MDs Must Know When it’s OK to be Average

Posted on November 13, 2022 by Dr. David Edward Marcinko MBA MEd CMP™

Should Active Investors Expect to Lose?

Rick Kahler MS CFP

By Rick Kahler MSFS CFP®

When it comes to investing, it’s a losing proposition to try and be anything better than average. Even if you are a doctor.

I was recently reminded of this important investing precept when I attended a presentation by Ken French, a noted professor of finance at Dartmouth College.

Dr. French Speaks

“The theory is institutions are smarter than ‘dumb’ individual and can add value,”

said French.

“That is simply not true.”

His research has found that institutions are no better at trying to beat the market than individual investors. When you pay someone to do better than the market, French told us,

“You should expect to lose. It’s really hard to identify the great managers. You are wasting your time and money trying to beat the market.”

If there’s no point in trying to beat the market through “active” investing, what is the best way to invest? Through “passive” investing, that accepts average market returns. You need to reduce expenses, diversify your portfolio into index funds of various asset classes, minimize taxes, and exhibit discipline.

  1. Reduce expenses. Passive investing generally costs around 0.20% a year in fees, compared to around 1.35% for active investing.
  2. Diversify into index funds. Simply select an index in the asset classes you want to hold. The inherent strategy of the index will determine when to buy and sell. For example, the inherent strategy of the S&P 500 is to own a fraction of the largest 500 companies in the US. Every June, those companies that fell out of the top 500 largest are sold and those that made it into the top 500 are purchased.
  3. Minimize taxes. The limited buying and selling of passive investing tends to reduce investment-related taxes.
  4. Exhibit discipline. Relying on the inherent strategy of an index fund puts some distance between you and buying/selling decisions, making it easier to maintain your investment discipline during market fluctuations.

You may be thinking that, if “passive” is the way to go, you might as well make things even simpler. Why not just put your retirement money in the bank and forget it? While you can certainly do that, the results may be disastrous. If you want more than just Social Security for your retirement, you need your money to grow.

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stock-exchange

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Considerations

In 1913, nine cents bought a quart of milk. In 1963, the same nine cents bought a small glass of milk. In 2015, nine cents bought seven tablespoons of milk. Clearly, putting money under the mattress doesn’t work for the long term. The culprit of the declining purchasing power of that nine cents is inflation. The moral of this story is to make sure your money grows at least as fast as inflation. That requires investing it.

Example:

It would require $13 today to equal the purchasing power that $1 provided in 1926. Had you put one dollar in the bank in 1926, you would have $21 today. Having invested the dollar in long-term bonds would give you $132. However, invested in the S&P 500 Index (stocks), you would have $5,386.

A Mix

Does that mean you should invest all of your retirement assets in stocks? If you are one year old, probably so. If you are 60 years old, probably not. For most of us, a mixture of index funds that include many asset classes—such as global stocks, global bonds, global real estate, and commodities—is the best strategy.

Assessment

Research supports the value of diversified passive investing as long-term strategy. According to a study by Dalbar, Inc., average passive investors earn 3% to 4% more annually than average active investors. Over time, that makes a huge difference.

Conclusion

Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™   Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

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“Sell Everything!”

Posted on February 13, 2016 by Dr. David Edward Marcinko MBA MEd CMP™

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Rick Kahler MS CFP

[By Rick Kahler MS CFP]

“Sell Everything!”

That’s the advice to investors from RBS, a large investment bank based in Scotland, which issued the dire recommendation to its customers on January 8th, 2016.

The warning urged investors to sell everything except high-quality bonds, predicting the global economy was in for a “fairly cataclysmic year ahead …. similar to 2008.” They said this is a year to focus on the return of capital rather a return on capital.

Stunning

I was first stunned that a respectable investment bank would issue such a radical recommendation. Then I was amused at my own surprise. I had momentarily forgotten this is logical behavior for a company whose profits depend on its customers actively buying and selling. It is not legally required to look out for customers’ best interests and has no incentive to do so.

Clearly, the time-honored way of earning market returns over the long haul is to diversify among asset classes, rebalance religiously, and always stay in the markets. The research is overwhelming that shows those who attempt to time the markets have significantly lower returns over the long haul than those who don’t.

Example:

For example, according to a study by Dalbar, Inc., over the last twenty years the average underperformance of investors and advisors that timed the market was 7.12% a year.

What’s so bad about trying to minimize loses and selling out when things begin looking scary?

Nothing. Who wouldn’t want to exit markets just in time to watch them fall so low that you could sweep up bargains by buying back in? Therein lies the problem: not only do you need to get out on time (not too early and not too late), but you must then know when to get back in.

The Crystal Ball

The only way I know to do this is to own a crystal ball, which the economists at RBS apparently possess.

Here are a few of the things they say to expect:

  • Oil could fall as low as $16 a barrel.
  • The world has far too much debt to be able to grow well.
  • Advances in technology and automation will wipe out up to half of all jobs.
  • Global disinflation is turning to global deflation as China and the US sharply devalue their currencies.
  • Stocks could fall 10% to 20%.

Prediction

The last prediction was the one that grabbed my attention. Given the comparison of the coming year to 2008, I expected a forecast of a significantly greater drop in stocks, say 40% to 60%. Comparatively, their forecast of 10% to 20% seems almost rosy.

While RBS is particularly gloomy, bearish forecasts have also been issued by other investment brokerage firms, including JP Morgan, Morgan Stanley, Bank of America Merrill Lynch, Barclays, Deutsche Bank, Societe Generale, and Macquarie.

Just for perspective, here’s a look as reported by The Spectator at previous predictions from Andrew Roberts, the RBS analyst who issued the recent dire warning. In June 2010, he warned,

“We cannot stress enough how strongly we believe that a cliff-edge may be around the corner, for the global banking system (particularly in Europe) and for the global economy. Think the unthinkable.” In July 2012, he said, “People talk about recovery, but to me we are in a much worse shape than the Great Depression.”

Incidentally, one thing Roberts did not predict was the meltdown of 2008.

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“Sell Everything?”

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Assessment

The inaccuracy of earlier dire predictions should encourage physicians and all investors to stay the course.

As usual, chances are that those who diversify their investments among five or more asset classes and periodically rebalance their portfolios will come out on top. The odds greatly favor consumers who ignore doom-and-gloom warnings, especially from those whose companies may profit from investor panic.

Conclusion

Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

 

Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™         Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

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Is Passive Investing Right for You?

Posted on August 7, 2013 by Dr. David Edward Marcinko MBA MEd CMP™

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On the “Buy low and Sell high” Strategy 

By Rick Kahler CFP® http://www.KahlerFinancial.com

Rick Kahler CFP“Buy low and sell high.” That was my simple approach when I was a smart young investment advisor. I poured over a company’s balance sheet, earnings statements, and forecasted returns. Then I bought those companies that were bargains and waited for my gains to roll in. More times than not, they did—eventually.

The problem came with the “not” and “eventually.” A majority of my picks did go up in value, but the minority that were “nots” still lost enough to have a negative impact on my bottom line. Even more frustrating, some of my “nots” turned into gains “eventually” after I sold them.

My investment returns were similar to findings from Dalbar, Inc., a financial services research firm. Dalbar’s studies have shown that average active investors barely beat inflation over the long term. They significantly underperform investors who put their money in an index fund of stocks and leave it alone.

So much for my early investment brilliance! Over the past 40 years, I’ve learned that with every passing year I know less than I thought I did the year before. I’ve proven to myself I have no idea where any market is going tomorrow, next month, next year, or in the next 10 years.

This awareness has led me to become increasingly passive in my investments. In passive investing, rather than trying to time the buying and selling of winners and losers, you instead buy a representative sample of the entire market. This is possible in any market: bonds, stocks, real estate investment trusts, or commodities. You simply buy mutual funds and exchange-traded funds (ETF’s) called index funds.

Benefits

The two biggest benefits of passive investing are cost and diversification.

Costs

Index funds have incredibly low costs, with annual fees as low as 0.1%. Contrast that with the average equity fund that costs 1.5%, fifteen times more. According to research, 97% of active mutual fund managers don’t beat the index over 20 years. Even the 3% who do must beat the index by more than the 1.5% fee they charge, in order for their investors to come out ahead.

Diversification

The smaller number of stocks owned – the more my fortunes are tied to those few companies. It’s the old adage, “don’t put all your eggs in one basket.” By owning index funds, I own hundreds or thousands of securities. While I will never hit a home run, I also will never strike out. My returns will be “average.” Investing may be one of the few professions where being average puts you in the 97th percentile of all investment managers.

The NaySayers

Not all of my peers agree with this philosophy. Many very smart investment advisors jumped off the passive investing bandwagon after 2008 and returned to tactical asset allocation, which is another name for timing the markets.

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Harold’ Strategy

A noted investment advisor, Harold Evensky MBA CFP® of Evensky & Katz, addressed this issue at a conference last year. After the 2008 crisis, his firm hired researchers to evaluate whether they could find any tactical strategies that would have avoided the crisis. They found some that, in hindsight, would have worked. Yet he didn’t feel those strategies could be comfortably applied looking forward. Instead, the firm decided to add a 20% allocation to non-correlated alternative investments, something I’ve done since the late 90’s. In other words, they increased their clients’ diversification.

Assessment

The bottom line is that passive investing actually gives you more control. It allows you to focus on reducing costs and taxes, the aspects of investing you can control. It frees you from trying to beat the market and worrying over what you can’t control.

Conclusion

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Investing Behaviors That Leave Money on the Table

Posted on December 6, 2011 by Dr. David Edward Marcinko MBA MEd CMP™

Are Physicians Guilty, Too?

By Rick Kahler, CFP®, MS, ChFC, CCIM

If you had half a million dollars for your retirement fund, and invested it in mutual funds, chances are you would leave $25,000 a year of potential income on the table. Over 20 years, that underperformance could cost you over $1,000,000 when you include reinvestment.

The Dalbar Study

This conclusion is based on a recent study by Dalbar, Inc. It found that mutual fund investors (individuals and investment advisors) consistently earn below-average rates of return. This group’s average annual rate of return for 20 years underperformed the average by over 5%.

The Results

The study concluded most of this underperformance has little to do with sound investment strategy and everything to do with psychological factors. It outlined several behaviors that contribute to poor investment decisions such as badly-timed buying and selling.

Lack of Diversification – Many investors try to reduce risk through diversification, but very few do it properly. They try to diversify by having several advisors, many brokerage companies, or different mutual funds. Using these strategies creates a false sense of security that one’s portfolio is diversified. Real diversification is having investments in many different asset classes, i.e., stocks, bonds, real estate, cash, commodities, absolute return, and international equivalents.

Anchoring – This is relating something to a familiar experience that isn’t necessarily true. For example, a financial salesperson may compare investing in an equity mutual fund to growing a tomato plant. You put in a little seed and watch your plant grow and grow, until one day you have a bushel basket of luscious tomatoes. It’s an appealing image, but it sets an unrealistic expectation of an equity mutual fund. Neither stocks nor tomato plants grow that steadily. Some don’t grow at all. Others grow overnight and then die just as suddenly. Some get wiped out by hail. And some thrive.

Media Reporting – Reacting to the financial news without a more in-depth examination can ruin the most sound investment strategy. Very few financial reporters have degrees in economics or finance. Most financial reporting is faddish, trendy, sensational, and shallow. Research suggests investors who shun or limit their intake of financial news do better than those who don’t.

Herding – This is the concept that the herd knows best. Few people want to be going east when the whole herd is heading west. This is especially true when the herd is panicking: selling out of fear that their investments are going to nothing or buying out of fear of being left behind. The most successful investors avoid stampedes.

Loss Aversion – This is placing more emphasis on avoiding loss than on the possibility of gain. It results in investors wanting their cake and eating it too by searching for an investment with a high return and low or no risk. Such investments don’t exist. When they discover this, many investors don’t invest at all. Others go into an investment expecting it won’t go down, then sell out at precisely the wrong time when it does.

Delusion – This is an attitude that “bad things only happen to others, but not me.” A deluded investor is one who holds onto an investment even when it’s apparent that it’s never coming back.

Narrow Framing – This is making a quick decision without gathering or being aware of all the facts and considering the implications. Usually, the investor doesn’t uncover “the rest of the story” until it’s too late and the financial damage is done.

Assessment

And so, are you guilty of any of the above investing behaviors? No one – not even doctors and medical professionals – wants to leave a sizeable amount of potential retirement income on the table. 

The best tool for getting more of that income into your pocket isn’t necessarily studying investment philosophy. It may be more important to learn more about your own behavior.

The Author

Rick Kahler, Certified Financial Planner®, MS, ChFC, CCIM, is the founder and president of Kahler Financial Group in Rapid City, South Dakota. In 2009 his firm was named by Wealth Manager as the largest financial planning firm in a seven-state area. A pioneer in the evolution of integrating financial psychology with traditional financial planning profession, Rick is a co-founder of the five-day intensive Healing Money Issues Workshop offered by Onsite Workshops of Nashville, Tennessee. He is one of only a handful of planners nationwide who partner with professional coaches and financial therapists to deliver financial coaching and therapy to his clients. Learn more at KahlerFinancial.com

Conclusion      

And so, your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

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Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

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