Dear First Mates,
Hello everyone. I hope you are all doing well and feeling great. This newsletter is a personal story about my investment journey and some lessons learned along the way. My philosophy that I am sharing with you is very specific, so here it is in a nutshell:
1) We are principled investors who follow a buy and hold approach. These principles center on optimism (that the market rises over time), patience (to hold long-term), and discipline (to weather market storms and always be buying).
2) Stocks are one of the best ways to grow wealth long-term and sustain one’s retirement; this is historically demonstrated by stocks growing wealth faster than inflation and taxes reduce it.
3) We remain goal-focused and planning-driven investors, rather than current events and politically-driven. Our portfolios serve the plan, not the other way around.
4) We diversify using cash, stocks and bonds, real estate, and alternative investments.
The College Days: 1999-2003
While at Washington University, in St. Louis, Missouri, I remember my professor teaching us how you can watch your money grow by investing it. I was speechless at this notion of money growing with interest just by placing it somewhere. I created a brokerage account and bought some shares of familiar companies - like Coca-Cola and Disney. I lost money on them short-term, so I thought the stock market was a joke. How dare it make me lose money?
Having no idea what I was doing, nor an investment philosophy, led to a poor start in the world of investing. In hindsight, I wished I held onto those companies, as my first picks weren’t too shabby. However, my thought process at the time was simple: get good grades in school so I can go to a good college; a good college will lead to a good job; a good job will lead to wealth. During my senior year I had good grades but no epiphany on what my career should be. This was stressful. Stressful indeed. Fortunately, my finance professor brought a local financial planner to come and speak to us one day. That day changed my life. I felt like I would enjoy his job of helping people with their money. My career path just became laid out before me.
Lesson Learned: Have an investment philosophy before you enter the market.
Advisor Dave: 2004-2008
In 2004, I began my career as a financial advisor, which greatly expanded my investment knowledge. Licensing exams, personal learning through books and articles, and training by coaches and managers at Ameriprise each helped build my investment philosophy framework. I found myself gravitate towards using mutual funds because it gave clients exposure to (1) thousands of great companies all over the world and (2) companies in different asset classes (large vs. small; domestic vs. international). Additionally, these funds were actively managed. At the time, this aspect gave me a sense of security knowing there was a professional selecting each stock behind the fund.
Lesson Learned: Diversify your investments because you don’t want to put all of your eggs in one basket. Especially with so many eggs and baskets to choose from!
Advisor Dave: 2008 Great Recession
Everything changed in 2008. No one told me the market could lose about half of its value within 18 months. What the heck! I was shell-shocked and very upset that I did not protect my clients. The fact that I (nor others) saw the crash coming was very humbling. Now my job was focused on damage control by relaying two simple messages to clients: (1) don’t panic (they did) and (2) leave their investments alone (most did, a few did not).
Lesson Learned: Investing is an emotional game. Cool heads prevailed by simply doing nothing. Optimism is an important quality to have in this world.
There is a popular investment strategy known as dollar-cost averaging. This is where you systematically add to your investments determined by a consistent schedule. I really love this strategy because it takes all emotion out of investing. As the markets began recovering after 2009, clients following this strategy did very well.
Lesson Learned: Always be buying. And buy as much as you can when things look most bleak!
Advisor Dave: Post 2008
After the 2008 financial crisis, I started to develop my own political identity as a Libertarian. I began listening to podcasts with some brilliant minds in that community. These individuals convinced me that (1) none of the problems were fixed, so (2) another recession was coming, and (3) it would make 2008 look tame. I needed to protect clients since I failed the first time. To protect clients, I used many strategies organized by leading investment firms that were extremely complicated. The deep recession that I was predicting? Never happened. Those strategies I thought were going to be awesome? They performed terribly. To this day, I still attribute it to the worst investment decision of my career. You see, people are funny – they are understandably not happy when they lose money, but will not get mad at you if everyone else loses money too. However, there is hell to pay when the market is doing great and they are not reaping the rewards because they are hedged.
Lesson Learned: Political views, current events, or whatever the media is shouting about should never, ever dictate investment policy. Your plan drives the portfolio.
Lesson Learned: Do not try to time the market. It is hard and the professionals fail at it constantly. Also, if you don’t really understand an investment – do not use it.
I was completely fed up and decided I wanted to keep it simple. But now there was a new kid on the block known as exchange-traded funds (ETFs). ETFs were cheaper and easier to trade than most mutual funds. I was also drawn to ETFs because they were passive structures simply following an index. This investment had all of the things I was looking for. I went deep down the ETF rabbit hole and started constructing my own portfolios using these fabulous vehicles. I started building my flagship model that I call the Core series based on your specific risk tolerance. Over time, I created other models including a Thematic ETF model, a Yield ETF model, and even an individual stock model with research provided by Zacks. I intend to add other strategies in the future as well!
Reading Nick Murray
I started reading Nick Murray in the beginning of my career as his philosophy always resonated with me. His book “Simple Wealth, Inevitable Wealth” is simply a classic. One of his insights, that I didn’t always agree with, was that advisors should help clients own more stocks than they might have otherwise. I have 100% come to terms that this is the right approach. Equities are critical to sustaining a 30+ year retirement. This is especially true after seeing interest rates decline to historic lows.
Lesson Learned: Stocks are critical to sustain one’s retirement. Don’t sacrifice long-term performance to protect against short-term volatility.
Advisor Dave – In Recent Years
As time went on, I became interested in other types of alternative investments. These other investments include real estate, farmland, private equity, venture capital, cryptocurrency, litigation finance, and even investing in ATM machines! I really took the idea of diversification to heart as I want all my investments to move independently of one another with low correlations between them. There is much to say on each of these alternatives so, I will save that for future newsletters. In conclusion, the journey is still going strong, which is incredibly exciting. My goal remains the same though: to continue to evolve my investment offerings that I bring for clients.
P.S. Here is my YouTube vid o’ the month!
David Warshaw, CFP®