Retirement Answers

Jacob: 00:01

So my suggestion to most people is to keep things really simple, lower your cost, buy the full market, and then almost forget about it. Stop worrying about it. Don't think that you're smarter than your neighbor. Don't think you're smarter than the market. You can't beat the market over time if you're trying to pick certain stuff.

Jacob: 00:21

Welcome to Retirement Answers, a podcast built to answer your most pressing retirement questions. If you're someone who's either thinking about retirement or already in retirement, well, you're in the right place. Hey there. My name is Jacob Duke, and each week, I'll be walking through different tips and strategies to help you succeed in retirement. So let's go ahead and get started with today's show.

Jacob: 00:44

Hey friends, and welcome back to another episode of Retirement Answers. As always, my name is Jacob Duke. I'm thankful that you're here. If you're a frequent listener, thank you so much for tuning into the podcast each week. I hope you find it valuable and hopefully it helps you on your retirement journey.

Jacob: 00:59

If you're new here, thank you so much for being here. We are glad to have you and I hope that you find this episode helpful. If you do, be sure to go back and listen to all the other ones. That way you can learn more tips and strategies around retirement planning. So today we're gonna be talking about investment principles.

Jacob: 01:14

Now, everybody has a different kind of guiding philosophy or principles that they like to follow when it comes to investing. But today I wanted to talk about the three investment principles that I operate by whenever I'm making investment decisions. Now, the hard part about developing your investment principles or the guidelines that you operate by is that everyone has an opinion. So your friends, your family, your neighbors and financial advisors, theywe all have different opinions on how you should be investing your money. And what's interesting is that each of these different opinions are likely going to be different.

Jacob: 01:46

Your mom could say, hey, only buy tech stocks. Your best friend will say, hey, only buy US stocks. Your advisor will say, Hey, I've got the best mutual funds that you could ever buy. And they're gonna outperform the market every single time. And your crazy neighbor will probably say, Go buy some company that's a startup and it's just destined to explode and grow really quickly.

Jacob: 02:03

So there's different opinions out there on how to invest and how to do it well. The hard part is, is how do you know which ones are right? How do you know which of these suggestions are the right way to go for you specifically? And beyond all these different opinions or suggestions we get coming to us, we all have our own biases and we have our own preferences. We have different levels of hopes and fears and risk tolerances and volatility that we're willing to experience.

Jacob: 02:29

And we ultimately base our investment decisions on our own personal biases. So what do we do in all this? Well, I've got three primary principles that I like to operate by when making investment decisions. And I think that these three guiding principles will help you make wise or more informed investment decisions so that you can ignore all the noise around you. Now, before we dive into those three principles, I wanted to highlight this week's listen review and it comes in from Jay Jenin RN, and they give the show five stars and they say amazing podcast, love it, done in a simple, easy to understand way, but still very valuable.

Jacob: 03:02

Thank you. Thank you for that review. I really appreciate it. And I'm really glad to hear that it has been impactful or valuable for you. It's because of listeners like you that the podcast is successful and reviews like this truly do help others find the show.

Jacob: 03:16

So if you're enjoying the show, I would greatly appreciate if you left a rating and review there on Apple Podcasts. Also, you can go check me out on YouTube if you wanna find me there, there should be a link down in the description. Okay, so with that out of the way, let's go ahead and jump into these three investment principles that I like to use when making decisions. Now, first, I wanna make sure that you hear me correctly. This is not going to be investment advice nor should you take it that way.

Jacob: 03:39

These are ideas that I use. So by sharing these with you, hopefully you'll be able to create your investment principles and just take these ideas and change them how you see fit. But don't take this as specific investment advice for you. Now, why do I feel the need to share these principles with you? Well, I have conversations with people every day and the reality is most of the time their investment portfolios are truly just a mess.

Jacob: 04:03

They've got 50 different mutual funds, they've got overlap everywhere, they've got high cost expense ratios, no direction, or don't know why they're invested the way that they are. They're buying 5% CDs and getting out of their long term positions to do so because that's the highest interest rate we've seen in a pretty good while, or they're getting in or out of the market because of who the president is or isn't. They're investing incorrectly in each of the account types. So meaning they don't have asset location or they're not doing that properly. And that's really just to name a few.

Jacob: 04:32

So most of the time I just see there's really no direction or strategy that's really being implemented. And it's just a hodgepodge of 10 different strategies put together to see which one works the best. And what happens there is you end up making no material progress over time. So what do I suggest? Well, the first step for most people is simply to get organized and simplify things.

Jacob: 04:54

We have to know where your accounts are, how are those accounts currently invested. And since most of the time it's a mess, we've got to spend a little bit of time organizing those accounts, making transfers, consolidating, simplifying things and organizing it in that way. So once things are organized, then they can begin to implement these different principles. So the first principle that I always operate by is diversification. And I know you're probably like, Jacob, I've heard that word.

Jacob: 05:20

I know what it means. I get it. We're supposed to spread out our money across all the stocks. I totally get it. Well, did you know that there are upwards of 15,000 stocks that you can buy across the whole world?

Jacob: 05:30

Most of us only really know about the S and P 500 or the Dow or a few different, you know, small cap funds perhaps or dividend paying funds, but there's another 14,000 stocks out there that we can buy. So the question is, is why aren't you owning those? Why aren't you buying those? Most of the time people typically lean towards large US stocks because that's what we know. We know the names that are in that category.

Jacob: 05:52

We know the Apples, the Googles, the Amazons and so forth, right? And there's nothing wrong with owning those companies. Absolutely, we do want to own them. But the problem is, is that's all that people are owning. What happens whenever The US large cap stocks start performing poorly and The US small or international stocks start performing better?

Jacob: 06:09

Well, you don't own any of those, so you'd be missing out. You might think to yourself, but Jacob, I would go buy the small cap and the international stocks whenever they start going up, duh. And I don't disagree with that thinking. Most of us think that we would do that whenever that time comes. But the reality is we simply won't.

Jacob: 06:24

So I encourage you to stop lying to yourself. Most of the time we always base our investment decisions on the most recent investment performance that we see on charts. So if one fund has done better than another over the last ten years, we typically lean towards buying the one that has done better. But what if I told you that buying the one that's underperformed might end up being the best bet, right? It goes against our normal logic or our normal human intuition.

Jacob: 06:49

So that's the first mistake. When it comes to diversification, most people are simply not diversified, or they're not as diversified as they thought they were. Most people are simply over concentrated in singular stocks or specific sectors of the market. So they're placing bets on what they think will do better in the future. And those bets do work just until they don't.

Jacob: 07:08

And then that's whenever the poor decisions get made. Now, the second mistake I see here around diversification is owning a bunch of mutual funds, thinking that the number of funds is actually making you more diversified. Now, here's what I mean. I oftentimes run into people that have 50 different mutual funds in their IRAs and Roth IRAs. And my question to them is, well, why do you have that many funds?

Jacob: 07:28

And they'll respond back and say, well, Jacob, because I wanna make sure I'm diversified. And what I often find whenever that's the case, and they're owning this many funds is, is there's what I call overlap. So that means you're buying one fund and you're buying another fund, but those two funds are doing the exact same thing. So it's kind of like, there's not any extra diversification happening. You're just buying two funds that are issued by two different fund companies.

Jacob: 07:50

So what's happening there is you're encountering overlap and this is a false sense of diversification. So a lot of people equate the number of funds with how diversified you are. But what if I told you that you could be as diversified as you need to be with two funds, meaning you can buy all 14 to 15,000 stocks across the whole world with just two individual funds. Now that goes against our normal intuition. Again, as humans, we think the more things we own in our portfolio, the more diversified it could be, but you could own an S and P 500 fund at Fidelity.

Jacob: 08:20

You could own an S and P 500 fund at Schwab, another one at Vanguard, and they're all still S and P 500 funds, but now you own three funds that are investing all in the same thing. So that is overlap and that's that false sense of diversification. So that's the second mistake I often see and kind of run into whenever I'm evaluating people's portfolios is they think they're diversified, but they're actually just buying the same thing over and over again, just in different funds. So diversification is the cornerstone of the decision making I do whenever I'm building an investment portfolio. If we're not diversified, then I'm not comfortable with it.

Jacob: 08:50

Now, does that mean that I'm gonna make you change all of your holdings and sell your favorite company? It doesn't mean that, but just know that I'm not gonna recommend you go buy only one company because there's too much risk there. What we're trying to do whenever we're diversifying is we're trying to get the highest potential return inside of the asset class of stocks for the least amount of risk. So if we buy every stock out there, we're still buying the stock market, right? But we're doing so in a way that lowers your overall risk of picking wrong.

Jacob: 09:18

So we're not trying to make decisions and pick certain stocks or even pick certain sections of the market, large versus small or growth versus value or, you know, financial versus tech. We're not trying to pick which ones we think will do better. We're just saying, let's buy all of them. And then there's gonna be different ones that do better or worse. And there's gonna be ebbs and flows and which ones do, the best each particular year.

Jacob: 09:40

But what we know is that we own all the good ones, but we also own all the bad ones. And so what's really happening here is the law of large numbers. We're just buying all of it and saying, hey, we're gonna get the byproduct of all these things combined understanding we're gonna have the best and we're gonna have the worst, but the average is really what we're after. So we want to eliminate in some sense, the decision making that comes with trying to pick which companies or which stocks will be better. So the second principle is that I wanna keep your costs low.

Jacob: 10:08

So whenever we are buying mutual funds, if we're kind of staying in that ETF or mutual fund category, all of those funds are gonna come with what's called an expense ratio. Now that's just simply the cost to use that particular fund. And whenever we're talking about diversification, typically your diversified funds, which are your index funds, those are gonna be the ones that are your lowest cost. The reason for that is because you don't have, you know, 10 different fund managers that are buying and selling and transacting inside of the fund every single day, trying to add the stocks they think are gonna be better and taking out the ones they think are gonna be worse. What that does is, is that begins to increase the cost of operating and running that fund.

Jacob: 10:43

And that cost is passed on to you because those fund managers have to be paid. So this expense ratio, that's what the technical term is. That's applied to every fund. You could be as low as point zero one or point 02% annually all the way up to two or two and a half percent, depending on which funds you're buying. So my recommendation is, hey, let's buy the ones that cost the least amount, right?

Jacob: 11:04

That means more money is to stay in your pocket. It doesn't take any extra effort and you're going to have most likely better outcomes, which we'll see here in just a little bit. So that's the second principle is keep your costs low. Now, the third one is to avoid market timing. Now, this is probably going to be the hardest principle to operate by for most people, because we all have biases.

Jacob: 11:21

We have, you know, intuitions. We think we know what's going to happen this year based on all these different factors in the economy and what we see, you know, day to day going in the prices going up at the supermarket or gas is going down in value or whatever it might be like. We all think we know what's gonna happen in the future. So that leads us to think that we can time the market or get in or get out at the right time. Now here's the problem with market timing.

Jacob: 11:47

You've got to guess right twice every single time you do it. So let's say you're invested currently, right? And you want to get out because XYZ thing is gonna make the market tank. So you go ahead and get out, right? Whenever that happens, you have to get back in at the right time in the future.

Jacob: 12:01

So you've got to get out at the right time and you've got get in at the right time. Now, whenever you get back in, then you have to get out again in the future whenever it goes up before it goes back down again. And you kind of have to continue down this path of going in and out of the market. And if you make one mistake, it's going to blow up the whole thing, right? So if you don't get in at the right time or you don't get out at the right time and you wait too long or you get out too early or whatever it might be, that's going to hurt you on all the good things you do.

Jacob: 12:27

So here's the hard part is we all have our friends. They tell us about their wins when it comes to investing the stock market, picking the right stock or getting in or out, you know, at the right time. What we don't hear about though, is all of their losses. So they tell us about the wins, but they don't tell us about the losses. Now, what that happens there is if we're novice at investing or if we're new to it, we think we can do as good as they are.

Jacob: 12:48

But the problem is, is you obviously don't know what all the bad decisions they've made have been. So, whenever we're trying to time the market, it's never, there's never an exact science. And the reality is, is we can try to do it based off technicals or fundamentals. And there's different opinions out there on how that works. But just know that if you're trying to time the market, you've got a guess right every time and one wrong decision or one misstep will negate all of the good decisions that you've made along the way.

Jacob: 13:14

So that's my spill on market timing. Now, hopefully these three principles that I operate by reinforce the fact that I love simplicity. I just really like keeping things simple because half of being successful with your investments is having a strategy that you can actually execute. Even if you had the best strategy in the world for picking stocks and time in the market, it's going to consume you. It's going to take up every minute of every day between trading hours and probably beyond trading hours.

Jacob: 13:38

And that's going to consume you, right? So it would be all you think about every day. And what's worse is you'll likely underperform a low cost diversified portfolio. So my suggestion to most people is to keep things really simple, lower your cost, buy the full market, and then almost forget about it. Stop worrying about it.

Jacob: 13:54

Don't think that you're smarter than your neighbor. Don't think you're smarter than the market. You can't beat the market over time if you're trying to pick certain stuff, okay? So here's actually some data for you on this. The odds of an actively managed fund to underperform the index is 51% any given year.

Jacob: 14:11

So any given year, it's a coin flip, meaning the index could be better or the actively managed fund could be better, but the odds get worse as time goes by. So over any given five year period, actively managed funds underperform the market 87% of the time and then keeps going and getting worse. Over any ten year period, they underperform 91% of the time and any twenty year period, they underperform 95% of the time. So any given twenty year period, you're almost guaranteed to be better off by buying a low cost diversified index portfolio than buying an actively managed fund or group of funds. Now, those stats right there that I just mentioned, those are only for large cap mutual funds.

Jacob: 14:50

If you wanna see the rest of the statistics for the medium, small or real estate funds, shoot me an email. I've got a graphic here that's really helpful and kind of maybe gives you perspective on some of the stuff that I'd love to shoot to you that we can have a frame of reference for what I'm talking about here. So just shoot me an email if you wanna see that, I'll happily send that over to you. And to sum all of it up, I thought a quote from the late Jack Bogle would be fitting. Now, Jack Bogle is the founder of Vanguard, yes, that Vanguard, And he's widely thought of as the king of index investing.

Jacob: 15:20

So when talking about active versus passive investing, he said this, he said, don't look for the needle in the haystack, just buy the haystack. So that's what I want to leave you with today. Again, email me for a copy of those statistics if you'd like to review those and check those out. Also, if you're enjoying the show, please leave a rating and review. Other than that, I hope you have a great week and I look forward to talking with you again next week.

Jacob: 15:46

Hey, it's Jacob again, and I wanted to extend a quick offer to you. If you have a question and you would like to have it answered here on the show, please email me at jacobretirementanswers dot net. And I'd love to answer that question for you right here on the show. Also, I wanted to remind you that nothing discussed in today's episode is meant to be financial, legal, or tax advice. Retirement Answers is for educational purposes only.

Jacob: 16:09

Thanks for tuning into this week's episode. I look forward to talking with you again next week.