Another week with more things to read and digest.
Here are a few I wanted to share with you this week:
Some Thoughts on Complexity, The "FAANG Factor", andYear-End Tax Tips.
Adam Harding, CFP / Smartvestor Pro
Complexity DOES NOT Equal Sophistication
Making smart decisions with money can be overwhelming and complicated. It's not uncommon to find that even everyday financial decisions can quickly reach critical complexity. We initially think a problem is simple, but as we progress through it we unearth endless choices and forks-in-the-road:
For most of our clients, this complexity is the primary reason they seek help from a financial advisor (although perhaps a small % of clients just want to work with us because we share videos like this).
Unfortunately, the financial services industry often just makes things worse. Wall Street uses complexity as a selling tool and a way to show off our intellect as financial professionals.... The traditional strategy seems to be:
Dig a hole, throw the client in, and then make them feel like we're the only ones with a ladder to climb out.
Put differently: The wider the "understanding gap" between investors and advisors, the more indispensable the advisors become.
I don't feel like this helps anyone sleep well at night. Alternatively, here's our mission statement:
Our role is not to mask our services in complexity, but rather to provide an objective opinion and process in the pursuit of elegant simplicity.
If we're using the Digging-A-Hole analogy, then I believe that it's our job to fill in the hole...To simplify the complexity.
Simplification requires that we dig into problems, consider every angle, every nuance, every rule and exception to the rule. We consider the options and tradeoffs so clients don't have to.
If we can't explain complex subjects in a way that's easy to digest, then we clearly don't understand them well enough.
That said, this pursuit of elegant simplicity is an ongoing process in constant refinement.
As Antoine de Saint Exupéry said, “perfection is attained not when there is nothing more to add, but when there is nothing more to remove.”... We're working on it.
The FAANG Factor
FAANG = Facebook. Apple. Amazon. Netflix. Google.
If you're not familiar with FAANG stocks, that's okay. It's just a catchy acronym used to describe five of the largest US companies which have driven significant stock market returns in recent years.
Over the last decade (2009-2018), the annualized return of the FAANG stocks was a whopping 30.4% per year!
Observing these massive returns may cause investors to feel regret about not being more invested in these stocks....It may also cause you to think to yourself, Why didn't my advisor buy these stocks for me?
Believe me, I wish there was a reliable way to identify the FAANG stocks in advance (or whatever the acronym is for the next great stocks), but it just doesn't exist. The long term lack of success within actively managed (stock picking) US stock mutual funds clearly outlines the failure of even the best-and-brightest minds in investing... Even after 20 years, only 23% of active stock mutual funds beat their benchmarks. In other words, the people who have the time, resources, education, and incentives to identify the best stocks rarely are successful (less than 1 in 4).
So here's the thing:
It can be enticing to want to pick the next FAANG stocks. But since we know it's unlikely to accurately forecast which companies will be great, we must also recognize what we may be giving up.
Specifically, what if we buy stocks and don't buy others? Here's some data to explain the potential for mishaps.
As you can see, if we miss the top 10% of good performing stocks, then the performance is vastly different. It's downright awful if we miss the top 25% of performers.
You don't need to pick the FAANG stocks in order to have a good investment experience. A broadly diversified portfolio, decreases the risk of missing out on the good performers (because you'll own everything), and the odds of being able to accurately forecast the top performers is low.
Make These Tax Moves for 2019 Before It’s Too Late
WSJ ARTICLE: 2019 Tax Tips
When the New Years' Eve ball drops on 12/31/2019, the confetti will pop, your resolutions will be made, and your opportunity to optimize your tax circumstances will have passed.
Yes, you can make IRA/Roth IRA contributions up until April 15th, 2020, but that's about it.
Here are some of the things we're helping clients navigate between now and the end of the year:
*Tax loss harvesting is where you sell an investment that is sitting at a loss, then buy a similar investment so you can capture the loss to offset a future gain.
The above link from the Wall Street Journal highlights some additional smart strategies for year-end tax planning.
Many clients have already scheduled a year-end discussion to review tax optimization opportunities. If you haven't yet, use the link below:
For non-clients (15 minute limit): https://calendly.com/hardingwealth/tax-optimization-meetingnon-client
I highly recommend that you schedule this time to see where we can make improvements.
Adam Harding, CFP®
Three Things: November 4, 2019
November 04, 2019