“Of all the offspring of Time, Error is the most ancient, and is so old and familiar an acquaintance, that Truth, when discovered, comes upon most of us like an intruder, and meets the intruder’s welcome.”
–Extraordinary Popular Delusions and the Madness of Crowds (1841)
If you asked a group of 3 people, “Is it safe to stand under a tree during a lightning storm?” all 3 people would surely say, “No, you’re more likely to get hit by lightning!” However, if you ask the same 3 people, “Is your house a good investment?” you’d probably get 5 different answers.
Unfortunately, mass delusions about money are nearly impossible to debunk, largely because people are paid handsomely to keep such fairy tales alive. Here are just a few:
Lie #1: Financial advisors are required to watch out for your best interest.
- The vast majority of financial advisors are not fiduciaries and are not required to watch out for your “best interest.” The only advisors who will act in your “best interest” are those who are willing to put those exact words into writing on company stationery. Most won’t.
Lie #2: Your financial advisor can choose fund managers who will outperform in the future.
- Very few fund managers beat the market for more than a few years. Hot streaks are fleeting, and jumping from one fund manager to the next in the hopes of finding the next Warren Buffett is a losing strategy. However, it does make for a convincing sales pitch.
Lie #3: The mutual funds or money managers that have done really well over the last 1, 3, or 5 years are the best bet.
- Fund companies are quick to shut down funds with lagging performance. Those funds that are lucky enough to hit their benchmarks go on to live another day. This window dressing is called survivorship bias.
- Also leadership rotates. By the time a sector, a region, an industry, or smart-beta factor has done well for a few years, the price has already been bid up, and the party has moved on to the next thing. That’s why performance-chasing rarely works out well for investors.
Lie #4: Advisors at large retail brokerages with plush offices are a better choice.
- There is no evidence that well-known banks or brokerages are less likely to drain customers’ accounts. “Wealth management” is often the most lucrative line of business for investment firms like Morgan Stanley, UBS, or Merrill Lynch, and there is tremendous pressure on advisors to extract higher fees from their clients to grow corporate profits.
Lie #5: Paying capital gains taxes now won’t hurt you because you have to pay them eventually.
- The goal in investing is to defer capital gains until you are in a lower tax bracket, such as in retirement.
- While working age, you might owe 20% (long-term) or up to 39.6% (short-term) Federal capital gains tax + 3.8% Medicare surtax + up to 13% state/local taxes.
- When retired, your taxes could drop to as low as 0% Federal capital gain tax + 0% Medicare surtax + 0% state/local taxes.
- What if you are already stuck in costly, under-performing assets with capital gains? Well, that’s a dilly of a pickle. Create a plan to switch to something like the Vanguard LifeStrategy Fund that you never have to sell until AFTER you establish residence in a tax-friendly destination like Ft. Lauderdale or Seattle or Atlanta.
Lie #6: You shouldn’t handle investing yourself.
- It has never been easier to manage your own investments thanks to low-cost index funds and set-it-and-forget-it Vanguard balanced funds like their LifeStrategy Funds and their Target-Date Retirement Funds.
- There are a few situations in which I *would* recommend outsourcing your investing to an advisor sworn to do what’s in your best interest:
- (1) Your spouse would get upset with you during the next bear market.
- (2) You have a psychiatric disorder that could impact your judgment.
- (3) You are at high risk for cognitive disabilities.
- There are cost-effective solutions for these situations, like that offered by Vanguard Personal Advisor Services as well as a growing number of registered investment advisors who charge a flat-fee.
As global markets skyrocket to all time highs after the post-Brexit slump, you can bet money guys everywhere are closing up shop early this summer and uncorking cases of Dom Perignon at their beach houses.
In fact, check out how one Wall Street “bro” threw a huge champagne bash and trashed a $20M Hamptons beach house. “It was like ‘Jersey Shore’ meets a frat party…chugging Champagne with midgets.”
While the rest of us sit on lawn chairs drinking box wine, we should seriously question our beliefs and how we are impacted by mass delusions.