If our entire approach to investments were to be distilled into one term, it would be “evidence-based planning and investing”. We are neither the first to this idea, nor are we unique. To offer our clients the best chance of long-term success, we stick to methods and strategies that have been proven successful through robust, long-term studies. Here are a few important pillars of our evidence-based planning and investing philosophy.
To succeed, make a plan
“If you don't design your own life plan, chances are you'll fall into someone else's plan. And guess what they have planned for you? Not much.” - Jim Rohn
It isn’t impossible to succeed without a plan, but it is so much easier with one. There are many ways writing a plan helps.
The process helps you set goals - always the first step in working towards them.
A plan can be a wonderful source of commitment and motivation.
A written plan can help avoid emotional decision-making during periods of market and family turmoil.
Having set goals and a clear path to get there can be a great source of confidence and peace-of-mind.
The evidence is clear. At similar levels of income, families with advisors and a plan accumulate assets 2.7x higher than un-advised families. The positive impact on assets increases with tenure of advisor, and advised families report higher levels of confidence in their financial futures. See source.
For the long term, invest in stocks
We anticipate we’d get little debate when we say that western capitalism has proven to be the most successful economic system at creating wealth and alleviating poverty. Further still, we’d get little pushback when we say that despite occasional hiccups, developed financial markets in the US, Europe and Japan are remarkably well governed and robust. It follows that within our capitalist world, for the long term, there is no better investment than to own your share of the world's best companies listed on these financial markets. In his seminal work, “Stocks for the Long Run”, Dr. Jeremy Siegel does a masterful job of comparing stock returns since the 1800s to other assets like bonds, gold and real estate.
The results are clear as day - stocks offer a handsome return, protect against inflation and beat all other asset classes.
It is very difficult to beat the market
Investors have three choices - pick stocks themselves, let professionals pick stocks for them, or simply invest in broad index funds across the entire market. The relatively new science of Behavioral Finance has uncovered considerable evidence that individual investors underperform professionals because they trade too often, hold on to losers too long and sell their winners too quickly. Even a gifted amateur will find the time and effort required to consistently beat the market more profitably invested in her primary profession. That leaves the old active (stock picking fund managers) vs passive (index funds) debate. Here too, despite years of trying to spin it - the active management industry has struggled to demonstrate that they beat passive investing after fees and expenses. See “The Arithmetic of Active Investment” by William Sharpe, 1991. The table below is a worth a trillion dollars. 95% of US funds under-performed the market over a 20-year horizon.
Given this evidence, it follows that for most investors, the best place for most of their wealth is in diversified index ETFs - own a proportional share of the entire market. This has the added benefit of being a tremendously tax-efficient way to invest over the long term.
Keep emotions at bay
As investors, our cognitive biases lead us to make the very decisions that hurt us financially. We sell winners too soon, trying to preserve our gains. We hold on to losers too long, because it is painful to book losses. Warren Buffet’s maxim, that we should be “fearful when others are greedy, and greedy when others are fearful” is a lot easier said than done.
Barry Ritholtz and team have created this hilarious chart to illustrate the point. Despite all so many reasons to sell, the market continues to reward patient and long-term investors.
This is where a trusted advisor can be the most helpful. We take a process-based approach to building a long-term financial plan and sticking to it. While you will inevitably feel the emotional ups and downs from being invested in the market, we can help channel this emotional energy away from your investments and towards the process. And more importantly, towards living the happy, fulfilled life you deserve.
There is free money in our tax code
We have already seen the near-impossibility of beating market averages, but there are ways to do better than the average American. For example, in 2021, only 12% of all American workers didn’t take full advantage of their employer’s 401(k) plans (see graph below and see report). Even for households with income more than $150,000, the number was just 56%. Similarly, despite the loud debate about student debt, only 18% of children have a 529 savings plan (see report).
In short, we believe that for the average investor, the use of opportunities in our tax code is a more fruitful endeavor than picking stocks or timing the market.
Over the long term - fees eat your lunch
The math is obvious - every dollar that your portfolio pays your financial advisor is a dollar that doesn’t compound in your account and eventually pay for your retirement. The picture below is directly from the SEC - and shows just how much smaller your nest egg can be because of fees.
What are less obvious is when and where these fees are deducted. It isn’t surprising that the financial industry has developed many complicated products with fee structures that are seem purposely obfuscated. Some Mutual Funds charge exorbitant fees through “loads”, which indirectly pay commissions to advisors who are incentivized to sell these products. Whole Life Insurance policies come with twenty year projections printed on glossy paper, but rarely disclose the commissions paid to agents who sell them.
This is why our advisory practice is “fee-only” - we don’t receive any commissions or incentives to sell you products. The only fees we earn are those that you pay us directly. This frees us to be true fiduciaries - looking out for your best interests. It also allows us to direct your investments into low-fee, tax advantaged structures like index ETFs.
Conclusion
There you have it - a quick tour of the bed-rock principles of Artham’s practice. The insights behind them were gathered from some of the greatest minds in investing - Ben Graham, Jack Bogle and Warren Buffett. They also form the essence of why this firm even exists - the idea that all families, regardless of financial assets, should have a financial plan and access to sound, evidence-based financial advice.
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