Adviser: Most investors will do best with basics
Stocks, bonds, mutual funds provide long-term diversityJune 21st, 2018
Vince Lombardi is recognized as the greatest football coach of all time. In fact, the Super Bowl trophy is named after him.
He was hired as the head coach of the Green Bay Packers in 1959. After two years of incredible improvement, his team was poised to be in position to win the 1961 NFL Championship.
At the start of training camp in 1961, Lombardi began camp with his customary emphasis on the fundamentals. He addressed his team while holding a pigskin in his right hand and saying, “Gentlemen, this is a football.”
After making this statement, one of his players, Max McGee, from the back of the room stated, “Uh Coach, could you slow down a little. You’re going too fast for us.”
My point in sharing this story is that success in anything, especially in investing, involves a good understanding of the basics, and sometimes, even the basics can be too difficult to understand.
I can’t tell you how many times I have been approached over the past year regarding my opinion on bitcoin and cryptocurrencies. I have been asked numerous times by clients if I could buy bitcoin and cryptocurrencies for their portfolios. The answer is no, I can’t assist clients with bitcoin and cryptocurrencies, and I have responded each time by telling anyone who asks that I think they would do better by just sticking to the basics.
I have had to obtain a working knowledge of things such as collateralized mortgage obligations, foreign currency options, futures markets, disintermediation, call options, commodities, hedging and margin—just to name a few. However, if truth be told, my most successful clients have avoided these strategies and just stuck to the basics.
Stacy Johnson, who is now the president and CEO of Money Talks News, is also a CPA and a former stockbroker with a major national brokerage firm. In his book, “Life or Debt: A One-Week Plan for a Lifetime of Financial Freedom,” he made the following observations:
“Becoming wealthy has almost nothing to do with income or investment knowhow. Accumulating wealth comes from avoiding debt, living below your means, and investing sensibly and consistently. … Nearly every wealthy person I met got that way by following this simple path. Conversely, among my myriad clients who gambled on options, commodities, penny stocks, sophisticated trading strategies, or other get-rich-quick schemes, not a single one was a long-term winner. Las Vegas offers better odds, and the drinks are free.”
I should also state that every person’s situation is different, and there is no “right” way to invest that meets everyone’s objectives. In fact, I am legally prohibited from making any investment recommendations without being fully aware of the person’s unique circumstances. I simply want to make a case for considering some of the basics with regard to investing before jumping into something that is new and difficult to understand—instead of the other way around.
I would like to highlight a few basic investments and strategies that might be considered as one begins the journey into the investment world. These brief ideas can be looked at in greater detail by reading “Coach Yourself to Success—Winning the Investment Game,” written by Joe Moglia, former CEO of TD Ameritrade. Bitcoin and cryptocurrencies may work for some people, but I suggest taking a look at stocks, bonds, mutual funds, and exchange-traded funds first.
A good approach to consider when investing in stocks is to invest for the long term. Try to avoid hot stock tips and don’t try to time the market by jumping into and out of stocks after a few days or weeks. It is usually best to not sell stocks short, hoping they will go down. Leave that to the professional traders.
Also, buy a mix of stocks and balance your portfolio with stocks from different sectors of the economy. It is good to buy stocks of different-sized companies. By doing so, you avoid getting burned when a certain sector drops in value. A final thought on stocks is to consider holding a stock for a least a year. That way you likely will pay much less tax on your gains.
Compared to stocks, bonds seem boring, but it is good to consider owning both. Bonds are less volatile than stocks, and they can be valuable when approaching retirement. They can be a great source of steady income over the years, and they typically go up in value when stocks go down, which will balance your risk and return. For very conservative investors, Treasury bonds, bills and notes are the safest investments you can make. They are backed by the U.S. government, but offer low rates. If taxes are a concern, you can invest in municipal bonds which provide a steady income while avoiding federal income taxes.
Mutual funds instantly diversify your money and your risk across dozens—even hundreds—of stocks. With mutual funds, you have many advantages over investing in individual stocks and bonds. Mutual funds provide you with skilled stock and bond pickers. You are hiring a professional portfolio manager for a small amount of money, in some cases.
Diversification is an important aspect of mutual funds. With 10 different individual stocks, you may not be protected against a severe market downturn. However, a mutual fund will hold 173 companies, on average. Mutual funds are often a great place for a beginning investor to look since most fund companies allow you to invest with low minimums.
Exchange-traded funds have not been around for as long as mutual funds, but they should be considered. ETFs can actually diversify your money over more stocks than the average mutual fund, and you typically will pay less than an actively-traded mutual fund.
ETFs track the market, and research has shown that they often outperform many actively-managed funds. Investing in an ETF can be attractive due to its diversity, low-cost, trading flexibility (ETFs are priced throughout the trading day and not at the end of the day like mutual funds), transparency, and tax efficiency due to low portfolio turnover.
When Vince Lombardi left the Packers to coach one season with the Washington Redskins—before being brought down by cancer the next year—he inherited one of the most talented quarterbacks in the league, Sonny Jurgensen, who had underperformed due to a lack of discipline and multiple head coaches that seemed to come and go. However, under the direction of Lombardi, Jurgensen flourished.
When asked why Lombardi’s coaching made the difference in his career, he said the following: “He was the only coach of mine who simplified the game of football. Every other coach had a tendency to complicate things. … His system was by far the simplest and the most successful.”
The next time you are tempted to throw your hard-earned money at something like bitcoin, cryptocurrencies, or foreign currency options in an attempt to get rich quick, take a step back and consider the basics. I strongly feel that if most people will consider investing in a more basic and disciplined manner, they may find that this type of approach just may be “…by far the simplest and the most successful.”
Rick Biel is a financial adviser with Biel Investment Management, in Spokane.
He can be reached at 509.995.5734 or firstname.lastname@example.org.