What are the Hidden Costs of Timing the Market? – Episode 153

The actual cost of market timing could be higher than you’re willing to pay. On this episode of Dentist Money™, Reese and Ryan discuss the difference between thinking you’re in control—and actually being in control. They examine, how acting on that impulse can lead to poor financial performance and the emotional cost of market timing. They tie it all together with some suggestions on how to rethink your approach to market fluctuations and why a long-term, globally-diversified approach to managing your portfolio helps eliminate the risk of emotional investing.

Are you ready to dive into the actual cost of market timing?

Podcast Transcript:

Reese Harper: Welcome to the Dentist Money Show. I’m your host Reese Harper, and in this episode, Ryan and I discuss the difference between thinking you’re in control and actually being in control. Everyone has an internal need to feel in charge, which is why the typical volatility of public markets can really end up messing with our emotions. Ryan and I offer some suggestions on how, for your own emotional good, you need to rethink your approach to market fluctuations. It’s a conversation that leads us to point out why, as financial advisors, we take a long term, globally diversified approach to managing portfolios.

Reese Harper: Make sure and sign up for our new Facebook group. You can go to dentistadvisors.com/group. Sign-up is always free. It’s a great way to give us any of your financial questions. When you’re ready to book a free consultation, just go to dentistadvisors.com and click book free consultation. You can check out our calendar and find a time that works for you, or just call us at 833-DDS-PLAN. Enjoy the show.

Speaker: Consult an advisor or conduct your own due diligence when making financial decisions. General principles discussed during this program do not constitute personal advice. This program is furnished by Dentist Advisors, a registered investment advisor. This is Dentist Money. Now, here’s your host Reese Harper.

Reese Harper: Welcome to the Dentist Money Show where we help dentists make smart financial decisions. I’m your host Reese Harper, here with my trusty old cohost Sir Ryan Isaac. Sir [crosstalk] Ryan Isaac. That’s a Spanish sir.

Ryan Isaac: Well, are there Spanish knights?

Reese Harper: It’s actually-

Ryan Isaac: There were Spanish knights. Yeah.

Reese Harper: I don’t think you actually ever roll your tongue to say sir.

Ryan Isaac: Sir. Well it goes into Ryan, it’s a double R. It’s kind of like in Heather.

Reese Harper: Well for those of you who wanted hear a Spanish lesson today, you sure got it. Right out of the gate.

Ryan Isaac: You got it. Reese, I got a story for you today. We’re going to just get right to this.

Reese Harper: Okay.

Ryan Isaac: Okay? Because this story’s too good. Now, you’re a man who likes pushing buttons, yes?

Reese Harper: Many. Happens on a daily basis. I don’t know if it’s intentional.

Ryan Isaac: No.

Reese Harper: I wouldn’t say I like to. I just tend to.

Ryan Isaac: You tend to push buttons.

Reese Harper: Not intentionally.

Ryan Isaac: You just like to push them.

Reese Harper: I just try to be myself, and sometimes that pushes buttons.

Ryan Isaac: It pushes a button.

Reese Harper: You’re talking about actual physical buttons, sir.

Ryan Isaac: Talking about physical buttons. So there’s this article that came out a couple months ago on CNN, and it was called The Illusion of Control, and the title is Illusion of Control: Why the World is Full of Buttons That Don’t Work. And this made so much sense to me, when I read this story, because this was an article with corroborated stories, and officials, over all these different things that I’m going to talk about, confirming that this stuff is true.
Story one. There is over 1,000 crosswalk buttons just in New York City, the downtown area, alone and only 100 of them work. Okay? So, what happens every time you walk up to a crosswalk? Do you wait? Do you just figure the system’s going to figure this out? Eventually it’s going to give me the little walk guy? Or do you go out of your way to push the button?

Reese Harper: Well it depends on if it makes a noise or not? If it makes a noise-

Ryan Isaac: Are you being serious? Because it’s actually in the science.

Reese Harper: Yeah.

Ryan Isaac: Okay.

Reese Harper: If it makes a noise-

Ryan Isaac: If it gives you some kind of feedback right away … It’s like, “Beep boop.”

Reese Harper: Then I’ll push it like 10 or 12 times just to get it … I could go dit, dit, dit, dit because I think it’s going to speed it up. And if it’s a button, sometimes I’ll just push it once. I’ll never push a button more than once.

Ryan Isaac: Like a physical depresses-

Reese Harper: Too hard. And it doesn’t give me enough … It’s called haptic feedback.

Ryan Isaac: Haptic feedback. That’s why our phones have it now. Because if you push it, it vibrates.

Reese Harper: Yeah. I don’t know this at all, by the way. This is totally news to me, this story. In our app design right now, that’s a big thing we’re trying to figure out is which haptic feedback should we give people based on what actions they take because you need to … It’s a big part of feeling like you’re doing work.

Ryan Isaac: It is. It’s not a coincidence and it’s not just because it’s fun that some of the smartest most talented people in the world are building our phones and our apps and they happen to buzz when we do certain things. There’s a reason for it. Anyway. New York City, most of the buttons on crosswalks don’t work. They don’t work at all, but people … Some of them were installed a long time ago and then more updated systems kind of replaced them and they left them. Some of the buttons, and this is all confirmed by city officials that are in charge of traffic and everything, some of them were actually installed as dummy buttons. They were put in there for people to walk up and just push them because it made people feel like they had control over something.

Reese Harper: I think if I had to guess, if I was doing this, I would also think it probably reduces or increases traffic safety somewhat.

Ryan Isaac: Increases awareness.

Reese Harper: People aren’t going to run across the street on a red light if they’ve pushed a button.

Ryan Isaac: If they’ve pushed a button because they’re like, “I’ve done something so something’s going to-”

Reese Harper: It’s like that was the step.

Ryan Isaac: Yeah.

Reese Harper: I think everyone wants to look for cars and then cross with even the red, if there’s not a lot of cars coming.

Ryan Isaac: That’s you.

Reese Harper: But not if you’ve pushed a button.

Ryan Isaac: I’m very safe and conservative. I don’t cross when it’s red.

Reese Harper: I don’t …

Ryan Isaac: You don’t know. What if the guy’s flying down the street. You don’t know it’s coming.

Reese Harper: I don’t do that. I mean, I might.

Ryan Isaac: You live on the edge. You’re a button pusher and an edge-liver.

Reese Harper: Well, sometimes the lights are broken.

Ryan Isaac: No, they’re not broken.

Reese Harper: Tell me which listener out there knows what I’m talking about. Have you ever … I grew up in rural life, all right, with old traffic lights. You pull up to a single stoplight and you’re there for like four minutes, maybe at least two or three, and at some point it never turns. Like ever.

Ryan Isaac: You just go.

Reese Harper: The train’s not coming. There’s no semis.

Ryan Isaac: There’s a cow down there.

Reese Harper: There’s not even a horse. There’s not even a small … There’s not even any kind of rodent or ground squirrel. There’s nothing. No water fowl. There’s no upland game. There’s no big game. There’s just nothing.

Ryan Isaac: No bears.

Reese Harper: At some point, you’re going to be like, “Whoever designed this is not smarter than me.” Because-

Ryan Isaac: Of course not.

Reese Harper: They should have turned the … I mean, it does happen. I’m saying-

Ryan Isaac: Okay. Fair enough.

Reese Harper: Not you city slickers.

Ryan Isaac: Okay. The city slickers don’t know better.

Reese Harper: … don’t know what it’s like. But in rural life-

Ryan Isaac: It happens.

Reese Harper: I mean, this happens.

Ryan Isaac: Okay.

Reese Harper: If you know what I’m talking about, please text at the end of the show.

Ryan Isaac: What about elevators? Okay. Everyone just think who’s listening to this. You get in an elevator. You’re the only one and you kind of want to get on your way. Someone’s like 40 feet away and they’re kind of walking, what do you do? Nonchalantly act like you’re ….

Jenny: Nonchalantly, I push it as fast and aggressively as possible.

Ryan Isaac: Jenny makes eye contact. Jenny makes eye contact and she just slowly pushes it, nodding yes.

Jenny: I used to do that in my apartment all the time. I’d see someone coming, and I’d just be like aggressively be like. “Not today, neighbor. Not today.”

Ryan Isaac: Close door. Yeah. That’s common. Push the Close Door button in an elevator.

Reese Harper: Yeah.

Ryan Isaac: Maybe because like Jenny, you’re trying to exclude humans from your personal bubble.

Reese Harper: Yeah.

Ryan Isaac: Or maybe you’re just in a hurry.

Reese Harper: Yeah.

Ryan Isaac: And the door is sitting there. Did you know they … Unless you have an overriding code as like a fire or police personnel, or you have some … They’re actually there for disability access, to keep doors opened or closed at certain times. That’s why they’re there. They don’t actually work for the general public. How many people still push these buttons like every single time you stand in an elevator?

Reese Harper: I’m pretty sure they still work.

Ryan Isaac: No, not … They don’t work.

Reese Harper: I’m just saying it feels like they do.

Ryan Isaac: You can’t stop it.

Reese Harper: It feels like they do. They don’t. But it feels like they do, but they don’t.

Ryan Isaac: This is why the article is so surprising.

Reese Harper: But it just feels like it.

Ryan Isaac: It feels like they do because there’s a delay. You push it a hundred times, and then it closes. You’re like, “Yep.”

Jenny: See, I don’t feel like it works. It’s always someone gets in the elevator with me.

Ryan Isaac: You know better.

Jenny: Thwarted every time.

Ryan Isaac: Okay. One more. One more. Thermostats in office buildings. Clearly not ours because we battle over it up and down all day long. But thermostats in office buildings and hotel rooms are mostly regulated where even if the temperature will show … Again, this is coming from by officials in the CNN story. They’re like, “Yeah. This is how we install them.” They’ll let the temperature go down, but it actually doesn’t go down past a certain point in air conditioning. Or they won’t actually go up. It’ll be like … I’ve got it at 77 degrees, if you’re my wife. But it actually doesn’t go above like 73, or 74. But it lets you feel like you did. They’re in hotels all over the place. Or they even install dummy thermostats in office buildings.

Reese Harper: Wow.

Ryan Isaac: Just to give people the control over like, “It’s really hot in here. I’m going to go push the down button.” And it doesn’t actually change anything, but it feels like they do.

Reese Harper: This is an area that’s not been regulated yet because-

Ryan Isaac: Clearly not.

Reese Harper: It’s a little bit lower than the national deficit, in terms of priority.

Ryan Isaac: A little bit. It’s like slightly lower. It seems like a crisis, though.

Reese Harper: Yeah. It’s like you can’t be jacking with my mind this way.

Ryan Isaac: Okay.

Reese Harper: You’ve got to be more transparent with me.

Ryan Isaac: Today we are talking about markets, and we are talking about investing in this beautiful asset class called Public Markets, also referred to as Stock Markets. Specifically, we’re talking about trying to time the markets, how to interact with them. What’s the behavior one should have in order to get what you expect out of it? That’s the point of today. But this button story was really fascinating to me because it started … It made me think, “Yeah. As human beings, we really kind of dig this.” We like things to push that make us feel like we’re having some control over something that we probably even know that you don’t have control over. But it feels good to just jam that button, you know?
I went and I looked up some studies by some psychologists and some different universities and there was a few interesting things. This one psychologist, her name in Ellen Langer, and she wrote this big study and she got the … This thing called Illusion of Control, she kind of named it. She said, “Taking some action leads people to feel a sense of control over a situation and that feels good, rather than just being a passive bystander.”

Reese Harper: They do this a lot in a lot of different … Like pricing research is all about giving people control options and if you present prices that they don’t have control over … You’re a white-

Ryan Isaac: You take away their choices.

Reese Harper: 37 year old male, therefore you get this option.

Ryan Isaac: Yeah.

Reese Harper: I don’t want that option. I don’t care. That’s not something I control. You have to give me options that are not-

Ryan Isaac: We’re like kids though. Kids are the same way, man. Kids are the same way. They’re still going pick what you want them to pick.

Reese Harper: I’ll say you’re like a kid.

Ryan Isaac: I’m very much like a kid.

Reese Harper: I’d like to say I’m a middle aged man.

Ryan Isaac: You’re kind of old. You’re an older guy.

Reese Harper: I feel more comfortable with that label.

Ryan Isaac: It’s fine.

Reese Harper: But I want the choice to be able to label myself however I want to label myself.

Ryan Isaac: Call me a millennial.

Reese Harper: Let me label myself my own way, though.

Ryan Isaac: That’s fair.

Reese Harper: I want the control of my own label.

Ryan Isaac: Yeah.

Reese Harper: Okay.

Ryan Isaac: I feel that way about a nickname, but I didn’t get that courtesy around here. We’re like 160 episodes. I’m still being called Sir.

Reese Harper: The pubic demanded.

Ryan Isaac: Oh, they do now.

Reese Harper: They demanded it.

Ryan Isaac: They do now. I’ll get on phone calls that people have scheduled and they’ll be like, “Is this the Sir Ryan?” Yes, it is. Hey, hey, hey.

Reese Harper: If the public demands it, the public gets what they want.

Ryan Isaac: The public freaking gets it. Okay. Let’s start talking about some of these things. We’re going to begin by talking about some of the costs, the actual costs that you incur when trying to time a market.

Reese Harper: This has not been a great stock market year, year to date.

Ryan Isaac: Right.

Reese Harper: What Ryan means by market timing is that whether it’s real estate or whether it’s the stock market, which is what we’re going to talk about today, or whether it’s buying a practice, or whether it’s-

Ryan Isaac: Yeah. Farmland or gold.

Reese Harper: Any kind of investment market, deciding if you’re getting into that market at a cheap price or an expensive price is very, very difficult. The more the market becomes transparent, meaning gold in a small remote town that’s very specific to one part of the Appalachian range, that might not be-

Ryan Isaac: Shout out to that town.

Reese Harper: That might not be a really transparent market. There might be a limited amount of gold and only a certain people have it and they’re exchanging it.

Ryan Isaac: Someone with some limited information could take advantage.

Reese Harper: Yeah. They don’t really know how pure the source is. I’m talking about people with actual nuggets in rocks that they’re exchanging. That’s not a very transparent market. You don’t know the quality. You don’t know if it’s real. You get to things like real estate and it’s a little more transparent because there’s an MLS for residential commercial. There’s some kind of form of it.

Ryan Isaac: There’s agents with valuations. There’s Zillow.

Reese Harper: But it’s still not quite as transparent as like cash in the bank. Cash in the bank is the most transparent of all markets. Our currency changes every day. We can see what it is. The stock market is a very unique asset and I really, really like it because it’s so transparent and gives me the price so quickly and reflects back to me its value. It never lies to you. It tells you the truth. I’m not saying that makes it the best investment for everyone, but I am saying it gives you the highest return of almost any asset in the world for the amount of liquidity it offers you at any given point in time. And that’s the truth.

Ryan Isaac: Okay. Let’s talk about some of the costs of interacting. I guess what we’re talking about is this, and what you’re saying, this asset class, the stock market, these returns, these expectations, they happen over longer periods of time. You can’t get long term returns with short term behavior out of this thing. That’s not how this asset works. Or a lot of them, anyway. Let’s talk about some of the costs that people incur when they try to do that. Specifically, market timing. That’s what we’re talking about.
The first thing I would say here is how , and I don’t think many people realize this, how frequently markets actually do go down. They happen way more than people think. When I hear conversations about trying to miss the next correction … People use words too I think that they don’t always correlate to the same numbers. People say, “I’m trying to miss the next correction. I want to miss the next bear market, you know?” A correction is 10%. The bear market’s 20. Right?

Reese Harper: You’re saying academically that’s what it is.

Ryan Isaac: Academically, that’s how they’re defined. One person will say correction and they mean 10%, and the other person means 50.

Reese Harper: Yeah.

Ryan Isaac: You know? They just mean-

Reese Harper: Or literally someone will say correction, they mean like any down day.

Ryan Isaac: Anything at all.

Reese Harper: Any down day.

Ryan Isaac: At all. Half a percent.

Reese Harper: Had a down day in the market. Just a little correction today.

Ryan Isaac: Little correction today. No, it’s not really how it’s termed.

Jenny: Can I use that personally?

Ryan Isaac: What?

Reese Harper: Yeah.

Ryan Isaac: What?

Jenny: I just had a little correction today, don’t worry about it.

Ryan Isaac: Just a little correction.

Jenny: Just having a little correction.

Reese Harper: Be like, “Uh, you forgot to feed your pets for the last week.”

Jenny: Just a little correction.

Reese Harper: Just a little correction, guys.

Jenny: Don’t worry about me.

Ryan Isaac: Here are the numbers, okay? If you look at the data from … This is United States markets for the last century. Correction, defined as 10% drop is happening on average every year.

Reese Harper: Okay.

Ryan Isaac: Okay. So let’s just … Maybe it meant that if we’re really seeing correction and we really define it as 10% that there’s probably not a way to avoid every correction. That’s probably not going to happen.

Reese Harper: Yeah.

Ryan Isaac: It’s annual on average. Average. 15% drops are happening every two years over the last hundred years, last century of data. Bear markets, which are 20% drops, are happening every three and half to four years. That means in a ten year stretch, as an investor, you will see a bear market 20% decline maybe three times in a decade. This is just happening way more frequently than I think people realize. And it’s only like, I don’t know, maybe someone who’s new to it or hasn’t heard this stuff before that it feels shocking. I don’t know. What do you think that is? Because people say this stuff as if it’s like this thing that’s coming that isn’t supposed to happen.

Reese Harper: I’m going back to what I was saying earlier. I just think that people in their own practices, if you said you have a 10% decline in collections, how often should that happen over a long period of time?

Ryan Isaac: Yeah.

Reese Harper: On a monthly basis. Well, a lot of people are in growth mode. A lot of our audience is a little bit tainted because some of them are in hyper growth mode.

Ryan Isaac: Little skewed, yeah.

Reese Harper: Okay. But on average, if you take all dental practices across the country, do you think that the average dental practice is always increasing its collections every year?

Ryan Isaac: Right.

Reese Harper: No, it’s not.

Ryan Isaac: Yeah.

Reese Harper: I mean, on average over a period of time fees will gradually go up. And that is expected. But you are going to have 10% corrections in collections. You’re going to have 15% declines in collections over short periods of time. You might recover by the end of the year and get back to a break, even. Talking about monthly collections here. I mean, the stock market’s graded on a daily basis. Earnings reports are coming out all the time each quarter. I mean, it’s getting graded every day.

Ryan Isaac: Okay.

Reese Harper: Because people don’t have the price of their practice reflected back to them on a daily basis, they don’t feel the same way about it.

Ryan Isaac: Yeah. You don’t know.

Reese Harper: And they’re … The same thing with your house. It’s the same thing with gold or bullion or collectables or artwork or-

Ryan Isaac: Your first point. It’s not priced every second by millions of people.

Reese Harper: It’s not priced every second.

Ryan Isaac: Yeah.

Reese Harper: And consequently, I’m just telling you, it’s lying to you. Okay? It’s lying to you.

Ryan Isaac: It’s withholding the truth.

Reese Harper: It’s lying.

Ryan Isaac: Again, something to use in life. Okay. I didn’t lie, I withheld the truth. I just didn’t tell you everything.

Reese Harper: Okay. It’s not a lie because it didn’t talk. It’s not an animate object. It isn’t a human and it cannot lie.

Ryan Isaac: It doesn’t have feelings.

Reese Harper: I get that. Just go with my analogy here.

Ryan Isaac: Okay. I got it. I got it.

Reese Harper: People-

Ryan Isaac: Lying.

Reese Harper: I just feel like it’s important to acknowledge we don’t like the truth thrown at us so often.

Ryan Isaac: It hurts.

Reese Harper: In relationships, in wellness, in food.

Ryan Isaac: Every second of the day you’re like, “Tell me what’s wrong with me.”

Reese Harper: Yeah. I would just be like, “What do you now like about me?”

Ryan Isaac: The old gut punch. Punched in the gut.

Reese Harper: Hurts constantly.

Ryan Isaac: Rib shot. Rocky II. [crosstalk]

Reese Harper: The few complements don’t really help the fact that the rest of it’s negative.

Ryan Isaac: No.

Reese Harper: Doing a presentation on like five to one, you’re supposed to do five positives to every constructive criticism. I’m like, that just doesn’t seem to be happening in my life.

Ryan Isaac: It’s reversed.

Reese Harper: I think it’s like one to five.

Ryan Isaac: One to five in reverse.

Reese Harper: Yeah. Like if I get beat up five times, then one person says something nice.

Ryan Isaac: Okay. Let’s talk about some of the numbers here. I think that’s the first point I want to make because maybe if you’re a younger investor or just starting out, which seems to be most … Most of the conversations I have are with people who are investing maybe for the first time in their lives. They’re putting their first bulk of money from practice checking into an investment account.

Reese Harper: Got it.

Ryan Isaac: When you hear there’s a 20% correction coming or a 20% bear market coming, that seems shocking.

Reese Harper: Yes.

Ryan Isaac: The point being these things are not flaws and bugs in the system. These things are features of the system.

Reese Harper: They’re features of businesses. They’re features of-

Ryan Isaac: It’s Universe 101.

Reese Harper: This is like features of the way businesses are built.

Ryan Isaac: Okay.

Reese Harper: Some practices decline and you buy them out for a song and a dance, and some practices are hyper growth. All practices combined collectively might be going up every year, right? But there’s a lot of volatility that happens-

Ryan Isaac: And that can be shocking for people.

Reese Harper: Industry wide. Right? And in business markets. Think about the stock market. Paper becomes less relevant and people start not buying newspaper and then media sources change and then technology. Like right now, Apple, with their new iPad announcement. There’s probably going to be more iPads sold than MacBooks in the next couple years.

Ryan Isaac: Crazy. I haven’t seen it yet. Don’t spoil it.

Reese Harper: It’s like there’s … Markets change. Laptops are dying. They’re just too big now. They’re too bulky. I mean, I still use one and a lot of people will in business functions. But man. I mean, people are only using their phones.

Ryan Isaac: You ever see the guy at the airport with the black ThinkPad?

Reese Harper: You’re like, “Dude. How did you haul that there?”

Ryan Isaac: Like the company you work with is still issuing it.

Reese Harper: It’s robust.

Ryan Isaac: You got to be honest. It is robust. Okay. That’s point number one. Point number two, let’s talk about some of the numbers of how hard it is … Well, where the return comes from. Returns in this asset class come from really short verse. Right?

Reese Harper: Super short verse.

Ryan Isaac: Okay. From-

Reese Harper: And the declines come in super short verse, too.

Ryan Isaac: Yes.

Reese Harper: Yeah.

Ryan Isaac: Okay. Which makes this all even harder. Let’s start with January 1980, year of our Lord. 1980.

Reese Harper: Okay.

Ryan Isaac: Okay. Best year of my life because that’s when mine started.

Reese Harper: Okay.

Ryan Isaac: All right. Through July of 2018. We’re talking almost 30 years. 30 years of data. If you had invested in the S&P 500 since 1980 until now, your annual return on average would have been 8.81%. If you had missed ten days out of that period of time, which is like .001% of the time-

Reese Harper: Okay.

Ryan Isaac: Very minuscule point of the time. Ten days. Your return would have gone from 8.81 down to 6.77. You’re talking about a 2% decline from missing ten days of that period of time. Now, 2% might not seem like a lot. Maybe it does to somebody. When that’s used in compounding for big numbers of accounts-

Reese Harper: The hard part is, I bet some of those days came in consecutive days, or like really close to each other.

Ryan Isaac: Sure.

Reese Harper: Because that’s-

Ryan Isaac: There weren’t spread out evenly.

Reese Harper: Yeah. These aren’t like-

Ryan Isaac: The ten back.

Reese Harper: It’s like , here’s the point that you’re-

Ryan Isaac: You want me to finish one more statistics?

Reese Harper: Yes. One more.

Ryan Isaac: I was just going to say, if you miss the best 30 of that entire 28 year period, your return is cut in half. It’s now 4.24%.

Reese Harper: Yeah. This is why most academics … If you go look at … Go read from the University of Chicago. Look at University of Dartmouth. Look at Kenneth French. Look at Eugene Fama. These are some of the most well respected stock researchers. Look at companies like Vanguard. Look at companies like Dimensional Fund Advisors. Look at these academically rooted index fund providers. They have ample amounts of data on this. They’re conclusions are … You have two choices. All right? You can get incredibly, either … You can either be incredibly lucky on the upside, incredibly lucky on the downside, incredibly lucky period. Or you can embrace the fact that you can’t miss out on those 10 to 30 days. You can’t miss out on those 10 to 30 days.

Ryan Isaac: Just accept it.

Reese Harper: Or your returns. This is what we see. Me and Ryan see this all the time. Meet someone new. It’s like most likely, if they’ve been self directing, there has been a point in time at least once, and be really honest with yourself about this, in your own life, have there been extended periods of time when you were unwilling to have your money exposed to the market and it was sitting in cash? Whether you just didn’t invest it because you were worried, or you actually liquidated your existing investments and went to cash. It’s the same. Your unwillingness to fully expose your portfolio at all times to this very honest trustworthy not lying-

Ryan Isaac: As opposed to the dirty, filthy, lying assets out there.

Reese Harper: I don’t know. I think everyone should have a balance of real estate and qualified plans, liquidity and all that stuff. Today’s argument. I love real estate for a lot of reasons. Mostly because it’s fun.

Ryan Isaac: And I live in it.

Reese Harper: And it’s really nice and you like it. Not all.

Ryan Isaac: And I have a pool.

Reese Harper: Primary residence excluded, okay? There is no … You’ll never make money in your own house. You just … Not if you’re honest about it. Okay?

Ryan Isaac: All right.

Reese Harper: Back up.

Ryan Isaac: Another podcast.

Reese Harper: The point is, I just think that you’re highlighting this really, really difficult issue which is I want to not go through this downside, but how can I possibly get a higher expected return if I miss these 10 to 20 days a year?

Ryan Isaac: Well, let me give you some-

Reese Harper: Over a 30 year period.

Ryan Isaac: 30 year period of time, man. Let me give you some more statistics, okay? If you just look at holding … Again, this is a US stock based portfolio. I’ll just give you a few here. If you held it for-

Reese Harper: Which we do not recommend, by the way.

Ryan Isaac: That’s not-

Reese Harper: It should be global.

Ryan Isaac: Yeah. That’s not a diversified portfolio. It’s-

Reese Harper: But we can’t get data easily on that. This is just if you’re US, okay?

Ryan Isaac: Yeah, so chill out. Okay? Just chill out a little bit. Let us be US investors.

Reese Harper: Let us just be unbalanced and have a bias here.

Ryan Isaac: Okay. If you held a portfolio of US docs for five years, you have positive returns about 91% of the time. In a five year holding period. At a three year holding period, you have positive returns about 85% of the time. Seven years, it’s like 95% of the time. Ten year periods of time, this is rolling data for like the last hundred years, it’s like 97% of the time. A ten year hold is positive. 15 and above, they’re all positive. What does that tell us then?

Reese Harper: Well, it tells us one thing.

Ryan Isaac: I think it tells us a lot.

Reese Harper: Do not start investing in the year 2000 to 2010 because that’s when you were in the 3% bad time.

Ryan Isaac: You were in that. That small-

Reese Harper: Don’t go in at the top of the tech bubble and leave at the bottom of the real estate crisis.

Ryan Isaac: So just know when that happens. Yeah. Just know when that’s going to happen. You’ll be okay.

Reese Harper: But if you held out for five more years and just kept going till 2015, you’re actually in pretty good shape.

Ryan Isaac: Okay. Those are some of the numbers. And here’s what I want to talk about next, the emotional cost. We just went through some of the financial costs of this. I want to talk about the emotional cost. One of the big benefits … You’re banging your head on the microphone now.

Reese Harper: The emotional benefits.

Ryan Isaac: This asset class, here’s what it’s supposed to be. It’s supposed to be one of the highest returning asset classes for how hands off it is, too.

Reese Harper: Yeah.

Ryan Isaac: The barrier to entry, the cost of operating it, and the cost to outsource it completely so you never have to think about it for the next 20 years, plus the return you get, it’s supposed to be one of the out of sight, out of mind asset classes out there.

Reese Harper: Yeah.

Ryan Isaac: The best for the return.

Reese Harper: Yeah.

Ryan Isaac: But when you start getting more involved with trying to time the markets, what’s the emotional toll of this that you’ve seen? I know you’ve seen people go through that.

Reese Harper: It’s not worth it, man. It’s just not worth owning, if that’s the way you want to own it. Go do real estate.

Ryan Isaac: Go do something else.

Reese Harper: Go start another company. Just save it in cash in the bank.

Ryan Isaac: Because you’re just blowing the whole point of it.

Reese Harper: Put it in bonds. At least, just put it in bonds, then.

Ryan Isaac: Yeah.

Reese Harper: I mean, bonds give you the same liquidity that stocks do.

Ryan Isaac: Also, not an official recommendation. Okay?

Reese Harper: Not official.

Ryan Isaac: All right. Chill out.

Reese Harper: I’m just trying to hedge a little here. Compliance is probably going to cut all of it out.

Ryan Isaac: They were here. They were just here. Signed a bunch of stuff.

Reese Harper: I would say you might as well just be in something more conservative if you’re going to live that way because there’s a huge emotional cost. I think it takes years out of people’s lives. It’s a big deal. Now, I think with a little … Here’s the example that I’d give. This morning I was at the gymn. I didn’t want to go.

Ryan Isaac: Props to you.

Reese Harper: But I was there. I went in. Me and Matt sat down. He told me … I told him a story. I told him a story.

Ryan Isaac: Buckle up, kids. Here we go.

Reese Harper: I said, “Matt.” I said, “There’s a lot of commonalities between a personal trainer and a financial advisor.”

Ryan Isaac: He’s like, “Stop working for 90 minutes, Reese.”

Reese Harper: He’s like, “You got to get back to your … You’re just missing your set.” I’m like, “Matt, calm down.”

Jenny: Sit down and listen.

Reese Harper: “Let me teach you. We’re going to have to go through this.”

Ryan Isaac: We’re going to have to spit a spell.

Reese Harper: No, but he actually taught me something. He said … We were talking about how it’s really difficult sometimes for people to learn something new and be-

Ryan Isaac: Uncomfortable.

Reese Harper: You know, do something new. And he just said … He gave me a horse race analogy, which I respected.

Ryan Isaac: Thanks, Matt. Shout out to Matt at Xcel.

Reese Harper: And Matt said there’s like four types of horses. Says you’ve got a horse that’ll just-

Ryan Isaac: I would have thought there was more, to be honest.

Reese Harper: They’re in a race.

Ryan Isaac: Okay. All right. Oh, okay. Okay.

Reese Harper: If you’re in the Triple Crown, there’s a few variety of horses that run the Crown. One can run like crazy and just be really vicious. They don’t even need a jockey and they would fly down the track.

Ryan Isaac: Okay.

Reese Harper: All right?

Ryan Isaac: All right.

Reese Harper: Then you get the horse that needs a jockey. It wouldn’t run.

Ryan Isaac: It wouldn’t prefer to run that race.

Reese Harper: Yeah. No, it doesn’t have the motivation. It’s like, “Hey, you got to get going. You’ve got to run.” And then the third horse, you have to have the jockey and a whip. It needs to be whipped a little.

Ryan Isaac: Yeah.

Reese Harper: And the fourth one is a horse that you’ve got to give some crazy feed in advance and a whip and a jockey.

Ryan Isaac: And some caffeine or something.

Reese Harper: A Red Bull.

Ryan Isaac: Little shot.

Reese Harper: Or it won’t go.

Ryan Isaac: Okay.

Reese Harper: Not everyone’s the same. And investors aren’t all the same. Some of them need different prodding. Some of them need coaching. Some of them need a little bit of tough love. Some of them need to just be … Some of them will just run down the track and you don’t need to do anything. They need no one. I just think it’s important to know where you stand because I couldn’t get into shape without a physical trainer. I’m pretty confident that without human accountability in my own life, almost nothing would happen. I’m very responsive to human input.

Ryan Isaac: Some things would happen.

Reese Harper: But I’m not very responsive if I don’t have another human. We’re better together. I like working with humans. I don’t like being isolated. I don’t want to be on an island. I like having human interaction. It helps me perform at a higher level. The stock market is a really, really difficult thing to tackle on your own because it’s more like working out than it is buying an … It feels easy to just be like, “I’m going to buy an index fund. I’m just going to go and buy.” It’s online. But there’s nutritional apps online. There’s like tons of physical … I could’ve done so many things online. I don’t need to pay for a physical trainer. I don’t need to. I literally have like tons of gymn equipment at my house. Tons.

Ryan Isaac: Yeah.

Reese Harper: I don’t use it.

Ryan Isaac: Well, you’re-

Reese Harper: I need a human.

Ryan Isaac: Yeah. You’re getting to this point where we have more resources at our disposal then we’ve ever had both for health fitness, that kind of stuff, de-stress, whatever, balanced life, and for financial tools. In both of those areas in this country, we’re not heading in better directions.

Reese Harper: No.

Ryan Isaac: We’re not getting healthier and we’re not getting more financially responsible.

Reese Harper: Worst savings rates. Dentists are retiring later. Their overall net worth growth-

Ryan Isaac: Two thirds of our country have weight problems.

Reese Harper: Yes.

Ryan Isaac: And associated health problems.

Reese Harper: I just think human interaction is critical to managing the stock market for most people. Not everyone is that horse that can run without a jockey.

Ryan Isaac: Yeah.

Reese Harper: It’s tough.

Ryan Isaac: Props to that horse. You’re getting at … The question was, what’s the emotional toll. When you see someone … Take two clients. One of them’s like, “Yeah. I don’t know. This is 20 year in money. I’m just practicing. I’m living life. I understand what I got to go through for 20 years in order to have the expected return later. We build a good portfolio. I save money. I save 20% of my income in it, and I don’t think about it.” Versus the person who’s really trying to take more control. He’s trying to push those crosswalk buttons, push the Door Close button. I’m trying to have more control because it feels crazy to feel like something’s coming. All these people are really smart and they’re saying something’s coming, so why would I sit around. I want to do something about it. What’s the emotional difference in both psyches? I mean, the stress level is different. The attention span is different.

Reese Harper: Well, one is like a part-time job. If not, a full time job.

Ryan Isaac: Well, they are full time jobs. And they’re some of literally the smartest people on the planet are filling those full time jobs, running funds, and teaching in universities.

Reese Harper: Yeah. What you’re saying is, what’s the emotional toll between the person that wants to push all the buttons and the person who’s not. I think that some … I’m glad that there are both types out there.

Ryan Isaac: Well, the market literally needs it.

Reese Harper: I’m glad there are both types. The market needs-

Ryan Isaac: Yeah. That’s how it works.

Reese Harper: … an opinion about Facebook. It needs an opinion about Google. If it’s your job, right, if it’s your job to try to have an opinion about when to get in and get out of the market, that’s your full time job, that job exists. For some use cases, some customer types, namely hedge funds, namely large institutional investors who that type of asset class, there is a place for that type of work. I’m not saying it doesn’t have a place. I’m just saying it is statistically not a good bet to make. Okay?

Ryan Isaac: Yeah.

Reese Harper: It’s not a statistically valid bet to make that you can understand when to entirely leave a market or not and just go to cash or weight. That is a bad … Even many active managers who pick stocks and who look at macro transient and have sector rotation strategies, many of them don’t believe in exiting markets to cash.

Ryan Isaac: Yeah.

Reese Harper: Even the most sophisticated market timers because they’ve been burned so many times when economic circumstances are just not quite the same as what their prior forecasting models or their historical experience was. This time is a little different and it just burns them.

Ryan Isaac: What do you think is harder to do, getting out of a market or getting back in the market?

Reese Harper: This is easy. Getting out is super easy because you’re taking risk off the table when you get out. Getting back in is much harder because the point you get back in is when you have to take the risk again.

Ryan Isaac: Back on.

Reese Harper: And putting risk on is way harder than taking risk off the table.

Ryan Isaac: Good. Okay. To that point, okay, so I did a little experiment prepping for this show. I wanted to see … In hindsight, we know when the bottoms are in all these things, right? That’s easy.

Reese Harper: Yeah.

Ryan Isaac: I went back and I used … You can go to Google and you can find news articles over exact periods of time. So I went back to March of ’09, which was the bottom of the horrible crisis, you know, when we decided to start this lovely business.

Reese Harper: Yep.

Ryan Isaac: Right in the beginning. Let’s just start it right then.

Reese Harper: I knew it.

Ryan Isaac: You timed it perfectly.

Reese Harper: I knew it was the bottom, except it was technically November of ’07 when we started it.

Ryan Isaac: We knew when we began this.

Reese Harper: But we were close, except we started at the peak.

Ryan Isaac: We were a year and a half off. Yeah. We started right at the beginning. I went back to news articles. I just went back and searched March of 2009 news articles around economy, stock market, should I invest. Here’s the headlines. Okay. I mean, there’s hundreds of these things.
Warren Buffet to CNBC, “Economy Has Fallen Off a Cliff. The DOW’s Buried Six Thousand and Under.” That’s CNBC.com. “How Low Can Stock Markets Go?” That’s Forbes. “In Dire Straits, the Urgent Need to Improve Economic Statistics,” from the Brooking Institute. “Investing in a Depression,” from Forbes. “Stocks for the Next Great Depression,” Motley Fool. “When to Sell Your Stocks,” Forbes. “Newspapers Fold as Readers Defect and Economy Sours,” CNN. “Don’t Catch Falling Knives,” Forbes. The only good one out of this whole period of time … You know the phrase “Thanks, Obama” where everyone’s like, “Thanks, Obama.” Obama on Politico, “Buy Stocks Now.”

Reese Harper: Obama said that?

Ryan Isaac: Yeah. Obama says that in March of 2009 on Politico. “Buy stocks now.” Thanks, Obama. #ThanksObama. Okay. Here’s my point.

Reese Harper: Were all of these from ’09?

Ryan Isaac: Yeah. This was March of 2009. My point has always been there is nothing in the news or in the world around you that would encourage you or give you any hope that now is the time. The good news is three years after the good time was.

Reese Harper: Yeah. It’s always after the market has had a chance to make sense of the data.

Ryan Isaac: And get back. And then the good news is reported like three years too late. I’ve always thought about that, so that was really interesting to go back and go, “The bottom was then.” There is nothing the investor would’ve taken encouragement or help from.
Let me ask you a question then while we’re on this subject of emotional toll and people trying to call their shot. Do you believe, because I know you’ve had these conversations, do you believe that people can set and stick to rules? Everyone will say, “Well, I’ve got a 15% threshold. I’m out.” But when it hits 15, you’re laughing because, and I’m laughing in my head, because I’ve sat in these conversations where I’ve heard this and when it passes 15, they still haven’t done anything. These are smart people.

Reese Harper: Individual investors do not often-

Ryan Isaac: Unless you are a computer.

Reese Harper: Well, boards-

Ryan Isaac: But then you’d be overridden by a human.

Reese Harper: Boards of multiple professionals, yes. If you’re a professional institution like the Yale Endowment and there’s like legal accountability to you sticking with your rules-

Ryan Isaac: Because it was in writing written up by attorneys.

Reese Harper: And if you don’t, you’re going to get fired. People stick with that all the time.

Ryan Isaac: Okay.

Reese Harper: Because that’s not even like … There’s zero emotion.

Ryan Isaac: Do you believe in a dentist’s ability to stick to his declined rules?

Reese Harper: Never.

Ryan Isaac: Okay.

Reese Harper: I mean, I would love-

Ryan Isaac: I don’t either. I’m sorry, you know? No offense.

Reese Harper: I’m going to meet that listener. I’m going to meet that listener. He’s going to be like-

Ryan Isaac: “I did.”

Reese Harper: “I didn’t see my rules. I’m the genius that you guys have never met before.” One thing that I think is really important that I noticed in my own emotional and time experience, okay, is I found that for legal reasons and compliance reasons, I had to physically click some buttons to make my own personal accounts, take my cash, and invest it into our portfolios that our firm uses for like all of our clients. My accounts were being traded in a different legal and compliance bucket than our client accounts. All going into the same funds and the same portfolios. But it was a separate physical process that I had to go through to actually trade my own money. And I found myself over an extended period of time not actually-

Ryan Isaac: Getting to it.

Reese Harper: Getting to it. It would just kind of be like you know most of my money’s invested. Most of it’s … But there’s-

Ryan Isaac: Fairly balanced.

Reese Harper: I have two or three months of auto deposits that are piling up. Sometimes four months. I just wouldn’t physically take the time to go and allocate the money. What I found was that over a long period of time my personal returns were lagging our client portfolios, even though we were invested in the same stuff.

Ryan Isaac: Because you were involved in the same process.

Reese Harper: It’s just I had more cash than they did. It was just like I wasn’t following the same rigid trading processes. It wasn’t because I was unwilling to do it. It was just a time factor.

Ryan Isaac: Yeah. More important things came up.

Reese Harper: I think sometimes if we look at this issue of markets and emotions, even … I don’t know that it’s always emotions that make us not do a good job with our own money. Sometimes it is the time factor.

Ryan Isaac: It’s just like all the tasks that have to get done, they’re not as important as other things.

Reese Harper: Yeah. I guess to summarize it, if you’re the type of investor that’s sitting on large or even disproportionately high amounts of cash in your accounts or in your practice checking and it’s not being invested and you’re not investing it because it’s like well, I don’t want to pay a financial advisor because then I would have to pay for them to do that. You’re eating up a lot more money in opportunity costs by not investing your cash than you would ever pay to a financial advisor who would at least follow a rigid process and do it for you.

Ryan Isaac: Okay. I know you’ve had these conversations over the years where someone has a set rule on what they’re going to get out and get back in. And you talk to them after the fact and they didn’t follow the rules. Right?

Reese Harper: Yeah.

Ryan Isaac: There’s this author and he’s a professor, really popular guy, Dan Ariely.

Reese Harper: Okay.

Ryan Isaac: Written a lot of really cool books on human behavior and psychology, especially in finance and money. He says … I found this quote because I was thinking about that and these rules, how we set them and we’re like really adamant and passionate. We’re like, “When it drops 15, I’m back in.” You know? But then we don’t do it. People don’t do that. They don’t stick to it. He said, “We’re storytelling creatures by nature and we tell ourselves story after story until we come up with an explanation that we like and that sounds reasonable and good enough to believe.”

Reese Harper: Yeah.

Ryan Isaac: And then that’s what we do. It reminded me of conversations I’ve had with clients and friends that have really strict rules, but then they don’t get followed. But then there’s a story that was a really rational story of why it didn’t get followed. You know? I’m going to get in when the market hits 10% down. But then the market goes 12% down and the news is still bad and they’re like, “Well, clearly the news is still bad. We’re going to go with 15.” And then it hits 15 and they’re like, “Well, the news is still bad. We’re going to go at 17.”

Reese Harper: It’s human nature.

Ryan Isaac: It’s just hard to do.

Reese Harper: Well, and I don’t think we want to … It’s uncomfortable to admit our own fallibility, our own weakness, our own lack of competence. When you … I was just talking to my son last night about he was unwilling to practice his piano and he wanted to go with his friends to a movie.

Ryan Isaac: Yeah.

Reese Harper: When I gave him pushback on the fact that he didn’t practice his piano like he said he would, his pushback to me was like, “Well, I’m like already really good at it. I already know all this. I already know this song.”

Ryan Isaac: Same conversation last night with my daughter.

Reese Harper: I’m like, “Well.” I’m like, “Play it for me then.” And he just slaughtered it. It was like an absolute mess, right?

Ryan Isaac: Not slaughtered in a good way.

Reese Harper: No, it was like … It was not-

Ryan Isaac: Not brilliant slaughtered that. It was a slaughter. It slaughtered him.

Reese Harper: That’s an exaggeration. He played it above average, okay? But it was like … There was a lot of-

Ryan Isaac: Because his dad’s a musical prodigy.

Reese Harper: But there’s a lot of gaps in it. There was a ton of gaps in it and he knew it. When I called him on it-

Ryan Isaac: If I had heard that song, it’d probably sound pretty good.

Reese Harper: When I called him on it, then he started making all these reasons for why it wasn’t good. Like, “We just moved, Dad. Our house is a wreck.” Or, “The piano’s not even tuned.” You know?

Jenny: It’s all your fault.

Reese Harper: And I hope he listens to this one day, –

Ryan Isaac: He will one day.

Reese Harper: Okay.

Ryan Isaac: These are his bedtime stories.

Reese Harper: It is human nature for us to justify why something happened the way it did.

Ryan Isaac: And we’re so good at it, though. It’s like Ariely said. We’re good story tellers.

Reese Harper: We don’t want to just say … You know. This had been the truth is, “It’s actually one of the more boring parts of my day, Dad. I don’t like it.”

Ryan Isaac: “I don’t want to be here.”

Reese Harper: “And I don’t want to practice. In fact, I would rather just play with my friends all the time.”

Ryan Isaac: “And I know it’s not good.”

Reese Harper: “And I know it’s not good but I don’t care.” Yeah. That’s it. And then it’s like, hey, now we’re admitting to the reality here.

Ryan Isaac: Yeah.

Reese Harper: That’d be healthy. When it comes to stock markets and investing in hindsight and trading, too many people in hindsight will say the following, “You know, I know it’s really hard to time markets. But-”

Ryan Isaac: But.

Reese Harper: But.

Ryan Isaac: Here it comes.

Reese Harper: “In ’07, I was just sitting there and I could start to feel this just isn’t right. This is not going to go. This can’t keep happening. This is too good.”

Ryan Isaac: Unsustainable.

Reese Harper: “This is unsustainable, so I didn’t do it.” Now, is that really what happened? Or is that the way you see it in 2018?

Ryan Isaac: Yeah.

Reese Harper: Because the truth might be, “I didn’t really have any money to buy property anyway. I was illiquid. I-

Ryan Isaac: But I remember thinking these things.

Reese Harper: “But I remember like having a little bit of the thought about it’s kind of crazy how my friends are making a ton of money in real estate. I wish I could.” Because you didn’t have any cash you didn’t-

Ryan Isaac: There’s no money.

Reese Harper: … buy anything. And then ten years later, you’re looking back and going, “I saw it coming and that’s why I did it in 2011 or 12.” I bought it at the bottom.

Ryan Isaac: Yeah.

Reese Harper: But did you? Or is that just when you had the liquidity and it makes sense at that point?

Ryan Isaac: It wasn’t a strategy.

Reese Harper: I think the truth about most people in timing is that we invest when we have the money.

Ryan Isaac: Yeah. We buy practices. You buy dental practices when you have the money and it’s time to buy one. You buy that primary residence you know is a little bit expensive in the city.

Reese Harper: That is a good plan.

Ryan Isaac: Yeah.

Reese Harper: If you have the money and you’re financial situation is diversified and you have an excess amount of money to then place into another investment that makes you even more diverse, do it at the timing that all of those stars align. And don’t try to wonder if what you’re buying at that time is priced perfectly. I know for a fact that I’m not buying real estate at the optimal time whenever I buy it. It’s not ever the optimal-

Ryan Isaac: I’ve never done it right.

Reese Harper: It’s never the optimal day.

Ryan Isaac: Yeah.

Reese Harper: I mean, it might be a general range.

Ryan Isaac: Man, I haven’t gotten it right.

Reese Harper: But I mean, you’re never going to get it right. But if you’re holding it for 15 years and that’s the amount of time you can actually hold it for because that’s your holding period. Every investment you make you should actually have a time frame associated with it. As long as that time frame will allow you enough time to get what Ryan was giving you earlier, the statistics about positive expected returns, whether it’s real estate, gold, crypto currency doesn’t have enough data yet. Okay. But stocks.

Ryan Isaac: Calm down.

Reese Harper: Bonds, business ownership. You’d never start a business and be like, “Is this-

Ryan Isaac: We’ll see how it goes.

Reese Harper: “If this thing’s not working in 90 days or a year, I’m bailing.”

Ryan Isaac: Yeah.

Reese Harper: I mean-

Ryan Isaac: What if there were buttons to push? I mean, I’m convinced that if there was a dental sell app, buy and sell app, and when the office manager quits or the basement floods, they’d pick up the phone and be like, “I’m going to be Associate. Boom. I’ll just buy this thing later.” We would buy and sell day trade our practices, too.

Reese Harper: If there was a very, very highly liquid market, even if it was discounted, even if it was a discounted market, we could literally push a button-

Ryan Isaac: I know the stress would drive someone into it.

Reese Harper: THey’d be like, “Dude, I’ll just take the few hundred grand, as long as I could just not work for like three months and just take a break. I want to go to the Caribbean.”

Ryan Isaac: Or I just don’t want to do any HR right now.

Reese Harper: Yeah.

Ryan Isaac: I don’t want to deal with it.

Reese Harper: I don’t want to deal with this.

Ryan Isaac: We wouldn’t be here.

Reese Harper: Push button. Push button.

Ryan Isaac: We’d be heading the same way. All right. Reese, we’re going to do a little bit of lightning round for a minute here. I’m going to give you two scenarios, okay? Client wants to just time the market, wants to get out for whatever reason.

Reese Harper: I get a phone call and they want to go all cash.

Ryan Isaac: They’re like, “Look, I heard this person speak and for X, Y, and Z reasons I trust them.”

Reese Harper: Yeah.

Ryan Isaac: “And it sounds reasonable to me. I want to do this.”

Reese Harper: Which is happening like 30 times a week right now.

Ryan Isaac: It’s a lot, to our clients. But I mean, to be fair, here’s the thing though. People are just beginning their investing careers right now. Even though we’ve been in this “bull market,” we just did a podcast on what that even is supposed to mean, these things happen. It was 2015, just a few years ago, the same sentiment, the same conversations. And then it was like 2013 was a huge year. And then 2014, everyone was worried about it. 2011 these same conversations happened.

Reese Harper: Yeah.

Ryan Isaac: These aren’t like … This isn’t new. It just feels new maybe recency bias, if someone’s just beginning. All right. A client wants to do this and they actually do it on your … I don’t know if they pull it off on your watch or not. Okay. But they do it. Someone does it. What if they’re wrong? What are you worried about if someone gets the timing of this wrong either on getting out or getting in or both? What are the costs that you’re most worried about if someone gets it wrong?

Reese Harper: Well, the primary one is I’m worried about lower long term returns.

Ryan Isaac: Okay.

Reese Harper: Because I don’t believe that I can know which 10 to 20 days I’m missing over a 30 year period that are going to cause returns. Instead of being eight to eight and a half percent, I’m going to be at six or five and a half or in the fours.

Ryan Isaac: That makes a big difference in planning.

Reese Harper: I don’t want to take that risk. I know that as long as I just get the time frames right on every dollar invested, like every dollar you put in, I know I got 15 years, if it’s been in the stock market. If you don’t have that long of period of time, I’m going into fixed income, and I’m going into bonds, and I’m trying to keep to more conservative, I’m worried that they’re going to have lower expected returns.

Ryan Isaac: Okay.

Reese Harper: That’s one of the biggest ones. I’m also worried that we’re going to have a tax bill that’s going to hit their income statement and we’re going to like sell off and pay capital gains taxes. The combination of the capital-

Ryan Isaac: Or short term gains in ordinary income.

Reese Harper: The short term gains because I haven’t held it for longer than 12 months. And then I’m also worried about the psychological precedent that that sets. That every time we feel that something bad’s going to happen that we just go to cash.

Ryan Isaac: Okay.

Reese Harper: I don’t want that psychological precedent happening because it’s bad behavioral psychology to develop. Because you’re going to feel that way … If you do it, did you feel it that way again and again.

Ryan Isaac: Well, this goes back to what we were saying at the beginning. This is happening really frequently. That’s too frequent to do this every time.

Reese Harper: Exactly.

Ryan Isaac: I was going to add on the emotional side of that, I would worry that people get it wrong and then they get to a point where they’re really disillusioned with the system, that they hate the stock market.

Reese Harper: That they hate it. Yeah.

Ryan Isaac: It’s a rigged system and people can’t win and therefore then they kind of just do random things with money for the rest of their career. And they get so discouraged by that experience that they won’t try again.

Reese Harper: Yeah.

Ryan Isaac: I worry about that. Okay. The other scenario. What if a client times a market … And you’ve met people, and we’ve met people who got something right at some point.

Reese Harper: Yeah.

Ryan Isaac: What if they get it right? What are you worried about if someone gets it right?

Reese Harper: Well, I got it right a few times. Like early on in my career when I was like believed in market timing. I believed in it early in my career, like in my early 20s. I actually felt like if I learned enough and I studied hard enough and I was just smarter than all these lemmings out there that are just not … They’re just brainless. That’s what I thought. All these market participants are just stupid.

Ryan Isaac: Yeah.

Reese Harper: If I know more than them-

Ryan Isaac: Than you can do something about it.

Reese Harper: Then I will be able to-

Ryan Isaac: [crosstalk] charts.

Reese Harper: Yeah. I mean, technicals.

Ryan Isaac: I used to believe in charts, technicals.

Reese Harper: It was a combination of different asset classes. I really … I didn’t ever fully embrace it. It always felt a little wrong to me. It felt like a more natural belief because I would go meet with the people that were … Even when I first started my business, started in the industry, it was 2003, 2004, the people that were actively trading, their language was so intimidating. They’re brilliant people. I mean, there’s like, for example, American Funds is a fund family that employs a lot of very brilliant people. I went and had an in office meeting in their office in LA and I met with a neuropsychologist.

Ryan Isaac: Yeah. That’s my argument all the time, how smart some of these people are.

Reese Harper: Like rocket scientist. And they’re like assigned sectors.

Ryan Isaac: No, literally rocket scientists.

Reese Harper: Yeah.

Ryan Isaac: People joke this isn’t rocket science, but there’s rocket scientists in the financial industry.

Reese Harper: And it’s often-

Ryan Isaac: Building like computer models.

Reese Harper: It’s often one of the places that these investment funds hire from. So when you hear these guys-

Ryan Isaac: Like NASA candidates.

Reese Harper: … walk through their understanding. They’ll break down Amazon to the point where you just feel like this guy must … He’s a genius.

Ryan Isaac: He must make-

Reese Harper: He knows like everything about Amazon.

Ryan Isaac: Yeah.

Reese Harper: Like from top to bottom.

Ryan Isaac: Yeah.

Reese Harper: From their supply chain to their marketing programs.

Ryan Isaac: I just know Jeff Bezos is working out lately. That’s all I know.

Reese Harper: Yeah. But it’s amazing to watch that.

Ryan Isaac: Yeah.

Reese Harper: And then walk away. You just feel like how could this person not be the person I should be following.

Ryan Isaac: Yeah.

Reese Harper: Because they know so much.

Ryan Isaac: Or you look at the fund they run and you’re like, “How have you trailed index funds?”

Reese Harper: How is your performance worse, though?

Ryan Isaac: Yeah.

Reese Harper: The point is that you feel really-

Ryan Isaac: It’s shocking.

Reese Harper: The way that a lot of our dentists feel when they’re listening to a speech or maybe a really articulate financial expert talk about fundamentals and markets and forecasts and economy, I felt that before. I know how it feels. And I’ve also gotten done and then looked at the person’s actual investment track record of like how they’ve managed money and that doesn’t always correlate with-

Ryan Isaac: Which would be nice if you could do that with every speaker you hear.

Reese Harper: Yeah. In most cases, a lot of the speakers have changed their philosophy over five years. It’s like, “Well, I did this and then I did that, and then I did this.” And it’s some combination of skill and luck and timing that created, in most cases, a disproportionate outcome.

Ryan Isaac: Yeah.

Reese Harper: You know? Or a higher than average return.

Ryan Isaac: So what scares you when a client gets one of those right is that they’ll extrapolate that onto the future. Like, “I can do this now.”

Reese Harper: Yeah. And that’s my worry.

Ryan Isaac: Which leads to almost more destructive behavior than just losing some money once from timing it wrong.

Reese Harper: Yeah. Because even these smart people you’ll find is they have a short shelf life at the firms they work at.

Ryan Isaac: Yeah.

Reese Harper: They’ll have a really great experience managing or forecasting form 2006 to 2015.

Ryan Isaac: Yeah.

Reese Harper: But then they have like four horrible years.

Ryan Isaac: It dies. Yeah.

Reese Harper: There’s a lot of … There’s some really, really, really smart managers right now that in the last three to four years have just really, they’ve lost all credibility in the investment industry because of their last four years of their track record. But they had 10 or 12 awesome years. The hard part is, during the awesome years isn’t always when they had the money that they were managing. Sometimes it’s like at the end of their awesome period when they’re about to go into their four bad years that all the clients like-

Ryan Isaac: Well, that’s when [crosstalk].

Reese Harper: All we’re saying is as financial planners, the reason we hedged and kind of adopted a more market based investment philosophy that doesn’t involve timing is because it’s more predictable. It’s not letting people or humans get in the way of your returns. But it’s just capturing the returns, extracting the returns from the market that it’s going to give you if you’re just willing to exhibit patient, accurate, diversified behavior. That’s still not easy to do.

Ryan Isaac: No, no. It’s still a hard job.

Reese Harper: But if you add the factor of getting in or getting out or add that emotional kind of toll of am I getting in or out at the right time, it complicates the whole success rate significantly.

Ryan Isaac: If a dentist tells you I’m willing and able to save 25% of my income and invest it in a low cost diversified portfolio and sit on that for 30 years and just keep rebalancing and saving, you know where they’re going to end up. Right?

Reese Harper: Yes, if it’s done properly. The only thing I would say about that that kind of … We sometimes rattle that off like it’s a simple thing to execute.

Ryan Isaac: Well, there’s 400 jobs that make someone be able to save 25% of their income and build and keep and maintain a good portfolio.

Reese Harper: Yeah.

Ryan Isaac: Those aren’t two jobs that are just one and done.

Reese Harper: A lot of people say … They’ll hear this podcast and they’ll be like, “Well, that’s what I’m doing. I’m a low cost diversified global investor.” And it’s like well, actually you’re not properly diversified. You’re going to suffer from under performance. It’s not as … Your pursuit of low cost is actually costing you returns because you’re missing key segments of the market. Indexing is a whole different topic. But I’m only giving pause to that because I think that everyone wants that easy button that they can just push and be like, “Oh, I’m doing that. My money’s at Vanguard.” It’s in a target date-

Ryan Isaac: Oh, that’s all you got to do. Oh, check.

Reese Harper: It’s in a target date fund.

Ryan Isaac: Yeah.

Reese Harper: I’m in an asset allocation fund. They’re doing it for me, dude. It’s like it’s-

Ryan Isaac: And I’m saving.

Reese Harper: Yeah.

Ryan Isaac: I think.

Reese Harper: That is correct.

Ryan Isaac: It’s not that easy.

Reese Harper: You have to know indexing is not the dumb mans way towards success. Indexing properly is just as difficult. It’s just as sophisticated. It’s just a different logic. It’s a different attack on the problem. I mean, it doesn’t … You can’t be … You become more precise in how you trade. You become more precise in the index funds you’re using. Your index funds have attributes that you’re trying to seek. Your index funds are targeting specific parts of the global economy. You’re not … It’s not just like well, stock trading and picking and market timing is complicated and indexing is easy.

Ryan Isaac: Yeah.

Reese Harper: They’re both very difficult to execute. They’re just two-

Ryan Isaac: Totally getting them wrong.

Reese Harper: Different philosophies.

Ryan Isaac: All right. Reese, I’m going to leave you with a little quote here. This is Napoleon. You know the military leader, right? You know the history.

Reese Harper: Yeah.

Ryan Isaac: Of Napoleon. Big Napoleon fan. This is Napoleon’s definition of a military genius is a man who can do the average thing when everyone else around him is losing his mind. With that, if you find yourself being the horse that needs a jockey or maybe needs a jockey. I don’t know. Maybe you’re testing jockeys out.

Reese Harper: Yeah. Or you need a jockey, a whip, and a Red bull.

Ryan Isaac: Maybe you need a whip and a Red Bull. We can respect that. If you’re going through these same questions in your head, if you’re wondering, “Can I set and follow rules? Do I need accountability? Can I withstand the emotional rollercoaster of how markets work?” Give us a call. Let’s have a chat. You can book a free consultation on one of our Dental Specific Advisors calendar by going to dentistadvisors.com. Click on the button that says book free consultation. You can talk to us whenever you want. You can also call and text us. We’ve answered late night texts before.

Reese Harper: 833-DDS-PLAN.

Ryan Isaac: Join our Facebook group. You can also go in there and just post questions. We’ll jump in and answer them. We’ll have great discussions. You can join that by going to dentistadvisors.com/group or just find it on Facebook. But thanks for listening.

Reese Harper: Carry on.

Behavioral Finance, Investing