Tidying Up with Robert Baharian

I’m so excited, because I love…mess!

That’s Marie Konda from the latest Netflix series, Tidying Up with Marie Kondo. In a series of inspiring home makeovers, world-renowned tidying expert Marie Kondo helps clients clear out the clutter – and choose joy.

For some reason, we have so much stuff…

Kondo has designed the KonMari Method – a unique Japanese method whereby she organises by category rather than location, and tidies five categories in a specific order:

  1. Clothing
  2. Books
  3. Paper
  4. Komono (kitchen, bathroom, garage, miscellaneous)
  5. Sentimental items

We feel stressed at home, because of the clutter.

Kondo and I have one thing in common. We both love mess! Well, Kondo loves messy homes and I love messy financial lives.

It’s kinda hard to let it go, because I really like this one…(crying)

Inspired by Kondo, I’ve designed the RobBahari Method – a unique Armenian method of organizing your wealth by category rather than investment, which I’ve broken down into five specific categories:

1. Security

This is the no to low risk stuff – from cash, term deposits, to government and corporate bonds. This bucket provides you with certainty in your life, and it’s the bucket you should keep the part of your wealth you cannot afford to lose.

2. Growth

This is the engine room of your financial wealth. And one that you need to take a long-term view on. Anything less than 10 years and you’re speculating – simple. This bucket includes your share portfolio, real estate, land, collectibles, etc.

3. Cashflow

This is the bucket that helps you live your life – clearly a very important bucket. This bucket may include items from the Security and Growth bucket too. Primarily this bucket includes your salary, shareholder drawings/business income, property developments, business ventures, etc.

4. Lifestyle

Life is about more than just money, and this buckets includes just that. Your family home, the beach house, the sports car, that nice piece of jewellery.

But hey, just because it’s lifestyle, it doesn’t mean it can’t be an investment either.

5. Contribution

They say the secret to living is giving. It’s taken me a little while, but I’m a big believer in that. The more you give to others, the happier you’ll be, and the more you have, the more you can give.

My beautiful wife has taught me that having a scarcity mentality of money is what will prevent you from being wealthy. If you don’t give away money when you have $100, then you won’t give it away when you have $1m. And it’s not just about giving away your money – that’s easy. It’s more about your time, your efforts, your ideas, your advice, your attention, your love, and your presence.

Far too many individuals and families go by each day without a strategy, without a game plan. In fact, far too many individuals and families are not clear on their goals and priorities. I ask you to challenge yourself…

  1. What are you working towards and why?
  2. What does money mean to you and why?
  3. What does wealthy mean to you and why?

I’ll leave you with this quote from Marie Kondo:

Keep only things that speak to your heart.

2019: My Year And Yours

When do you officially stop saying happy new year? This debate continues. There are no rules really, rather, personal preference – so do whatever you want. Happy New Year folks! The team at BWM are officially back from a very well deserved break, and we’re looking forward to a massive year ahead.

The new year is probably one of the most common periods when we set new goals for ourselves. I’m not talking about new year’s resolutions, I’m talking about real goals. Whether it’s to run a marathon later in the year, to travel the world, to double your income, or whether it’s to quit your job and set up that business you’ve always wanted, January is a great excuse to get you doing something about it.

A goal is a dream with a deadline

– Napoleon Hill

Like the management of money, goal setting is something we are not taught at school, yet there is some impressive evidence that supports goal setting. A Harvard Business Study found that 3% of Harvard MBAs who had written down their goals ended up making 10 times as much as the other 97% combined.

I’ve always set goals for myself that I was confident I would achieve – it came as no surprise when I was told this. Not only could I have stretched a little further, but I could have done a better job benchmarking my progress as well as setting new goals when I had achieved my goals in advance. So a few weeks ago I did something a little different. I set goals for myself that literally scared me. Goals that were totally out of my comfort zone. Goals that would put a big smile on my face when I imagined achieving them. There are some simple stuff in there, and a couple of goals that start to make me a little nervous – but that’s the point of stretching yourself and your ambitions, otherwise we wouldn’t achieve greater heights.

Here’s what I did (using the Goal Mapping worksheet and the BWM Clever Cashflow Guide):

I used this Goal Mapping worksheet produced by team Tony Robbins. It’s probably the best tool I’ve used because it’s super simple, and straight to the point – 1) what is your goal 2) why is it important/what is the purpose 3) what actions will you take to achieve it.

When setting my goals, I stick to the S.M.A.R.T. acronym:

Specific: Saying you “want to earn more” is too vague. Pick a number for how much money you want to earn. Do you want to start making $150,000 per year, $500,000, $1 million? Set a clear number that will enable you to track your progress. As you work toward this goal, visualize your specific outcome.

Measurable: When it comes to goal setting, you need a way to track your progress. For example, by setting a clear goal (earning $150,000) you can check the numbers as the year goes on. How are you matching up to your goal? Are you on track to succeed?

Achievable: If you pick a goal that you know is outrageous – say you’re currently earning $30,000 and want to earn $5 million next year – you’re most likely not going to achieve it. Pick a goal that requires effort on your end, but is actually achievable as well. When you create a goal that’s too lofty, you might begin to feel that it’s impossible and eventually give up.

Realistic: You’ve always wanted to learn Japanese, but it’s not realistic to learn an entirely new language with foreign characters in three months. Be realistic about how much time you have to commit to your goal and the amount of resources it takes to do so.

(In a) Time frame: The final S.M.A.R.T. principle is setting a clear time frame in which you can achieve your goal. Give yourself a reasonable amount of time to accomplish your goal. Do you think you can start earning your desired salary in six months, one year or two years? Having a clear time frame is essential for checking your progress along the way to reaching your goal.

Finally, in order to help manage the finances to support some of my goals, using inspiration from my good friends at SiDCOR, I built on their budget tool to create the BWM Clever Cashflow Guide.

You can download it here for free. Please use it to help manage your own household’s cashflows, and pass it on to your friends, kids, and family. If you have any questions or would like some help with either the Goal Mapping worksheet, or the BWM Clever Cashflow Guide, please give me a call as I would be delighted to help.

What now? Print off the Goal Mapping worksheet right now! Block 1 hour out of your day start writing. Remember to leave any bullshit excuse as to why you can’t do something at the door – don’t let them into the same room!

And if your goals are finance related, then set some time aside and start filling in the BWM Clever Cash Flow Guide so that you know where you are now and what you need to do to make your dreams a reality. And if you tell me you don’t have time to write down your goals, where are you going to find the time to accomplish them?

Let’s go!

New Arguments Against Low-Cost, Passive Investing Are No Better Than The Old Ones

Since the GFC, index funds have taken a huge slice of investable assets globally. And in my opinion, rightly so. There will be many that disagree with me on this, but let the evidence and data speak for itself I say. For every winning stock picker, there is a loser – it’s just how it works. Unless active funds dramatically reduce their fees, index funds will always be at or near the top quartile of long-term performance.

The premise of active management is essentially that with enough skill, it’s easy to consistently outperform the market, or the benchmark. When this view was challenged decades ago, it sparked a longstanding debate with strong believers on both sides, and some in between.

If you want to see some of the data, you can click here. The SPIVA (S&P Index Versus Active) Scorecard is a robust, widely-referenced research piece conducted and published by S&P that compares actively managed funds against their appropriate benchmarks on a semiannual basis.

Investors have been voting with their feet and ploughing money into index funds over the last 10 years. Vanguard, the primary beneficiary of this evolution, took in as much as its eight competitors in 2017.

In fact, over the last 8 years, Vanguard’s total Assets Under Management (AUM) has grown exponentially from US$1 trillion to over US$5 trillion. Mind blowing.

The more investors passive funds attract, the more they’re criticized. And all the new arguments you hear against low-cost, passive investing are no better than the old ones.

There are three reasons why indexing has become so popular. First, it costs less — often much less. High fees are a drag on returns; compounded over decades, they lead to a 20 to 30 percent penalty on total returns. Next, the alternative is active-stock or mutual-fund selection or some form of market timing. Academic research overwhelming shows that the vast majority of investors lack the skills or discipline to do that. Attempts at out-performance invariably lead to under-performance. Last, even among those who have the requisite skills, the discipline and emotional control necessary to successfully manage money is intermittent at best, absent at worst.

Market Watch recently published an opinion column arguing index funds are terrible for our economy and highlighted 3 key areas indexing is creating a risk to our markets and economy. Barry Ritholtz responds to each of these in order:

Index funds contribute to market melt-ups and meltdowns.

Really? That statement is at odds with the experience of most Registered Investment Advisors (RIAs) and index-fund managers. Indeed, we have experienced several bubbles and crashes, melt-ups and meltdowns, during the past few decades. The evidence is clear that passive-index investors behave better than active-fund investors or market timers, tending to blunt rather than aggravate volatility.

During the financial crisis, passive investors sat tight and for the most part didn’t sell. Indeed, they were net buyers, according to former Vanguard Chief Executive Officer Bill McNabb. As my Bloomberg colleague Eric Balchunas pointed out, during the 2008 credit crunch, the money flows were into index funds and exchange-traded funds, in part because they displayed less volatility; more than $205 billion was put into these funds while active funds experienced $259 billion in withdrawals.

“Index funds reduce the quality of stock analysis.”

If this were offered as a joke, we could ignore it. But this is a serious — and a seriously flawed — allegation.

Let’s be blunt: Stock analysis has been famously terrible for most of forever. Analysts are too bullish when things are going well, and perhaps too bearish when they are not. They are highly conflicted. Since research itself doesn’t generate income, analysts are paid out the funds generated by other parts of a securities firm’s business, such as investment banking. Their goal is to encourage more active trading, which generates commissions but also higher tax bills and lower returns. For a reminder of how problematic Wall Street research is, recall the analyst scandals of the late 1990s and early 2000s.

I believe this author has it exactly backward: Expensive and ethically compromised analysts were shown to be of so little help to investors that they actively contributed to the rise of indexing.

“Index funds contribute to poor corporate governance.”

Again, I think this is exactly backward — it’s the long-term owners of public stock, that is, index funds — that management must deal with year after year.

Consider what Dave Nadig, managing director of ETF.com (part of CBOE Global Markets) wrote earlier this year:

State Street voted against the slates of directors proposed by companies over 400 times, because those companies failed to add women to their boards. And BlackRock recently published an open letter to markets, putting every company on notice that they would be taking a hard, hard look at everything from executive compensation to community development to environmental impact.

Active managers and activist investors can threaten to sell their stock, and sometimes they do. But then what? The indexers are long-term owners — and they vote their proxies. Management has to acknowledge their permanence.

The complaints about indexing have become tiresome: Indexing is Marxist, it’s a bubble waiting to burst, it’s dangerous to the economy or the efficiency of the market, and so on. The need to relitigate every lost battle is telling. The people who want to sell you newsletters, expensive mutual funds, or costly trading advice have suffered greatly from the move toward low-cost, passive investing. No wonder so many of them refuse to accept the obvious benefits of indexing to average investors.

END

Next time you’re looking at your investment statement, take a moment to think about how much you’re leaving on the table – 10, 20, 30%? The fact that investors choose to, year after year, make voluntary donations via the sacrifice of returns from their portfolio to those that purport to be able to ‘beat the market’ astounds me.

There’s a great book by Fred Schwed Jr. titled, Where Are The Customers Yachts?, which exposes the folly and hypocrisy of Wall Street. The title refers to a story about a visitor to New York who admired the yachts of the bankers and brokers. Naively, he asked where all the customers’ yachts were? Of course, none of the customers could afford yachts, even though they dutifully followed the advice of their bankers and brokers. Full of wise contrarian advice and offering a true look at the world of investing, in which brokers get rich while their customers go broke, this book continues to open the eyes of investors to the reality of Wall Street.

Source:

  • Bloomberg – https://www.bloomberg.com/opinion/articles/2018-12-12/index-investing-critic-takes-aim-fires-misses
  • Market Watch – https://www.marketwatch.com/story/your-love-of-index-funds-is-terrible-for-our-economy-2018-12-10
  • Morningstar
  • SPIVA

Here’s What Happens When You Invest at Market Peaks

PT Barnum is often credited with coining the phrase, “there’s a sucker born every minute.” History buffs argue the famed circus founder instead stated, “there’s a customer born every minute.” When it comes to investing, the words “sucker” and “customer” could be interchangeable.

As human beings we are drawn to the idea of the future being predictable. And anyone that, for one second, purports to be able to have some insight into what the future hold, we’re hooked – yet as clear as day, we all know these folk hold no insight whatsoever.

It’s tough to make predictions, especially about the future.

– Yogi Berra

Financial markets are no exception. We want to avoid the tops and pick the bottom, we want to avoid paying top dollar, and pursue bargain basement prices. Yet when we find ourselves in the midst of euphoria or a crisis, we tend to follow the crown.

Try to be fearful when others are greedy, and greedy when others are fearful.

– Warren Buffett

What if you just had shear bad luck when investing? What if you weren’t able to avoid the tops? Even worse, you retired precisely when the market peaked?

Ben Carlson of A Wealth of Common Sense ran these numbers for a US based investor, so I decided to run the numbers for an Australian based investor. We’ve got three investors, James, Frank, and Steve. They each retire just before the stock market peaks with AU$1,000,000 invested 70% in the Australian share market (S&P/ASX All Ordinaries Index – Total Return), and 30% in Australian bonds (Bloomberg AusBond Bank Bill Index). They also draw 4% of their portfolio at the beginning of each year to help fund their retirement. I’ve also assumed the portfolio is rebalanced once a year, and I haven’t taken into account fees or taxes to keep things simple.

Here’s what I found:

  • James retired on October 1987,
  • Frank retired on June 1998, and
  • Steve retired on September 2007.

Here are the returns adjusting for inflation:

Trying to time the market for it to add any benefit to your investment returns is super difficult. Investing at market tops prior to retirement hasn’t been as destructive as one would have assumed – although it could be. The analysis shows a somewhat diversified portfolio that is structured, disciplined by rebalancing, and an investor’s who remains patient without getting in and out of the market, their portfolio can remain quite robust through their retirement. Of course, the longer one invests for, the better the financial outcome – who would have thought.

The best time to invest is when you have the money.

– John Templeton

The Disease of Kings And King of Diseases

The disease of the kings and the king of diseases dates back to Egypt, 2,600 BC. In 1963, Thomas Sydenham, an English Physician described its occurrences so very accurately.

Those who fall ill to the disease are either old men, or men who have worn themselves out in youth as to have brought on premature old age—of such dissolute habits none being more common than the premature and excessive indulgence in venery and the like exhausting passions. The victim goes to bed and sleeps in good health. About two o’clock in the morning he is awakened by a severe pain in the great toe; more rarely in the heel, ankle, or instep. The pain is like that of a dislocation and yet parts feel as if cold water were poured over them. Then follows chills and shivers and a little fever… The night is passed in torture, sleeplessness, turning the part affected and perpetual change of posture; the tossing about of body being as incessant as the pain of the tortured joint and being worse as the fit comes on.

Today, the disease is more commonly known as gout – the term dating back to around 1200 AD, and is typically a combination of diet and genetic factors. There are certain things that make it worse, and others that make it better.

Last week I fell ill to the disease of kings, and boy, it certainly earns its name – king of diseases. If you’ve never experienced the pain, the torture this illness brings, ask someone who has and they will describe pain of dislocation, and fractured bone. Whatever you do to try and alleviate the pain, it’s merely temporary. The disease needs to be treated before it hits.

Like the disease of kings, investing too cannot be left untreated – one can simply not look for immediate relief when one has not made the right decisions for years prior.

Here are three key principles to apply when investing for the long-term that will ensure you’re not looking for the pain killers when things go south:

Start investing early

Unlike most things in life, you can start investing as early as you like. The chart below shows the impact starting early has on the end balance of your portfolio. It shows four investors each saving/investing $5,000 annually. Just take a look at Consistent Chloe’s portfolio, and compare it to that of Late Lyla – it’s almost half the value only having started 10 years later!

Source: JP Morgan

The power of compounding

Whether Einstein called it the eighth wonder of the world or not, it matters not. What matters is how powerful such a small decision can be. The chart below shows the difference between reinvesting dividends and distributions and without – almost four times the amount!

Source: JP Morgan

Stay invested

By trying to time the ups and downs of the market, history shows time and time again you’re going to lose money.

The chart below shows us the return of an investor who remained fully invested in the Australian stock market from 1996 through to 2017 – they earned 9% pa. If they had missed just the 10 best days during that time, their return fell to 6.50% pa. If they missed the 20 best days during that time, they return was halved – 4.60% pa, and so on.

Source: JP Morgan

Looking for short cuts and get rich quick schemes in the midst of great pain is like taking pills at the peak of illness expecting it to solve all your problems. I just ain’t gonna happen.

Sources: JP Morgan, Wikipedia, Gout – The Affliction of Kings

This is the Biggest Risk to Your Portfolio

Academically my background is in financial and risk management. During university I studied the usual stuff, economics, corporate finance, and probably the subject that most interested me was statistics. We learned about portfolio construction, risk, diversification, correlations, R-squared, standard deviation, gamma, delta, and the list goes on. We spent a lot of time optimising portfolios and assessing possible risks that may impact the portfolio’s performance.

One of the biggest things I’ve learnt since coming out of the academic world and into world of people and money, is that you cannot diversify away from human behaviour. The cognitive biases that are inherent in all human beings are the biggest risk to our portfolios. It’s not the Fed raising rates too quickly, it’s not deflation, inflation, or hyper inflation, it’s not property prices crashing, it’s not trade wars, it’s our cognitive biases and poor understanding of how markets work that destroy our wealth.

It was 10 years ago the GFC tore through world markets and was on the verge of paralysing our economy for good. But it didn’t. And you would have thought as investors, we would have learned a lesson or two from this experience. Nope – we have gained no new wisdom, nor have we gained any further self awareness.

The lessons that can be taken from the GFC will remain in history books forever, and you will hear old folk tale from investors decades from today.

At a financial markets conference in New York, Cliff Asness did precisely that. “We are not market-timing”, said the large endowment fund, “but we will probably return to U.S. equities in the spring.” Rarely at a loss for words, Asness was left sputtering and speechless.

At the same conference Bill Miller told this story: He presented the idea of buying junk bonds in December 2009 to a large firm’s investment committee. At the time, the bonds were trading at 22 cents on the dollar, but the idea was rejected by the committee as too risky. Five years later the fund bought these same bonds at a much higher price and much greater risk. (Miller was not involved in that transaction).

These errors led Asness to observe, “You can have a committee of 10 geniuses that proves collectively to be a moron.”

As can be seen from the below chart (click for larger image), financial markets have rewarded long-term investors. Investors who have a game plan in place, who have taken the long view, and who have remained disciplined and patient.

Source: Vanguard

I get it, it’s super hard. And this is precisely why financial research and literature is littered with evidence that human behaviour is the biggest detractor of performance, also known as the ‘behaviour gap’.

The below research, conducted by Dalbar, clearly illustrates how difficult it is to remain focused on the long game. The average investor over all time frames has underperformed the market. For example, over the last 20 years, the average equity fund investor returned 4.67% pa, whereas the S&P500 returned 8.19% pa. The average investor underperformed the market by 3.52% pa. The investor simply had to do nothing and their portfolio would have returned 8.19% pa for 20 years. Yet they chose not to. They succumbed to their human biases and did something, which detracted from their performance.

Don’t do something, just stand there.

– Jack Bogle

They could have spent that time doing things they loved; built a business, spent time with their family, traveled, rebuilt an old muscle car. But they chose not to. They chose to “manage” their own money.

Source: Dalbar

Here are the specific causes for underperformance, with investor behaviour making up a staggering 42% of the loss (1.50% pa of 3.52% pa).

Source: Dalbar

As the scars of the last financial crisis heal, we plant the seeds for the next crisis that will again decimate financial markets. And next time it won’t be different, it will only seem that way due to our inability to learn from our prior experiences, a failure to understand our own limitations, and poor risk management. Blame no-one but yourself.

Godspeed.

Source: Dalbar, Vanguard, Bloomberg: The Next Financial Crisis is Staring Us in the Face

3 Benefits Of The Next Bear Market

I was out at dinner over the weekend with a group of friends and the topic of financial markets came up. “Are your clients really worried about the share market?”, I was asked. “Not really”, I responded. My response was foreign to her. She was shocked that the stock market’s decline of about 8% over the last couple of weeks hadn’t shaken our clients. “What do you mean, not really? We haven’t seen a decline like this for a long time, the stock market is at it’s peak, the US are raising interest rates, Trump is ruining global trade, and China is slowing down”.

I believe that over the long-term markets are driven by fundamentals, and over the short-term, sentiment. The recent events have investors asking how much further will the market fall, and whether this is the start of a bear market.

Here’s what the recent market decline looks like since (chart since June this year):

Source: Yahoo Finance

And here’s a longer-term perspective. I’ve highlighted the most recent decline as well as similar declines we’ve seen over the last few years:

Source: Yahoo Finance

It’s been 10 years since the GFC, and the stock market has gone bonkers since. In fact, it’s the second longest bull market in history, with a gain of almost 325% (S&P500). Let’s all now look forward to the next bear market and it’s benefits.

1. The Greatest Gift

It’s one of the greatest financial gifts that may be offered to you, but only if you accept it. What do I mean by that? It is only rewarding if you do something about it, that is, if you continue to invest – because you’re buying assets at a lower price. It gives you the opportunity to leapfrog your wealth in such a short-period of time.

This is what a Black Friday sale looks like in the US. For those of you who don’t know, Black Friday is basically the first day of the Christmas shopping season, and everything is ridiculously cheap.

Here’s what folk do when the stock market is ridiculously cheap.

Bizarre right?

2. Your Risk Tolerance

Fred Schwed wrote the celebrated 1940 book about Wall Street, “Where Are the Customers’ Yachts?” In it, he offers this memorable passage: “Like all of life’s rich emotional experiences, the full flavor of losing important money cannot be conveyed by literature. You cannot convey to an inexperienced girl what it is truly like to be a wife and mother. There are certain things that cannot be adequately explained to a virgin by words or pictures.”

There’s no way to know ahead of time, how we’ll feel and act during the most turbulent of times. While things are going well investors will typically allocate more money to this asset class – it’s the classic buy high, sell low strategy. The most important decision investors can make is how much they will allocate to different asset classes – their asset allocation, which dictates 90% of your return with stock selection and market timing making up the rest.

Harry Markowitz, Nobel Laureate and father of modern portfolio theory, when he was asked by Jason Zweig how he allocates his personal portfolio, his response was hilarious:

Mr. Markowitz was then working at the RAND Corporation and trying to figure out how to allocate his retirement account. He knew what he should do: “I should have computed the historical co-variances of the asset classes and drawn an efficient frontier.” (That’s efficient-market talk for draining as much risk as possible out of his portfolio.)

But, he said, “I visualized my grief if the stock market went way up and I wasn’t in it — or if it went way down and I was completely in it. So I split my contributions 50/50 between stocks and bonds.” As Mr. Zweig notes dryly, Mr. Markowitz had proved “incapable of applying” his breakthrough theory to his own money. Economists in his day believed powerfully in the concept of “economic man”— the theory that people always acted in their own best self-interest. Yet Mr. Markowitz, famous economist though he was, was clearly not an example of economic man.

Living through a bear market is really the true way of discovering what mix between stocks and bonds we’re most comfortable with.

Ben Carlson summed it up perfectly in a recent tweet:


3. A Necessary Detox

Bear markets are a necessary detox to the foolishness of euphoria. They’re a neat way of weeding out the not so long-term investors – an ugly way to do, but one that is necessary.

Bull markets are born on pessimism, grown on skepticism, mature on optimism and die on euphoria.

– Sir John Templeton

Although it’ll dent your portfolio in the short-run, it’s much better for you long-term.

Morgan Housel’s tweet was a knock out:

With the right mix of assets, a bit of cash under the mattress, investments that have specific objectives, and someone to guide you along the way, you too wouldn’t be worried about the next bear market.

Source: Ben Carlson – A Wealth of Focus, Market Watch, Yahoo Finance, Giphy, Investopedia, NY Times

Why The Experts Didn’t Tell You About The Stock Market Correction Before The Fact

A little over a week ago, we took a family trip up to the Gold Coast – Surfers Paradise to be exact. We were supposed to have a week of sun, beach, and fun. Leading up to our trip, we would constantly be checking the weather (as you do). The closer we got to our trip, the worse the weather forecast – 90% chance of rain, thunder, and humidity, for 6 of the 7 days. Queensland’s Gold Coast has around 300 days of sunshine per year, that’s a 82% chance of a sunny day. Unfortunately for us, we got caught up in the 18% of no sunshine. In fact, torrential rain and wind.

As you probably know, I love my charts and tables, so here is the rainfall report for the month of October (in millimeters). I have highlighted the days we spent in Surfers:

Source: www.weatherzone.com.au

Yuck – enough said.

The stock market is offering similar odds – a 75% chance of a positive return in any given year, and a 25% chance of a negative return in any given year (it has done so over the last 100 years).

During our time away, the stock market went a little crazy (as you probably saw and heard), down 3.30% in one day, and 5.27% over two days. Here’s the chart:

Source: Yahoo Finance

The sell off on the 10th of October was in fact just the 98th one-day drop of 3% or more for the US stock market since 1952, and the 20th time we’ve seen a one-day drop of 3%+ since 2009 (that’s about 2 per year for the last 10 years). Here’s a fun fact for you, it was just the 14th time it has happened on a Wednesday – here’s the chart:

Source: BIG

Other than the beginning of 2018, we haven’t seen this much turbulence in the stock market for some time now (see VIX below), in fact since June 2016 – no wonder investors were nervous. We’ve had such a relatively stable and non-volatile stock market during this time, that investors have become accustom to something that is not normal.

Source: Yahoo Finance

Since the sell off of last week, no doubt you have read and heard all the “after the fact” explanations in great detail – what happened and why, with utter certainty.

What led to the stock market sell off was so obvious – how could you not have seen it coming? And we didn’t want to spoil the fun by providing an explanation before the sell off either.

It was the Fed’s monetary policy and raising of interest rates? Or maybe it was elevated stock valuations? Oh wait, it was probably President Trump and his many “wild” policies. No, no, it was a strong US dollar, or the risks inherent in emerging markets, surely? But didn’t we know of, and aren’t we all aware of these risks, and have been for some time now? How did they startle markets overnight?

Human beings seek certainty. We seek predictability, rationalisation, and for things to unfold in an orderly fashion. Unfortunately, as we all know, life does not work this way, let alone the stock market I’m afraid to say. Yet each and every day, we turn to the so called experts and gurus to enlighten us with what just happened and why.

So what can investors do?

Accepting the facts is a great place to start. And for most of us, the facts are:

  1. To invest means we must take on some level of risk.
  2. The amount of risk we decide to take will likely influence our return.
  3. Risk means not knowing. Not knowing what tomorrow brings. Not knowing when the market will collapse. Not knowing when the market will recover. Not knowing when we’ll encounter our next recession.

In the 1927 book “Security Speculation – The Dazzling Adventure,” Laurence H. Sloan repeated the now famous anecdote about J.P. Morgan’s view of the stock market:

History has it that a young man once found himself in the immediate presence of the late Mr. J. P. Morgan. Seeking to improve the golden moment, he ventured to inquire Mr. Morgan’s opinion as to the future course of the stock market. The alleged reply has become classic: “Young man, I believe the market is going to fluctuate.”

No one really knows what the market will do from here. Whatever it does, we cannot control. What we can control is how much we are prepared to expose ourselves to the game – the game we cannot control. We can control costs and expenses, and we can control our behaviour and discipline. This has been proven again and again in the data.

You can sit there and lend an ear to the gurus who provide you the ‘after the fact’ rationale you so desperately seek. People sound and look smarter by providing it to you too – I truly wonder where they were the day before. If it was so obvious, why didn’t we see it coming?

The reality is simply this: Markets are random. The stock market is driven by fundamentals over the long-term, and sentiment over the short-term.

Once you make a decision to invest, whether it be a trip to the Gold Coast, or in the stock market, you’re also making a decision to accept the risks – the weather on your trip, and the ups and downs of the stock market. Cancelling your trip because of the poor weather, or withdrawing your funds because the market fell 10% is a sure way to lose money.

This bull market has been running hot for 10 years now, and investors seem to have gotten cozy in their seats. We all know bull markets don’t last forever, and if the events of last week made you a little nervous, you probably should revisit what you’re doing and why.

Invest your portfolio today as if the market will collapse during your sleep. Because one night it will, and what you do next will either leapfrog or destroy your financial wealth.

Apple Could Have Made You Rich, But You Couldn’t Handle it

Last week, Apple marked yet another milestone, becoming the first publicly traded US company to hit a US$1 trillion valuation – making headlines all over the world.

Since topping US$1 trillion, the world wide web has been inundated with analysis, research, and commentary on the company, and my favourite, here’s how much you would have made if you invested US$1,000 following Apple’s listing. To cure your curiosity, I’ve crunched the numbers for you.

The company (AAPL) listed on the NASDAQ market at $22 per share. After taking into account stock splits and dividends, the company’s share price closed at US$0.02 following a successful listing on 12 December 1980 (according to Yahoo). Most recently, the stock closed at US$207.99 (see below chart).

Source: Thomson Reuters

If you had invested US$1,000 in Apple when it first listed, and you didn’t sell the stock (more on this later), your small investment (which is around US$3,058 today) would be worth about US$8,937,886 – an 893,789% return.

The entire problem with this analysis is that most people would not have been able to sit in their seat for the ride Apple took investors during the last 38 years. Here why:

  • In 1983 the stock fell 69%
  • In 1987 the stock fell 50%
  • In 1991 the stock fell 37%
  • In 2000 the stock fell 78%
  • In 2003 the stock fell 44%
  • In 2006 the stock fell 40%
  • In 2008 the stock fell 40% and 59%
  • In 2012 the stock fell 17% and 45%
  • In 2015 the stock fell 32%

These numbers are staggering. A stock with this much volatility would see more than just a few investors jumping for the life boats.

Investors as a group are a funny bunch. Constantly talking about the great winners with the benefit of complete hindsight, encouraging more and more investors to simply pick the handful of winners and voalá, you’re rich.

Unfortunately it’s not that simple (according to Longboard Asset Management).

  • 18.5% of stocks lose at least 75% of their value
  • 39% of stocks lose money
  • 64% of stocks underperform the index
  • Only 25% of stocks are responsible for all the market’s gains

Not only are the odds significantly stacked up against you, the ride these suckers will take you on are rough enough to scare the pants off even the most seasoned investor.

Unfortunately, it’s the winners that write the history books, yet few know what it took to get there.

I Received a Speeding Fine Last Week. Here’s What it Reminded me About Investing

Last week I was driving my family home after having dinner at my parents’ place. On the way home I was pulled over by the police – “I’ve pulled you over sir because you were speeding”. After 15 minutes of patiently waiting in the car, and after my wife convinced my 4 year old son that daddy wasn’t going to jail, my infringement notice was handed to me – $322 and 3 demerit points.

Now, the last time I received a speeding fine was at least 5 years ago, so I think I’m okay on the demerit point side of things. How about the money? It’s not a small amount of money. I mean, this money could buy my wife and I a fancy night out at dinner, it’s almost half the price of my Collingwood footy club membership, or 3 months of public transport costs. I chose not to spend the $322 on any of these items, but the infringement must be paid – this got me thinking.

I could have easily taken this money and invested it. I could have paid off the credit card. I could have put it toward my children’s school fees. I didn’t do any of these, because I didn’t have the money (that’s what we tell ourselves I guess). Yet the moment I am handed an infringement notice, the money miraculously appears. Why, as investors, do we not apply a similar philosophy to our own financial affairs and prioritise our wealth accumulation? Imagine if we placed as much importance and discipline to our wealth management strategy as we do ensuring we pay infringement notices on time? Imagine if each month we issued ourselves with a wealth infringement notice – say 5% of our net monthly salary, no questions asked – not negotiable.

They say most of us overestimate what we can achieve in one year, and totally underestimate what we can achieve over a lifetime. Small amounts of money, invested over long periods of time can make an enormous difference to our wealth, yet we choose to ignore this fact.

Here’s my challenge to you: Apply a wealth infringement on yourself. Take 5% of your income, and everytime you get paid, direct that money into a long-term investment portfolio. Whether the market is booming or otherwise, religiously invest that sum of money each and every month. You’ll be blown away by what your portfolio could be worth 10, 20, 30 years from today.

Actually, I’ve done the work for you. I’ve compared three individuals. They all begin with a $1,200 investment, each investment earns 8% pa, and they invest for 30 years. Investor 1 simply makes a one off investment of $1,200. Investor 2 makes further investments of $6,000 every 5 years, and Investor 3 makes a $1,200 investment each and every year.

As you can see from the above chart, the portfolio of Investor 2 and 3 portfolio each ends up with a relatively close amount. However, Investor 3’s portfolio is worth 7% more than Investor 2. Small amounts of money over long periods of time make an enormous difference. Imagine swinging your golf club 2 degrees to the right off the tee. The further that ball flies away from you, the more and more it will swing to the right, well and truly beyond the 2 degrees from when you struck the ball. Investing is no different.

And if you think you may not have the money to save and invest, just think about it this way: If interest rates rose tomorrow, and the repayments on your loan subsequently increased, you’ll probably have the money to make the extra repayments. No different to if you were issued an infringement notice each month, you’ll probably have the money to make the payment.

How often do we look back to situations and think, I wish I had done this, or if only I had done that – especially when it comes to investment decisions. I’m sure you or someone you know has looked back and thought, if only I had bought that property 10 years ago, or, if only I had invested my money 20 years ago when I had the chance.

As human beings, we’re constantly in the pursuit of instant gratification. Work out what you really want, put in place a plan, execute, and remain disciplined. Once it becomes a regular thing, you won’t even notice it, and you’ll thank yourself later for it.