So today's Cardinal lesson we're talking
about the 10 principles of investing success, so these are the principles that Tom and
I use when we're managing clients money, when we're taking the money under management and
we're investing it for the future, okay. So we're going to go over these 10 principles and these
were brought to us by a fund company that we use quite a bit which is Dimensional and so let's just
kind of jump right in. Number one is embracing market pricing. So you know what this means
to me is there's 774 billion dollars in 2021, on an average day globally 774 billion dollars
in stocks are traded by the market. There's buyers and sellers every single day of the year
and what we mean by embrace market pricing is that you just accept it. So I want to bring Tom
on and I want Tom to just talk a little bit about what number one means here. Yeah and so, you know
what the market pricing is is you have a buyer and a seller. They're coming together and they're
agreeing upon a price of what they're gonna trade this stock for for example. Um and then, our
belief in really what we follow here is that that is very efficient, is that is the best way
to know what something is worth as the market comes together. There's a lot of money that's
trading hands and so it's being priced in very quickly and so we want to embrace that is not try
to you know go against it it's just that's that's what it is that's what the pricing is on there. So
number two is don't try to outguess the market. I mean it really ties in with number one, is while
this Market is going on it's going on right now and all over the world buyers and sellers are
trading and so don't you try to sit down and say I know better I I this thing's underpriced this
one's overpriced. I mean the market is there and then as you pick a fund manager or an advisor
put themselves in a position where they think they know better what we're saying is we don't
know better we don't try to outguess the market. Yeah and I think you know and we'll get into the
show notes in a second but there's data that's showing over like a 20-year period only 18% of the
equity fund managers, these are people who do it professionally, outperform the market. So when we
have individual investors thinking that they can do this better than the professionals I think
it's it's um I think it's maybe unwise to take that approach that you think you're smarter than
people who do this and then the people who do it professionally only 18% of them can out perform
once you start factoring in the fees that they charge for it generally it's it's about the same
as what the Market's going to do. Yeah, Tom why don't you bring up the show notes and let's just
let's show them the documents so you can refer to later if you want a little more detail on these
10 points. Yeah and so these show notes are in um the link below of our video they're also on our
website I actually I go to our website frequently to get the stuff that we use on our notes just
in our practice but it's it's very helpful um. I'm going to go through fairly quickly just
so you can see them a lot of the main points are on the board so we're going to focus on the board
but if you want more information they are they are here in the show notes. I'll make it a little bit
bigger but again we have the numbers the different pieces we'll go through each one as we go through
the board but this is where you can really get some more detailed information something backing
up the stuff that we're talking about kind of on the video here um you know there's a bunch of
disclosures down at the bottom um obviously. Yeah and the whole point of this presentation
is to we Embrace as we practice day to day all 10 of these things. I mean all of them together
so it's the body of work so we're going through these fairly quickly. So we want number three
is resist chasing past performance. We see this a lot is just because something or a fund or an
individual security has performed well in the past and their performance and their track record looks
good that isn't necessarily the sole reason to buy something. Yeah I mean I think there's a again
there's data there and the data is looking at you know mutual funds, ETFs, things that have
a broad diversification but if you look at the funds that over like a five-year period were
in the top quartile, they've done the best, the next five years only you know like 20%
of them stayed in that top quartile. So looking at past performance to try to predict
future performance and you'll see this on all investment stuff that you ever see is it will
have a statement down at the bottom you know past performance is no indication of future results
and this just speaks to that is that looking at what it's done previously is not necessarily
what it's going to do in the future making your decisions solely on that is not a great
idea. Okay so consider the drivers of returns you know and there's different drivers for stocks
or equities there's different drivers for bonds. Yeah and so you know again this is the data that
Dimensional has put together and they have a lot of academics who have done a lot of research
on this. But if we focus on the equity side of things what they have shown in their in their
research and in their their studies is that there are three drivers of uh performance and the
equities that tend to show up across time frames, across geographically internationally, it shows
up there. So this is there's a lot of data that has shown this works again it's not necessarily
saying it's always going to work in the future but what they have shown is that company Size
Matters relative um pricing matters and then profitability. So the data shows that small caps
over time tend to outperform large cap stocks. Value tends to outperform growth stocks again over
time not necessarily in a short window. And then High profitability stocks tend to outperform low
profitability again there's more data there if you're interested in learning more about that
call us. We can have a further discussion on that but that is we we believe that that is part
of our investment philosophy and so we tilt our portfolios not going all in on those factors
but tilt it more towards those to try to gain a little bit more performance within those funds
okay. So number six practice smart diversification get many market segments in diverse globally.
Yeah and I think one thing that we often see is people will come in and they'll have you know
they're investing themselves or they have someone else investing and they might have I don't know
50 different Investments and they say I'm I'm diversified I have a lot of different companies.
But when you really look at the data all these companies are all these positions they move in the
same direction when one is up they're all up when one is down they're all down that's not really
diversification, that's just holding a bunch of different positions, and so true diversification
is having things that that don't move in sync with each other when one is up one might be down when
one sound one is up you want that different mix of things and it needs to be globally it's not just
you know here in the U.S you know I we're of the opinion that you should widen your investment
approach and not saying that it needs to be evenly distributed but having some International
exposure having exposure to different parts of the economy some tech some financials some
you know retail whatever it might be getting a broad diversification across sectors across
globally is is uh tends to work out over time. So number seven avoid Market timing which segments
outperform year to year. Uh you know it's going back to what we've been saying all along is a
lot of people are doing this right now. Where they're you know they've just they've been on
the bad side of Market timing. I mean they're they're they're wanting to sell now and the
only people that we're going along with that if you're going to sell you're going to get out
permanently that's understandable especially if you've made money over time but it really now
you could make an argument is the time to be looking at buying when we've just suffered uh
you know a severe decline because we're a dip so Tom. Yeah I mean I think you know and there's
a lot of different ways to approach us but again it's this sort of is relative you know related
to a lot of the other points we've talked about on the show is trying to time the market and maybe
trying to pick which sector of the Market's going to do well the next year is is really hard to do.
I mean it's you know in one year there might be a certain area that does really well the next year
it might be down and there's another area that does well and so again that speaks to having a
diversified portfolio, it speaks to trying to not to pick and choose which one you're going
to invest in and just sort of stick to a plan, get invested appropriately from the start and
stick to that over time you know rebalancing as you go to stick to the overall plan we're looking
at is is the better approach in our opinion to investing as opposed to trying to time which
one's going to do well you know this next year. And number eight here is big, yeah this even
goes for us too is manage your emotions. I mean you know I'm what I'm talking about
is acknowledging the optimism that's there when it's there is you know things are
going to go way up I'm going to make a lot of money and then the elation that happens
after you've had a period of time where your stocks have increased greatly, acknowledging the
nervousness after we have a year like last year um and then you know the fear which is which is
really present a lot today is to acknowledge all of that. And then this is where we remind our
clients to go back to the financial plan that they created with us or we we wrote the thing
but we created it with them and the financial plan is there for the long term. I mean it's
just we have people coming to us at retirement or anticipating retirement and it's time to redo
the financial plan and then when we get to a point where we've had some bad performance or we've had
a dip and all of this stuff becomes ever present people call us up and you know they're going
to say sell everything well we got to follow that if that's the orders we get but we we try to
take them back to the financial plan and we point out to them that this was accounted for. Yeah I
mean I think this is this is really the hardest thing that people it's easy to say and practice
oh I can manage my emotions I'm I'm a disciplined investor I'm not going to worry about the ups and
downs until it happens especially in the clientele that we're dealing with a lot of times is they're
right they're approaching retirement they might have just retired and they're looking at this
they don't have a paycheck coming in they're having to live off this money and it feels
different this time than it did back in say 2008 or any previous decline that they've been
through and so even though they might say with their words I'm okay with the risk I'm taking,
I'm okay with this in practice you know and it bears itself out when we see a decline and
they're calling us up freaking out it's like clearly they were taking too much risks and even
though they told us they're okay with that in practice they weren't and so this is where that
plan is really helpful creating this plan where we can stick to it because the worst thing you
can do is sell right as it went down and then it recovers you missed it going up you buy back in
then it goes down again and then you sell I mean it's a cycle that's really problematic and can be
very detrimental to your long-term success and so trying to manage those emotions getting invested
appropriately on the front end and being able to stick to this long-term plan is a much better way
to go about it than having to you know worry about the the you know and this is gets to the next
point but like the headlines of the day you know what should we do now and that's you know we want
to take a long-term approach to the investing. I mean I read the headlines and the
articles under the headlines every day and I'm on those I I don't turn my back on these
but I don't go act on them and I don't call my clients up and start acting on those things
we're going to go back to the financial plan and either revise that and then act or we're
just going to go back to the financial plan point out what this is and that the financial
plan accounted for some dips and just kind of look on the tracks of where we are so it's really
looking beyond the headlines like the svb crisis that's going on right where we're making this
video. The war, the recession, uh the economy, I mean you need you need to pay attention to these
things but you don't need to get in a state of fear or a state of optimism and then start making
emotional decisions about your Investments. And I will make the point out that that is assuming
that you have are in the right investment mix from the start. We've done this plan we've got
you invested appropriately we have a lot of people come in that are not invested appropriately
they maybe are taking way too much risk and it might be appropriate to to change the things
but that needs to be in the context of an overall plan not just based solely off of the headline
so the headlines can be you know a catalyst to talk to us potentially where we come up with
the plan but once the plan is in place we're not going to focus on the headlines and we're not
going to veer from the plan because in the plan we've accounted for the possibility of these ups
and downs in the in the short in the short term. Yeah, so it's number 10 is focus on what you can
control okay and that's what we focus on as we're managing our clients money to the financial plans
that we've created together. Yeah, I mean I think there are there are things you can control,
we can control how much risk you're taking in your portfolio, we can control taxes, we can
control expenses in the funds, we can control the diversification there, we can't control what the
Market's doing I mean we we are not in control of what's going to go up and what's going to go down
and so that's where we want to get into a plan have it be a long-term plan have it be a invested
appropriately for you you specifically and that's different from client to client and then that
allows you to control what you can not have to worry about what you can't and know that it's part
of this larger plan that you're going to be okay. Well yeah and sometimes when people come to us at
retirement they are invested too aggressively and it's paid off for them and then they've lived the
downside of that like last year and now they're coming in it's appropriate to take some of the
money off the table and get into something that can give them a guaranteed income stream that they
don't have to have to worry about so I mean that all gets back to the financial planning that's not
the investment planning. So I want to go through and I want to just go through these 10 things
really quickly because it's the body of them that really make up how we think and how we act and
really that clients can use these things to decide whether they want us managing their money. I mean
embracing market pricing, we don't try to out guess the market, we don't chase past performance,
we let the markets work for us and our clients, we consider the drivers of returns in the academic
research on each individual security in each fund, we practice smart diversification and real
diversification, we we avoid market timing we don't try to get in and out at certain times based
on what we think the Market's going to do, we help our clients manage their own emotions, and we we
act as a stable force that has written a financial plan with them and we going to kind of remind
them of that. We look beyond the headlines so that doesn't mean we don't look at the headlines but
we look beyond there to and back to the financial plan and we focus on what we can control. So what
I want to do is just go over what of the seven things or the seven worries of financial planning
that we're doing for seniors for retired people have we touched on today and really it's been,
IRA, 401k, that's where a lot of the money that we're investing for people is it's focused
on income and it's focused on taxes because that's a big part of our investment planning
is to try to get people in the right place tax wise. So I want to bring Tom back on and I want
to thank you very much for listening. Thank you.
