Paul Winkler: Welcome to “The Investor Coaching Show.” I am Paul Winkler, talking about the world of money and investing. I’m here to educate you because guess what, if you’re not an educated investor, good luck.
That’s all I’ve got to say. Good luck.
There are things investors ought to know that they just don’t. They just blindly trust the investing industry and it just makes me crazy because the industry is not trustworthy. Can I just say that the industry is not trustworthy?
Don’t trust anything. Don’t even trust me. Don’t trust anything.
Now I’ll tell you things, but trust your own intellect; that’s really where I want you to come down to. And that’s why I want you to be part of the process. I want you not to just blindly trust anything that you just get involved in. I want you to understand what I am doing, why I am doing it, and how it works.
And it’s not over your head. That is my thing. It is not over your head.
Guaranteed Return Annuities
I was reading Yahoo Finance. The first thing that hit me front and center was the 14% guaranteed annuity return.
Now a lot of people are going to say, “I don’t believe any of that, Paul. I don’t believe.” Well, good. I hope not, but how many people do believe it?
They’re designed to be one of the safest forms of retirement plans. I had a guy that actually had one of these annuities, guaranteed rate of return, put $400,000 in it, and then nine years later, it’s $405,000.
But wait a minute, it was a guaranteed return on the income rider, which is not spendable money. It’s a phantom account, it’s fake money, and yet it was sold to them as a guaranteed rate of return. You can’t lose it.
He said it sounded so good when he first bought it. And I said, “Of course it would sound really great. Who wouldn’t want a guaranteed rate of return?”
If the investment account doesn’t do anything and the market doesn’t do anything, don’t worry, you’re still going to make money. This is the kind of stuff that’s sold out there and I see it all the time.
The thing is this guy just happened to be somebody I knew who asked me how many people do I not know personally who are sitting on these things that don’t even think to ask, “Is this for real? Do I have anything that’s any good?” Now he’s frustrated because he’s basically looked at a $400,000 account that has grown by $5,000 over nine years.
And this is what I see all the time. Just below this particular thing in Yahoo Finance, I saw “one Vanguard index fund to buy before it soars 50%.”
This is the industry. “You need to buy this before it soars 50%.”
Now wait a minute. Do you think that maybe the stocks in this particular fund are owned by somebody else? And the answer would be yes, they’re owned by somebody else right now.
Who in their right mind if they knew something was going to soar 50% would give it up and give it to you?
Why would they do that? They’d be like, “I want the 50% for me. I’m not selling this to you at today’s price.”
I mean, when you just think through this, it becomes pretty doggone obvious that this is not necessarily in your best interest to go listen to this stuff and read things like this and take it at face value. But how many people act on information like this?
Market Predictors
Now this particular index fund that they’re talking about, let me just talk about it because there’s more to talk about regarding this particular article right here.
They’re talking about how you need this fund. “He’s a stock picker. This person’s a genius. This person has a track record and the last time that this person said something, this happened, and you need to listen to them this time.”
Let me ask you this: How many people are out there predicting what’s going to happen in the market right now? A lot. And if you look at that group, a huge group, millions of people out there do this.
I mean, you have some that are professionals and some that are non-professionals, but that’s what people do — try to predict where it’s going to go. Because if you get it right, then you end up front and center in an article or on a TV show or on some radio broadcast or something like that. If you predict what’s going to happen and end up being right, that is what makes you a genius.
So there is a great incentive to try to predict what’s going to happen in the future. If you can just get it right, man, you’ve got it made.
Now this particular person is recommending the Russell 2000 ETF that Vanguard has. Number one, we don’t have a dog in the fight as far as the fund company goes. I couldn’t care less. We don’t represent fund companies.
You know you hear people talk about us and how we don’t do anything on commission. We don’t have anything in regards to any kind of tie to the company or a fund company.
And Vanguard, when I want to use, I use. If I want to use Fidelity, I use Fidelity. I don’t care. That’s not what it’s about.
But what happens is fund companies will do this little dance where they have funds where this was what it was 20 years ago. They would have actively managed funds, buying, selling, and trading stocks, and they still do.
Giving People What They Want
Why do they still do that disproven method of managing money where you try to pick stocks and you try to figure out where the market’s going to go?
It doesn’t work. But why do they still do it? Because there are some people that still want that, and it gives the people what they want.
It’s like going to your doctor’s office and going, “Why, George? I come in the doctor’s office and you tell me what’s wrong with me.” And the doctor says, “Well, this is what’s wrong with you and blah, blah, blah. You need to do this.”
But they got a cigarette machine out in the lobby. If you remember those cigarette machines, it was like a vending machine except it gave you cigarettes. You don’t even see them anymore.
But imagine you had one of those machines out there or they had a big donut kiosk out in the waiting room of your doctor’s office and you go, “Well, this is a little inconsistent.” Well, that’s kind of what it’s like working with a mutual fund company.
They will give you whatever you want. “Oh, you want an actively managed ETF? Hey, you know what? We got that now.” It used to be that they weren’t actively managed, but now we have that.
“Oh, you want an actively managed mutual fund? You want one that’s investing in sectors? You think that gold is going to take off? We’ll give you that.
“You think that technology is going to take off? You think that Bitcoin is going to be the thing of the future? We’ve got a fund that invests in that. We’ve got a fund that invests in artificial intelligence.
“We’ve got a fund that does that, and you can have a fund that just invests in companies that are likely, quote, unquote, to benefit from artificial intelligence. We will let you gamble away to your heart’s content. We’re okay with that. As long as you do business with us, we’re okay with that.
“Oh, you want to fund that investment in the Russell 2000 ETF? Oh, it’s a cheap way to lose a lot of money because we’ll do it cheaply.”
There was one fund company, and I actually liked the fund company. It bugs me because I do like a lot of what they do, but they decided that they were going to come out with a commodity fund.
They came out with a commodity fund because there was demand from none other than a big investment advisor who said, “We need to do this.” Do you know what it’s done since it came out? Lost money.
It lost a lot of money. But you know what they did that was so great? They did their trades really inexpensively.
They charged a really low management fee. You could have what you wanted on the cheap.
The Russell 2000 Fund
In this particular case, they’re saying, “Vanguard, we’re going to give you the Russell 2000 fund.”
Now do you even know what a Russell 2000 fund is? If not, you’re going to find out.
If you take the 3000 biggest companies in the United States, and you lop off the thousand biggest, that’s what’s called the Russell 1000. Now the 2000 that are left of those 3000 companies, that’s the Russell 2000.
People look at that and go, “Well, that’s a small cap index.” It’s not exactly small. It’s more medium-sized companies.
But basically, what they’re saying is that the Russell 2000 could outperform the S&P 500 in 2024 and beyond.
Now historically, they would be actually right on that. The index should historically do better than the S&P 500 because the S&P 500 is the 500 biggest companies and big companies don’t historically have to pay you as much to use your money. So they’re not saying something that is incorrect as far as likelihood.
But what are they saying they could outperform? Well, if I’m an investor and I’m using a target date fund or an S&P 500 fund, then why even put any money in the S&P 500 if the Russell 2000 is going to outperform? So what they do is they hedge their bets.
They say it could outperform; it might. “It’s possible.” So that way, if they’re wrong, then they go, “Oh, you know what, we said could. We didn’t say it was definitely going to happen.”
So this person recently told CNBC that the small-cap Russell 2000 could soar 50% for this year. Okay.
So the Russell 2000 isn’t really small companies. Well, sort of. We’re picking up after the thousand biggest companies. So it’s smaller.
But let’s say that you go back to the year 2000 because that’s when I opened this company, and I started the radio show in 2001. And let’s say that you had invested in the Russell 2000. What’s your rate of return? Over 6%.
What was the rate of return of truly small companies? Because remember, they’re picking up after a thousand. They’re not really holding smaller companies.
I would argue it’s going to be further down. It’s the bottom 20% of the market that is typically what I would hold as far as small companies. You take all of the companies, the bottom 20%. What was the rate of return of really small companies?
About nine. So six versus nine.
You go, “Okay. Oh, well, what’s the difference? I mean, really, Paul, mincing it, what’s the difference between that?”
Well, let’s say I had a hundred thousand dollars, and let’s say that I had a 6% rate of return, and let’s say that it was over a 30-year period of time, just to get you to understand this. How much does that a hundred thousand grow to at 6% over 30 years? About $574,000.
That’s if you actually made sure that you stayed disciplined the whole time, that you didn’t get pulled off by the next article that said, “Oh, you need to invest in the S&P 500 now and you need to go and put your money over here.”
What if it’s nine? What’s the difference? It’s 574,000, right?
1.3 million. So we’re talking about more than double over that period of time.
I’m not saying, “Here’s what this is going to do,” or “here’s what that’s going to do,” but I’m saying, what is the difference between 6 and 9%? It’s that. It’s a big deal.
What Investors Miss
So what happens is Wall Street, the whole time they’re making money, they’re fine. They’re getting their management fees, they’re getting transaction fees. When money flows in and flows out, you have bid offer spread costs. They’re fine.
Well, where is the responsibility to the investor? That’s my question. Where is it when you look at it?
Well, it’s a low-cost index. Well, it’s low cost because they’re not really doing anything in the management of the portfolio. They’re not being discriminated. They’re not doing anything to offset why is there such a big difference in returns.
Well, part of it’s a size difference. Part of it’s what they do with securities lending revenue because that’s how mutual funds have zero management fees.
Mutual funds, by the way, can do that because they make other money in other ways that you’re not necessarily aware of. And then they can ignore things like momentum as far as a way of reducing expenses in the portfolio. There are a lot of things, and this is what people miss as investors.
If you’re not engaged in the process, you don’t know these things, and they sure as heck are not going to tell you these things. So as an investor, this is why it’s critical just to get involved in the process. People say, “I don’t want to learn this stuff, Paul.”
I hear that. I hear some people say that. Not a lot, but I hear it enough. I hear it enough that I’m alarmed.
If you don’t know how to measure risk in a portfolio, how do you control risk in an investment portfolio if you don’t even know how to measure it?
“Oh, my advisor takes care of that.” Oh, really? How do you know? Ask him a little bit about it.
How are you measuring risk? How do you put the portfolio together? What do you do to mitigate the risk?
What are you using? How much could the portfolio go up? Or more than likely, I’m worried about how much could it go down in a given year.
I have to tell you a story after this break because I actually dealt with this a lot when I first started this radio show, and it frustrated me because to get people to get off of ground zero and do something was incredibly difficult. So I’m going to tell a little story right after this.
Where do most people get information about investing? People selling investment products, people advertising investment products, and mutual fund companies. What are they doing? They’re trying to get you to buy their funds.
Maybe you go to your workplace retirement planning meeting and it’s run by who? The fund company that runs the 401k.
And this is why I think it’s critical to get involved in the process. If you don’t understand this stuff, there’s somebody else that understands it on your behalf, or maybe they do or maybe they don’t.
The Market Rising After Bad News
So, years and years ago when I first started this radio show, it was a challenge because we had this period of just euphoria in large US stocks especially. The S&P 500, oh my goodness, what a phenomenal run the market had. And if you look back at that period of time, if you look back at the 90s — literally the mid to late 90s — and at the S&P 500, if you go back to the year 1993, you see a 10% return, then 1% return the next year, 38% return 1995 for the S&P 500, 23% the year after that, in 1996, then 33% the year after that, 29% the year after that, and 21% the year after that.
Who would not think, this is great? This is easy. This is phenomenal, I love it, this is great.
And then you were hearing about investing in technology — and technology, it’s not unlike what you’re hearing right now with AI. It’s going great. Things are wonderful in the stock market anyway.
People are worried about inflation, right? They’re not sitting there going, “Man, inflation is wonderful, I love that.”
I’ll get to that in a second. But they were really fat, dumb, and happy. The money of most Americans, that’s where it is — it’s in that area of the market, the vast majority. And I’ve done shows on that where I talk about that.
Then what happens? Negative 9% return, negative 12%. And here I am on the radio before this and I’m going, “People look, don’t do this, watch it, this is an accident waiting to happen.”
It’s the weirdest thing. I mean, you have bad news, and bad news was good news. You ever notice that?
Sometimes you hear bad news and they say, “Oh, bad news. The fed might lower interest rates.”
And then the stock market goes up, right? And you go, “What on earth is going on there?”
Why is the stock market going up with bad news? Because lower interest rates are a cost of doing business for a company.
If you can lower the cost of doing business, you can increase profits, so it makes sense from that standpoint.
But this was what was going on in the late 90s, and I was hearing, “Hey, the market’s rallying because the interest rates are going down, and the economy’s looking bad, blah, blah, blah, blah, blah.” And I would just shake my head watching TV in the morning as I was getting ready to go to work, and then I’d go on the radio show and I felt like I was banging my head against the wall.
The Time To Be Vigilant
Then the market went down. Then the market went down, and things that I started talking about and was talking about started to actually happen.
Then what was I hearing from people? “Oh, well, I lost all this money. I have to wait till it just comes back and when it comes back, then I’ll do whatever you’re telling me to do.”
And I’d be sitting there going, “Wait, when’s the best time to be prudent? When you figure out what prudent is? Yeah, that’d be a good idea. That’d be a really good idea.”
Whenever you figure out what prudent is, be prudent.
I like that. That sounds good.
“But I have to wait because I have to wait for it to come back.” All I could think was that that sounded like the gambler going to the casino, losing a bunch of money and just saying, “When I win it all back, I’ll stop gambling.”
Then they would say, “Well, it’s gone down by so much. I mean, I can’t bear to sell this thing.”
And then I would say, “When in your life did you ever have the thing that got you into trouble, be the thing that got you out of trouble?” “I got in trouble, I was beating up the kid next door.” “Well, here’s how you get out of trouble: Go beat him up again.”
What on earth? Who would imagine that would be a good game plan?
And that’s what exactly was going on in the early 2000s. “I’m hanging on to these stocks. They went down a lot and that’s what’s going to get me out of trouble.”
So, it was a challenge on both ends, but my point is this: You look at that period of time and the S&P was doing better than anything else. Not unlike recently. It hasn’t been the top asset category, but it has been in the top asset category enough in recent years that it’s got people to the point where they are complacent.
It’s gotten them to the point where they’re going, “Hey, you know what? This is good, this is easy. I don’t to diversify. I don’t have to do any of these things that we talk about as being prudent investing because this is working.”
And this is where it gets tough because when things look okay, that’s when I don’t take any action. That’s when I don’t look at the portfolio, I don’t think about the portfolio, I go off and do other things. “I’m going to be fine.”
But I’m telling you, this is when you’ve got to be vigilant. Because if you look at large US stocks right now as measured by the S&P 500 as I talk right here, they’re selling for significantly higher than historically normal.
Now, I’m not saying that they’re mispriced. This person, this one guy, is saying you need to jump it all into small company stocks because they’re likely to do better.
What is that? That’s market timing. So, what do we typically think about in regard to market timing? That it’s not prudent investing, that it’s gambling.
The Dunning-Kruger Effect and Bad Advice
Yet, when somebody comes out and says this, they think, Oh, you just need to move more money over to here. If you just move a little bit more money, if you’re really confident in your bet that that area of the market’s going to do better, why not move all your money over there? Why would you hedge the bet by leaving anything anywhere else?
It’s because they know full well they don’t have a clue whether what they’re thinking is right. That’s why they use the words “possibly,” “maybe,” and “might” in their prognostications. “This might do better than this.”
And the whole time what happens is people watch these people and they say, “Well, they seem to know what they’re talking about. They’re using language that I don’t understand. And since I don’t understand the language — it’s above my can, it’s above my head — then they must be right.”
There is a psychological concept called the Dunning-Kruger effect. And that is literally where experts in a subject matter can be fooled by people who don’t know that much but they use the lingo, they use the jargon, and they sound like they really know what they’re doing.
Because they sound like they know what they’re doing, it’s attributed to them that they have more knowledge than they actually do.
That is commonplace in the investing industry. I will never forget my early years in this industry when I was talking to guys who had been around for years, this was the late 80s, and they were telling me, “Paul, don’t have any of your clients’ money in US stocks, don’t even bother, international has trounced US for two decades.”
Technically, were they right? They were right.
But that was the advice they were giving their clients because they truly thought it was good for their clients. It was horrible.
Remember what I just said? The returns of large US stocks in 1990, yeah, it was a negative year right there for some areas of the market, but the S&P 500 went up 31% in ’89.
Let’s see. Well, let’s go through the 90s, shall we? Now, the 1990s started off in the negative 3%. It was a little bit down.
And you go, “Wow.” You’re getting that advice from your cohort, people that you work with and they’re saying, “Gosh, don’t even bother with US stocks,” and you look at that and see the negative 3%.
But you know what the international stocks did? Negative 23% for the Europe, Australia, and Far East Index, and negative 18% for international, so you would’ve been better off had you not listened to them even in a year that the market was down.
But let’s look at 1991 — it was up 30%, in ’92 it was up 7%, then up another 10% for the S&P 500 in the next year. The next year it was up 10, up one, up 38, as I said earlier, up 23, up 33, up 29, up another 21. “Don’t bother with US stocks, Paul.” Oh, that was really great advice, thanks guys.
You have to know that these people were giving their clients that advice and it was horrible. And that ended up being paid for by their clients. And I wonder, to this day, how many of their clients actually knew how bad that advice ended up being. I don’t really know.
Advisory services offered through Paul Winkler, Inc an SEC registered investment advisor. The opinions voiced and information provided in this material are for general informational purposes only and not intended to provide specific advice or recommendations for any individual. To determine what investments are appropriate for you, please consult with a financial advisor. PWI does not provide tax or legal advice. Please consult your tax or legal advisor regarding your particular situation.
