Well, this is it: the day has finally arrived! Today, we are going to take all of your planning from the previous steps, and put it into action. And we have come quite a long way! But if you’re anything like me, when I reached this stage, I was flat-out nervous. I had taken the time to build our investment plan, had the knowledge to back it up, and knew the steps to take, but all of that didn’t matter. I didn’t feel very confident setting out. After all, I was new to this. What if I’d missed something—overlooked some critical detail that, carried forward, would cost us hundreds of thousands of dollars? Would my wife and I sit there, decades from now, eating cat food and envisioning how different life would be had I been better prepared?
I didn’t feel very confident setting out. What if I’d missed something—overlooked some critical detail that, carried forward, would cost us hundreds of thousands of dollars? Would my wife and I sit there, decades from now, eating cat food and envisioning how different life would be had I been better prepared?
Rest assured, a Friskies Feast isn’t in our cards. I know that now. In fact, I look back now, and it seems silly that I ever had those thoughts. From this angle, I see how truly simple and effective investing can be, and the fact that it ever seemed beyond me seems laughable. But it may not to you…yet. So, if you’re feeling that way now, don’t worry—it’s normal. Every investor, at some point, has felt overwhelmed and out of their depth. The ones that take the time to create a solid plan (Past You), implement that plan (Present You), and know how to stay the course going forward (Future You), will succeed. But, to build a little confidence setting out, let’s briefly look back at all you’ve done so far. To this point, you have:
- Established an emergency fund of 3-6 months’ expenses (Part 1)
- Paid off all high-interest debt (Part 2)
- Have an understanding of stocks, bonds, mutual funds and ETFs (Parts 3, 4, 5, 6, and 8)
- Learned about the three asset classes that most investors should consider (Part 7)
- Established your asset allocation (Parts 9 and 10)
- Researched the best index fund options in each of your accounts (Part 11)
- Planned out the asset location of your portfolio (Part 12)
Pretty impressive, no? In taking those steps, you have all the foundations of a very solid investment plan. You’re goin’ places, kid. So take heart—this is just the beginning. And the first thing we need to to is make sure you are the one at the wheel.
This may sound obvious, but the first thing we need to do is ensure that you are the one in control of your investment accounts; this is called self-managing. Let me explain. Depending on your individual situation, you may have someone being paid a fee to actively manage your accounts for you; this is particularly common in retirement accounts. This person could be an investment manager, financial planner, broker and so on. As we covered back in Part 6, simplicity is one of the main benefits of the portfolio structure we have designed for you. This means two things:
- Paying someone to manage such a simple portfolio is entirely unnecessary, and
- It creates a cost layer between you and your money that leaves less for you in the end.
Unnecessary and costly. So, it’s time to cut the cord, and remove the middleman. “Taking control” here amounts to calling each of your brokerage firms and ensuring that you are set up to self-manage in all of your accounts. Confirm that you are not paying any fees to have someone (or a service) manage your investments for you.
You should know that when you call, you may encounter pushback on this decision. So this is a good opportunity to talk about something important.
The Illusion of Complexity
If I’ve done my job correctly so far, you now understand that planning a portfolio, choosing investments, and managing it all going forward can be both simple and effective. But it’s important to understand that the very nature of this idea can be threatening to those in the industry whose livelihood depends on it.
Here’s the deal. When we look at the financial services industry, we find a full spectrum of utility, ranging from those who add real, substantial value to your financial situation, to those who look parasitically at what they can draw off of it for their own gain. I want to be clear: the ones I’m taking aim at here are those in the latter category, not the former.
Those in this “parasitic” category essentially carve out a space for themselves between you and your money—and they are able to do so based solely on the illusion that investing is far too complex for individual investors to attempt themselves. Far too often, this means that as they are managing your investments, they are also working feverishly to keep up the illusion of complexity needed to justify their presence. If you’ve ever gotten off the phone or read an email from one of them, I wouldn’t be surprised if you felt like this.
As should be clear by now, all of this means that their intervention is not only unnecessary, but is actively harmful to investors. This is for two reasons:
- Your success or failure largely hinges on the skill of the investment manager. And, as research has shown, this is overrated: the vast majority of active investment managers fail to even match the performance of the benchmark index.
- Hiring someone to actively manage your portfolio comes with increased costs. This additional cost layer directly takes away from the return that is left for you, and compounded over time, this can be hugely significant.
My wife and I ran into this ourselves years back, when we were at this stage of implementing our investment plan. She had a workplace 401k that she’d had for years—and for years, it had been set up with an investment manager, who had been taking a quarterly fee to manage her 401k portfolio for her. When we called to remove this and arrange to self-manage, this manager did everything in his power to make us feel like we were making a mistake—he tried to play on fears and insecurities, and insinuate that if we were to insist on powering on alone, we would find ourselves adrift at sea without anyone to guide us. Nothing could have been farther from the truth.
Some “parasitic” investment managers essentially carve out a space for themselves between you and your money—and they are able to do so based solely on the illusion that investing is far too complex for individual investors.
I hope that you won’t run into anything like this, but I say this so that you will be ready if you do. Trust me—you have put in the time and effort to construct a truly solid portfolio. Once you begin to see through the illusion of complexity, it’s truly amazing how quickly the whole thing crumbles.
Investing at “All-Time Highs”
Here’s another question I hear often: “Is it a good idea to invest now, when the market is at an all-time high? Should I wait for the market to drop before getting in?” This is a reasonable question. After all, if the market is at an “all-time high,” wouldn’t the likely trajectory from here be…downwards? The answer is no. Here’s why.
The first thing to note is that the market is far more likely to go up from here than it is to go down. Author JL Collins (who wrote the phenomenal book The Simple Path to Wealth) has noted that the market goes up 77% of the time, and consequently goes down 23% of the time. What this means is that when you select any random insertion point into the market (such as today), the market has a greater than 3 in 4 chance that it will go up from here (and only a 1 in 4 chance that it will go down). While it is by no means guaranteed to go up from here (spoiler alert: nothing in the market is a guarantee), the odds are with you.
The second point to note is this. While the term “all-time high” at first glance sounds like something that is hugely significant, it’s anything but. In reality, “all-time high” valuations don’t mean much—we hit them all the time on this ever-continuing, slow plod upwards. To illustrate this, consider any of the peaks here for the S&P 500 over the past 20 years.
At the time, each of these peaks (except #1) was considered an “all-time high.” At each of these peaks, someone, somewhere was worried about this exact thing—investing in the market at such a high valuation. But watch what happens next. Given time, that peak is replaced by another peak, and another…and another, and so on. The ceiling today will become the floor tomorrow. At times there are drops, sure, but those drops ultimately amount to short-term noise. Long-term, they mean little. Long-term, you are climbing a mountain; don’t pay much mind to each individual step, rocky or not.
Believing that the market is at an all-time high, and planning to wait until it drops before investing, is essentially trying to time the market. As we’ve discussed in previous posts, not only is this extremely difficult to do, it puts your emotions in play as a central factor, and as such, is unreliable as an investment strategy. You might (through sheer luck) be right—maybe today is a 2 or 5 on the chart, and the market is on the verge of a correction or a bear market. But it’s far more likely (77%, in fact, as we just discussed) that today is a 1, 3, or 6 on the chart, and that by waiting for the opportune moment, you will miss out on the gains that follow. After all, while you’re doing all that waiting, your money is on the sidelines, gaining you nothing (or even eroding away due to inflation).
Long-term, you are climbing a mountain; don’t pay much mind to each individual step, rocky or not. Only those actually walking the path gain the benefits from being on it.
So here’s my advice: put your money in the market, keep walking that path up the mountain, and don’t try to predict what the market will do next. No one can. Always remember: only those actually walking the path gain the benefits from being on it.
One last quick point. I’ve mentioned it before, but there are additional considerations if you will be investing inside a taxable brokerage account. It’s important to understand that certain moves inside these types of accounts (such as selling investments) can have tax consequences. If you’ll be making any big moves in one of these getting started, I strongly urge you to contact your tax professional, so that any moves you make will be done with full knowledge of the tax implications.
All that remains now is to take action and implement your plan. By now, you should have a clear understanding of the moves you need to make in your portfolio to bring it in line with your target asset allocation, so I’ll leave you to it.
After you are done implementing your plan—congratulations! All that is left from here is the small matter of maintaining your portfolio going forward. Outside of contributing consistently, this mainly takes the form of what is called periodic rebalancing, and we will spend the next post going through that in-depth. See you there, in Part 14!
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