Day: August 8, 2024

Dear Michael

You asked about any personal finance quandaries. One I think about is my ability to manage investments on my own or pivot to a financial advisor. 

Major changes are coming faster. The number of US stocks (and related mutual funds and indexes) continues to decrease while more private offerings and companies could be a missed opportunity.  How do I know I am current and on track and keeping up with change when needed? 

My overall situation is I consider myself an average or better investor but I will never be an expert, nor have I the time or desire to be one. How do I stay knowledgeable about investment choices and know when I am not?  Are the benchmarks today (i.e S&P 500, NASDAQ, etc.) still relevant or am I missing non-public upside?  Should I seek a financial fiduciary?

Joe Fischer, Houston, TX

Thanks for your questions Joe, which I think many people struggle with. You ask about four related issues: Personal expertise, the need for an investment advisor, the opportunity of non-public investing, and the major stock indexes. I’ll address all four.

On personal expertise

The healthiest way to approach investing is probably to be exactly as you described yourself: “an average or better investor, but not an expert.” And not just to be that, but to know that in your bones, and to act accordingly.

Here, a Charlie Munger quote is useful:

“We try more to profit from always remembering the obvious than from grasping the esoteric.”

The recently deceased Munger was of course Warren Buffett’s billionaire sidekick and partner at Berkshire Hathaway. 

Personal ignorance isn’t great, but an even more dangerous place to be is probably to believe oneself an expert and to invest like one. I have done this a variety of times and it can be a very, very expensive education in how little I actually understand.

If you understand the obvious and remain modest in what you claim to understand, that humble approach will serve you best. Munger and Buffett did pretty well for themselves.

About seeking a financial advisor

Most people with financial assets – I usually say 95 percent of people – would benefit from a good financial advisor.

People with assets who do not need a financial advisor usually have a rare combination of extraordinary self-control around investment psychology plus comprehensive knowledge of markets to avoid big mistakes, combined with a healthy modesty about their own expertise. 

I can tell from your question (but also frankly from some other correspondence you shared with me over email) that you personally might not need one. But that is rare. 

A good financial advisor brings that comprehensive market knowledge but sets up a good plan that takes care of the self-control part and encourages the modesty part. That good plan isn’t good because it correctly predicts a market outcome. That good plan is one which will succeed regardless of what markets do. 

Finally, the good financial advisor reminds the client not to freak out when the rest of the world is freaking out because – and here the advisor must be a good market psychologist to the client – the plan was built for all possible scenarios, particularly that freak out moment.

Another relevant Munger quote about expertise: “It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.”

On non-public markets

A good financial advisor does not help the client access non-public markets. The more non-public markets-oriented a financial advisor is, the more I would become skeptical about the advisor. There is just a tremendous opportunity for overconfidence, inexpertise, and frankly conflicted-interest shenanigans when advisors begin to help their clients invest in non-public markets. 

When you mention the part about non-public investments and companies, I detect FOMO. This is totally fine and absolutely common but try to resist that siren’s song. All of my worst mistakes when investing have come from non-public investing in which I either believed I had the relevant expertise or believed I didn’t need the expertise.

Munger again: “When you locate a bargain, you must ask, ‘Why me, God? Why am I the only one who could find this bargain?’”

The right model for non-public investing with a financial advisor is for the advisor to remind the client each of the 27 ways the idea will go wrong in the future. Then and only then, if the client insists on throwing their hard-earned money down that particular rat-hole, does the advisor wash their hands of the client’s foolishness and move on. Then a polite advisor bites their tongue when the non-public investment eventually does go sour. 

I hope that gives you a sense for whether I think you’re missing out on non-public investing in 2024.

On indexes

The S&P500 and Nasdaq indexes are absolutely still relevant in the sense of giving an idea of how the largest 500 or so companies performed, or how the tech-oriented portion of the US stock market performed, respectively. Neither is comprehensive but both indexes are indispensable. We can say they are “necessary, but not sufficient.” 

The main thing to understand about the S&P 500 in 2024 is that it’s become extremely concentrated among a few holdings at the top, all of which are the largest companies in the US – Microsoft, Apple, NVIDIA, Amazon, Meta (Facebook), and Alphabet (Google) – due to their extraordinary world-dominating success over the past decade. The Top 10 holdings out of the 500 or so companies actually make up 34 percent of this index. So you live and die by how these extremely few companies go if you own the S&P 500 or if you track your stock market investments against the S&P 500. Because these tech behemoths have been so successful, very few other investments – public, private, fantasy or otherwise – match up favorably with the results of the S&P 500 over the past decade. 

That will not always be true in the future, to paraphrase that important financial disclosure written in the fine print of every single brokerage statement you’ll ever receive.

Similarly, with the Nasdaq, you should understand that this is skewed toward information technology and biotechnology companies, not for example consumer staples, utilities, or real estate. It’s totally fine for what it is, it’s just not comprehensive or representative of the US economy. It also shares the same largest 6 companies as the S&P 500, and its top 10 holdings (out of 100 or so companies) make up more than 48 percent of the total, so it’s even more skewed and top-heavy than the S&P 500.

To track a different index of the US stock markets and a broader segment of the US economy you could look at the Russell 2000, which tracks small cap public companies from every sector. But nobody is moving away from at least comparing their stock holdings to the S&P 500, the Nasdaq, maybe the Russell 2000, and that old standby the Dow Jones Industrial Average. 

You’re not missing anything new there. If you own international stocks – and you should! – then you’d compare that against one of the MSCI indexes that closely matches your international exposure.

One final note about investment advisors. I do not have one myself, but I subscribe to newsletters from a few. These Munger quotes above come from one of the recent newsletters from one to whom I’ve happily recommended friends. Having a good investment advisor for most people will absolutely more than make up for the roughly 1 percent of assets the advisor may charge annually. On the other hand, having a mediocre or bad investment advisor will not be worth anything, or could be worse than nothing. If you do go shopping for one, I hope my comments about what a financial advisor properly does will help you sort the good from the mediocre or bad.

Please see related post:

Book Review: Simple Wealth Inevitable Wealth by Nick Murray

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