Your Last Career Will Be Investor
By Kevin Estes
Final Career
When I was in high school, a mentor said something that stuck:
No matter what you do,
your last career will be investor.
Three of the many reasons to learn how to invest include:
No one cares about your money as much as you.
People take special care of what they own.Think of the difference between renting and owning a home. There’s pride in ownership!
If someone else cares more about your money than you, it’s likely you and your money will part ways. 😬
You know yourself best.
No one will know your dreams, goals, and preferences better than you.You’re in the best position to use money as the tool it is to live your best life.
It costs a lot to have someone manage investments.
A typical investment management fee is 1% a year.
Someone with a:
$500,000 portfolio might pay $5,000 a year
$1,000,000 portfolio might pay $10,000 a year
$5,000,000 portfolio might pay $50,000 a year
That’s like buying a brand-new luxury car. Every. Year.
Where would you even put them?
Costs More Over Time
It usually takes time to accumulate wealth.
According to the U.S. Federal Reserve Survey of Consumer Finances, the median family net worth by age in 2022 was:
Less than 35: $39,000
35-44: $135,600
45-54: $247,200
55-64: $364,500
65-74: $409,900
75 or more: $335,600
Wealth tends to grow with age.
Investment fees typically rise as well.
Learning how to invest young could save more later!
Professionals Underperform
It’s stunning how few active managers consistently outperform the market.
According to a New York Times article:
… over a full 20-year period ending last December, fewer than 10 percent of active U.S. stock funds managed to beat their benchmarks.
Add in active management fees and active stock funds have - on average - underperformed low-cost index funds.
Think about that for a minute!
Companies who:
employ an army of highly educated (and compensated) people dedicated full-time to beating the market,
spend billions on research each year,
talk to all the right people on Wall Street…
consistently underperform basic index funds. 😯
What chance does someone with a few thousand dollars working late Wednesday night have to outperform?
Why Outsource?
Why do people outsource investment management?
It seems to be a lack of one of the three T’s:
Time
Training
Temperament
1) Time
People are busy. Many folks would prefer someone - OK, anything - other than make investment decisions.
That’s completely understandable.
However, would they make the same decision if they knew how much it was going to cost them?
If they streamlined their investments, would it take less time?
2) Training
If someone doesn’t know the difference between a stock and a bond, it could be tough to construct a portfolio!
However, these things can be learning quickly.
For instance:
If someone owns a stock, they own a tiny portion of that company. If the company earns a profit, they may receive some if through a dividend payment.
If someone owns a bond, they own a loan that a company or government owes them. They receive interest payments and will (hopefully!) get what they loaned back later.
3) Temperament
There’s a belief - and some research to suggest - that people tend to buy high and sell low.
When prices are rising, it’s human nature to want to buy the “can’t miss” thing.
When prices are falling, people want to sell before they lose even more.
Buying high and selling low is a bad combination.
Like Breathing?
A metaphor may help.
Millions of people have trouble breathing.
Quitting smoking might help.
Escaping city pollution by enjoying the great outdoors may as well.
Getting more exercise can improve lung capacity.
An inhaler or other medical treatment might also ease someone’s breathing.
Very few people need a ventilator to breathe for them!
Similarly, many people don’t need someone to manage their investments for them. They may just need someone to help them strengthen their investing capabilities!
Developing Investing Discipline
Becoming a good long-term investor takes discipline.
It’s a skill that takes time to develop.
There is no easy path to expertise.
Good judgment comes from experience, and experience - well, that comes from poor judgment
- A.A. Milne, creator of Winnie-the-Pooh
An expert is a person who has found out by [their] own painful experience all the mistakes that one can make in a very narrow field.
- Niels Bohr, developer of the atomic model
What to Do?
Don’t want to learn from the School of Hard Knocks?
Already have enough saved that a mistake could be costly?
Lack the time, training, or temperament to invest on your own?
Hire - and listen to - a professional!
There are advice-only planners who help people develop the skills they need to successfully manage their own money.
Prepare to Change Careers
If it’s too expense for you to hire an expert, focus on preparing for your final career. It may be helpful to start now - perhaps decades before it becomes your primary role!
Educate Yourself!
Listen to podcasts.
Read investment books.
Take the no-cost 11-episode financial education course.
Cut Back on Financial News
Moderate how much financial news you consume.
Watching those shows can cause someone to make short-term decisions which negatively impact long-term performance.
Here are some helpful tips:
If you know yesterday’s closing price for either the Dow Jones Industrial Average or the S&P 500, you’re likely listening to too much financial news.
If you’re watching a TV show with a ticker tape scrolling across the bottom, change the channel.
If your friends often talk about how their investments are performing, get new friends.
Of course, I’m kidding… a little.
Simplify and Streamline
People sometimes feel overwhelmed by their finances.
One way to reduce the workload is to have less to manage!
Checking and Savings
Instead of playing a shell-game with a half-dozen checking and savings accounts, consider paring back to:
one (1) checking and
one (1) savings account - ideally a high-yield savings account or money market fund.
Funneling more cash into and out of one account reduces volatility. It’s easier to maintain the water level in a swimming pool than in many buckets!
Doing so also makes that checking account more of a one-stop shop to check and make transactions.
For people in a committed relationship, it depends on what works best for the couple. There are many ways to combine finances. It’s more like a dimmer switch than a light switch.
Investment Accounts
I often see people with a dozen or more investment accounts. Many of them are the same type owned by the same person!
Instead, work to combine like accounts. It may be best to have one account - per person - for each account type:
brokerage account
traditional IRA (Individual Retirement Arrangement)
Roth IRA (Individual Retirement Arrangement)
employer retirement account like 401(k), 403(b), and 457(b)
From One-Man Bands to a Symphony
Good news! People have gotten the message to diversify.
Bad news! They’ve taken it too far.
I often see portfolios where every account is diversified. 🤯
Each account is acting like a one-man band - someone who plays a number of instruments simultaneously using their hands, feet, limbs, and various contraptions.
Think: Dick Van Dyke’s character in Mary Poppins.
The performance of a symphony is objectively better than that of a one-man band.
One requires an expensive ticket for admission.
The other is performed on the street.
As in an orchestra with professionals dedicated to playing one instrument, it’s best for each account to be specialized.
The (financial) instruments are then harmonized to optimize performance.
(While each account may have a specific goal, it might contain one, two, or even a handful of low-cost diversified investments.)
Below is a potential ranking of how aggressively accounts might be invested (least to most) as well as sample investments:
checking - cash
emergency / opportunity funds - cash or cash equivalents
brokerage - broadly diversified low-cost index stock and bond funds
traditional IRAs - low-cost index stock and bond funds
Roth IRAs and Health Savings Accounts (HSAs) - low-cost index stock funds
stock plans - individual stocks until they can be diversified
Investing Is Just Part of the Plan
Today’s topic was investing. However, investments may be only 5-10% of a comprehensive financial plan!
It’s just one of many topics - some of which may be more critical:
If you’d like to learn what else financial planning includes, check out this list of topics.
If you’d like help preparing for your final career…
Disclaimer
In addition to the usual disclaimers, neither this post nor this image includes any financial, tax, or legal advice.