20 things I’ve learned about investing and how people approach money.
I’ve been in engrossed in personal finance and the financial services industry for more than 25 years, and I’ve seen some amazing successes and some things to be avoided. I decided to compile a list of 20 observations based on my experience—and the ways people can do better. See the bulleted list below.
1. Wealth, career success, and financial sophistication are not perfectly correlated.
Whether you have $50 million, $5 million, or $500,000, success in one area of life doesn’t mean you’re ready to be a good investor; investing is a totally different skill set.
2. Most people spend too much (today) and save too little (for tomorrow).
Taking the long view is an adjustment for a lot of people. If you want to live comfortably for your entire life, you have to start planning early—while you’re earning an income that gives you the flexibility to save and spend.
3. Most portfolios are not properly diversified.
The typical non-Hill investor owns too much of too few things—like U.S. large-cap stocks. Being truly diversified means owning global capitalism. Think 10,000+ stocks, not 500.
4. Most investors pay too much in tax.
Common mistakes include high-turnover investments, not taking advantage of tax-loss harvesting, not matching the right assets to the right accounts, and not coordinating charitable giving with an investing strategy.
5. After-tax returns don’t show up in annual performance numbers.
But they do show up in the total dollars that compound in your investment account, which is more wet snow for the snowball to gather during its long roll down the hill.
6. Most people don’t take the time to understand the three definable investment philosophies.
There are critical differences between the three main approaches:
- Active investing (believing that you or your fund managers can pick investments better than the market)
- Plain indexing (a passive approach that captures the returns of a given market index, but rarely results in good coverage across asset classes)
- Evidence-based investing (which captures investment premiums shown by historical data to work across asset classes)
7. Strategy can be controlled, outcomes can’t.
This simple fact is why it’s so important to understand—and choose—an investment philosophy that you can stick with.
8. At any given time, there’s a balance between lucky investors and unlucky investors. Together, they create the market’s return.
The market is smarter than any one of us, and the math of investing is a zero-sum game. You want to put yourself in the best position to reduce the likelihood of being on the losing side.
9. Understanding investment premiums is the surest way to superior long-term outcomes.
No one is lucky all the time. Applying everything we know about the science of investing to create portfolios is the closest thing to a repeatable, reliable strategy.
10. Frustrated investors lack patience.
Investment returns are not linear; therefore, patience is essential.
11. Only a small percentage of people have an integrated financial plan.
Investments are just one piece of your financial puzzle. A good advisor can bring order to chaos.
12. Do-it-yourselfers need supervision.
You need someone to help you use your time wisely and to reveal your blind spots.
13. You can have the best attorney and CPA and still have an inefficient plan.
This costs you money and maybe more importantly, time. Decisions should be made in context of the overall plan with an advisor that knows how to optimize the full picture.
14. Few people can see the big picture and make it work.
Each person’s financial situation is different—it’s like a 1000 piece Lego set with no instructions. Only a good advisor can see how to fit those pieces together and build something uniquely strong and beautiful for your family.
15. If you’re focused solely on low-cost funds and ETFs, your strategy may be due for an upgrade.
Focusing solely on cost can cause you to miss the forest for the trees. Instead focus on the value of your investments with tax strategy and planning. You need both to capture the highest return.
16. “Money managers” are not financial advisors.
The job of a money manager is simply to invest the money you give them. They don’t think about estimated tax-payments, after-tax returns, insurance strategies, estate planning, and all the other pieces of a financial plan.
17. Private equity and venture capital funds have their place.
…in someone else’s portfolio. If you give up liquidity (as you do with these investments), you should expect outsized returns. More often than not, you just end up with a bigger tax bill each year and less money at the end versus a buy-and-hold strategy. Plus, you have to deal with K-1s, capital calls and long-winded updates along the way.
18. Most people don’t understand that 90% of financial advisors in the U.S are not required to give advice that’s in the client’s best interest.
The so-called “suitability standard” lets these financial professionals make decisions that benefit them personally, or that benefit their companies. Fewer than 10% of the market—Registered Investment Advisors—are true fiduciaries, legally required to put clients’ needs first. They are the only help worth considering.
19. If you have accounts at major Wall Street brokerage firms, you can do better.
The professionals who work there are among the 90% who have an incentive to serve their companies, not just their clients. Today, these are high-cost custodians that are marketing as much to advisors as they are to current and prospective clients.
20. Be prepared, because life happens.
If you love your spouse and your kids, you should have an advisor. We’re like the co-pilot flying this plane with you. When something happens, we are prepared, we have the experience and proper motivations to see your family through a time of crisis.