yeah I’ll be able to live through these I’m in it for the long haul. But when things go down you know 10% down 20% they’re probably going to want out or they’re going to wish they were trying to follow.

The other thing too is not all markets go up forever. There’s the case of Japan, Japan and the Nicki index. It kind of peaked in the in the late 80’s and it never recovered since then and pauses camera for a second while I pull it up. Alright so here’s the Nicki 225 Japan’s index. It peaked right here just before 90, it was up here and it never recovered since then so you know I bet there’s a lot of people in Japan saying Buy and Hold just doesn’t work look at our economy. And there’s nothing to say that the United States can’t go Japan, there’s nothing to say that the S&P 500’s trend is going to keep going up. So a lot of the investors that were you know back in the Japanese markets probably wish they were trying followers now I believe the S&P 500 in the U.S. equities will continue this up trend for the foreseeable future but they might not. You know they always say past is not prologue when it comes to investing returns and while the S&P 500 has had a great return what if it doesn’t? And that’s where trend following comes in and trend following offers some protection, it’s 100% quantitative. You know you can look at the strategy the first day of the month if it’s above the simple moving average you go into your stocks, if it’s below it you go into bonds.

There’s nothing hearsay, there’s no punditry, there’s no talking heads like Peter Schiff telling you oh it’s going to crash. You don’t care you don’t even need to watch the news in fact I suggest you just do not watch the news. I don’t, I don’t care what the news says about the S&P 500 but let’s just see what we’ve got here. Let’s just see what it says today, S&P 500 just did something that is meant gains 100% blah, blah, blah. This stuff doesn’t matter, with trend following all you need are two simple numbers, the current price or total return and the simple moving average and you’re either into your investment or you’re not. So yes you could try to follow S&P 500 but there are ways also to make it more diverse and trend follow other markets, you know we can look and see that this not only appears robust outside of time as we’ve seen here but through other markets as well. So we can take a merging markets for example and you’ll notice.  Merging market data only available from 96.  And it gets whipsawed a lot more but you avoided a lot of the drawdowns associated with a more emerging markets here and you’ve actually had a higher total return again we don’t know if that is going to happen going forward. We can’t guarantee you’re going to have a higher total return but you can you know avoid some draw downs.

We could do the Eva index, other foreign stocks. I did this wrong. Out of Market asset of bonds.  From 2003 again foreign stocks you’d have avoided the big drawdown of the financial crisis and avoided a lot of the, you know up and down volatility since then to have a higher total return. Trend Following works across nearly every asset class and you know if they take my word for it there’s Alfa Architect has done a ton of back tests on it, they’ve even got some back test going back as far as the 20’s with data on it showing how robust it is.  So all linked to those in the show notes and let me know if you have any questions you know I think there’s a lot of investors out there that if they knew about trend following and knew how easy it was they would do it and that’s what I’m trying to tell more people about it.  Thank you guys.


pitfall of financial advisors

Who’s Who: The Full Mess Of Financial Advisors [Infographic]

Some days it seems like everyone is a ‘financial advisor’.  When I go to the bank, I get suggested a meeting with their financial advisor.  I’ve got some financial advisor who consistently hounds me on the phone for a meeting about how he “can help me”.  And at the bar, there’s a financial advisor too.  Armed with their bachelors degree, and 2 week introduction course from their employer, they all have the latest and greatest financial instrument or portfolio suggestion for me.  I’ve heard some them out for mere comical value, and none of them have anything of value.  The better ones have just the typical diversified portfolio for about 5x the cost of diversified portfolio through a robo-advisor.  Some of the worse ones, have high load fee mutual funds, or some mythical strategy to ‘protect’ your investment.  The reality is, they’ve all got bullshit.  That’s not saying there aren’t great financial advisors out there, but generally most of them are financial salesman, more concerned with their commission check than your portfolio.

So when everyone (most) is an advisor peddaling overpriced and/or crap investments, who’s who?   Morgen Beck Rochard of Origin Wealth Advisors recently created the helpful infographic below on the wide range of possibilities you can get when you hire a “financial advisor”.

What can we tell from all this?  The term “financial advisor” is extremely broad, kind of like saying “dog”.  It tells us nothing about:

  • Their qualifications, certifications, or years of experience.
  • The types of financial instruments that suggest (sell); individual stocks, active funds, passive funds, life insurance products, or annuities.
  • How they are compensated (flat fee, percentage of assets, commissions).
  • Whether they are a fiduciary (legally required to always act in the client’s best interest).

All of the robo-advisors I suggest for everyone who wants a ‘hands-off’, effective portfolio, including my sister, such as Wealthfront, Betterment, WiseBanyan, Schwab Intelligent Portfolios, all find their place near the top of the chart in the “Fee-only Passive Management” category.  They are all Registered Investment Advisors, which are fiduciaries legally required to act in your best interest, and they are  Securities Investor Protection Corp (SIPC) insured, which means that the securities in your account are protected up to $500,000 per individual account type (Note insurance cover mis-management, not portfolio fluctuations).  All of them will give you a well diversified portfolio of low-cost passively managed funds based on your risk tolerance and investment horizon.  Their fee, which is all relative low, around 0.25%, is based on the total value of your account.  The provide limited financial planning using well designed software.  In my opinion Betterment does the best of financial planning with their tax loss harvesting and tax coordinated portfolio’s.

Stay away from everything in the yellow, orange and red boxes.  Here you get complicated universal life insurance, mythical hedge fund strategies, and expensive mutual funds often with managers who will not even invest in their own funds.  By simple avoiding the crappy financial products, you’re already doing better than the average investor.

Up at the very top are the unicorns of financial advisors.  A well qualified human advisor that evaluates your financial position, and life financial picture holistically, and acts as fiduciary sounds great, but it is also out of reach for most of us.  These guys often won’t even say return your call unless you’ve got an account balances over $1,000,000m they also tend to be a bit more expensive.  The Form ADV of Origin Wealth Advisors (firm who published the infographic above), reveals that over 75% of their clients are “high net worth” and the portfolio management fee  is 1.5% annually, unless you have more than $5 million.  That’s clearly not for most people and quite frankly it would be hard for any advisor to add that much ‘alpha’ to a portfolio.

There are lower cost financial planners out there, but they are hard to find, and still have a minimum investment beyond what most can invest.  On the otherhand, anyone with $500 can go to Betterment an awesome portfolio, coordinated with their goals, and with tax strategies implemented, for 0.25%.  A $100,000 portfolio will cost just $250 per year.  Not even 10 years ago, this kind of investing was only available for the upper echelon of investors.

Statistically, all investors would be best served just saving up a bit and opening an account with any of the robo-advisors mentioned here, and then consistently investing into the account.  That means avoiding all the other financial advisors and their largely unmet promises.  At the same, learn all about investing, taxes, market history, and investor psychology so you can be your own financial advisor.  It’s really not that hard, and I believe everyone should… thats part of why I started this site!



5 Reasons Why I Told My Sister To Invest With Betterment

When I had that talk with my sister about “so how much money do you have sitting in the bank? – You need to invest!”, I ultimately pointed her to Betterment.  At the most basic level Betterment aims to get you simple, do nothing, stock market returns – adjusted for your level of risk and time horizon.  With Betterment you buy (according your goals), do nothing except keep investing, and check back in many years to see how much you have (aka buy & hold).  Some of you might be a bit shocked by that I would suggest a buy & hold allocation for my closest relative.  If you know me or have read my blog, its no secret that I’ve invested countless hours into finding quantitative formulas to beat the market.  Formulas to give me a slight edge over the market beta returns of a globally diversified portfolio like what betterment offers.  So why would I, her brother, who has all kinds of awesome quantitative investment ideas and knowledge point her to Betterment – a solution so simple?

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Active Funds Had A Rough 15 Years (and That’s Putting It Nicely)

Today S&P released their SPIVA US Scorecard through the end of 2016.  For the first time ever, the SPIVA Scorecard, which presents data on what percentage of actively managed funds beat their benchmark, had data for the trailing 15 year period.  As implied by the headline, things didn’t look good (at all) for the actively managed funds (And Thats Putting It Nicely).

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trend following with dollar cost averaging

Trend Following With Dollar Cost Averaging (it doesn’t look that awesome)

Simple, quantitative trend following can help you avoid the drawdowns and black swans of the market… considering you can stick to the rules.  This is highly noticeable when you look at a chart showing the growth of $10,000, especially over any time period including the ‘lost decade‘ of the $2,000s. Read more

top market fund mutual fund

Top Pick For A Winning Emerging Market Fund Mutual Fund

We sit in a period where emerging markets haven’t been so popular.  Over the last 10 years the diversified emerging markets index has gone nearly no where, having been left in the dust by US Equities or a globally diversified portfolio.  From 2008 through 2016, the S&P 500 Index returned 7.1% per year, providing a total return of 85.5%.  During the same period, the MSCI Emerging Markets Index lost 1.3% a year, providing a total return of -11.3% all the while volatility as about 50% greater than the S&P 500 Index.  The result of all the gloom and pain emerging markets have inflicted has been that many investors are simply under weighted to emerging markets, which represent about 13% of global market capitalization. Read more