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Are you smart enough to beat the market? How do your odds in the stock market stack up against your odds in Vegas? Should your investment strategy change as you acquire more wealth? In this episode, we address the most common misconceptions about investing and how to avoid the traps that leave your future up to chance.
Tune in for the best advice on financial planning for dentists.
Reese Harper: Welcome, welcome everyone. I’m your host, Reese Harper here on the Dentist Money Show—where we help dentists make smart financial decisions. I’m here with my co-host Sir Ryan Isaac.
Ryan Isaac: Hello. Today, Reese, we’re going to talk about myths.
Reese Harper: You’re a myth.
Ryan Isaac: A myth and a legend. We’re going to talk about investment myths; you’ve written about this in the past a little bit, but I was talking in the office to one of the advisors and he brought up a good myth. Do you remember when you were a kid and you’re chewing gum, and if you’re going to swallow it—do you remember what your mom would tell you?
Reese Harper: Don’t swallow it or it will stay in your stomach forever. Your whole life. A hundred years?
Ryan Isaac: You’re ruining this. It’s seven years; that’s the myth. What about—we’ve got Thanksgiving coming up; everyone eats, lays on the couch, turns on football. They’re tired, and they blame it on what?
Reese Harper: Turkey. Food. I overate.
Ryan Isaac: You overate. People drink too much, and they eat a lot. That’s really why they get tired. But they blame it on the myth—the turkey Thanksgiving myth.
Reese Harper: No?
Ryan Isaac: You’ve never heard of tryptophan? That’s the thing—everyone’s tired and they say, “oh turkey, it has tryptophan; it’s an amino acid which produces serotonin which makes you tired and happy and everything. It makes you feel good.
Reese Harper: Okay, I thought it was the banana cream pie I ate. The whole thing.
Ryan Isaac: That’s actually the real reason; I thought that was funny. The studies show that it’s because you eat too much, and you eat mostly carbs like potatoes and bread. And a lot of people drink a lot.
Reese Harper: Rhodes Rolls, white rolls, homemade rolls, Grandma’s rolls.
Ryan Isaac: All the rolls. Interesting fact—there’s actually something you probably eat being a pizza connoisseur that actually has three times as much tryptophan as turkey, and that’s mozzarella cheese. Does pizza make you sleepy?
Reese Harper: Well I’m usually eating it at a late hour; so I’m usually tired prior to eating it and after.
Ryan Isaac: Last myth and then we can talk about the serious stuff. By the way, the gum thing isn’t even true. It’s about two days. Unless you ate like a hundred pieces of gum and it literally got stuck in your stomach and didn’t process.
Reese Harper: Okay so gum does not last in your stomach.
Ryan Isaac: It does not sit in your stomach, no. That was something our moms told us. It’s like 2-3 days.
Reese Harper: Now the second myth about the turkey?
Ryan Isaac: It has tryptophan, but it’s not why you get sleepy. You said it—you get sleepy because you just ate a ton of food. And you’re probably stressed and tired and football is on.
Reese Harper: See? I’m a myth buster.
Ryan Isaac: You are a myth buster. We’ll change the name of the show to Financial Myth Busters. Okay and the last one—this was important to me because I’m bald. But have you ever heard that you lose 80% of your body’s heat through your head?
Reese Harper: Yeah, I’ve heard that—and that’s why you have got to wear a hat.
Ryan Isaac: Do you know where this came from? This is funny. So in the 1950s, the U.S. Military did this really weak study on these guys in the Arctic where they dressed them from neck to toe—they left their heads uncovered and then studied where heat came out from. And they lost a lot of body heat through their heads because they didn’t have a hat on. So when you cover things equally, you lose heat equally. It’s the Law of Thermodynamics actually.
Reese Harper: Really?
Ryan Isaac: I don’t know if that’s true—it’s thermodynamics somewhere. So those are the three myths. Now we’re going to talk about investment myths today. I have three or four of them. The first one that we hear a lot—you hear this all the time and you see articles on this all the time. The first one would be—the stock market is gambling: it’s a casino. Myth number one of investing: the stock market is a casino, and it’s gambling and it’s 100% true. Right?
Reese Harper: Yeah that’s a huge one. We probably get that once a month maybe.
Ryan Isaac: What do you think fuels that?
Reese Harper: I think lack of information probably. I don’t think people really understand what the stock market is. To a lot of people it just feels like some big super computer that is kind of controlled by greed and Wall Street, and it’s this vague explanation. Because I hear that a lot; someone will just say something to me and assume I agree with them. You know the market? That crapshoot. I’m like—okay, well it kind of is not. It’s not gambling, but it does move up and down a lot in a pretty methodical way.
Ryan Isaac: There’s some pattern to it.
Reese Harper: There’s a very large body of academic research that proves that it is anything but gambling.
Ryan Isaac: I think it’s funny—I just always wonder when people say gambling like it’s a bad thing, it’s because we’re the gamblers—the ones losing money. But if you say, “it’s like a casino,” to an actual casino—they are probably like yeah exactly—it is a casino. It’s fantastic. Some nights and some weeks they lose money, but they know they have a slight margin on every single game. I actually have this chart of games. Here’s a little trivia—which game do you think casinos have the highest margin on? And it’s pretty bad. I’ll tell you the lowest and the highest, but you can guess. What do you think?
Reese Harper: Well I would have thought slots would have been a really bad one.
Ryan Isaac: It’s bad. It’s 5-10%. They have an advantage—they call it the “house edge.” The easier one is Black Jack; it’s like .5. The casino has to deal a lot of hands of Black Jack to make their money. Keno is 27%. You know when you’re sitting down and you’re eating a little brunch or breakfast and a little keno card comes around and you’re like, well I might as well try my hand at that. I think people get that same feeling though because like you said, they probably don’t understand what to expect from the market in the first place. They don’t understand that like a casino, they have to view that as a very long-term thing. The media, every magazine, movies, TV, all the news—it’s not a long-term thing. The stock market is daily, minute. If you turn on CNBC right now—it’s like two in the afternoon—they will tell you the After and Before the Bell Trade. We’re all trained to think of these things in short terms therefore we behave in short terms, which makes it like a casino because then over time we lose by making those kinds of decisions.
Reese Harper: Yeah, that’s a good point. I like that. I think it’s a good analogy. Overall I think when you’re gambling, you actually don’t own anything. Primary difference. You’re not acquiring an asset, and when you own a share of a company—if I own a share of Apple, I’m not gambling. I’m not speculating on its value; I’m purchasing it for an actual price that’s been agreed upon by everyone.
Ryan Isaac: It’s been appraised by millions of people that minute.
Reese Harper: Millions of people have appraised it, and I get to purchase that asset. I get to own that asset, and it can change in price just like my house. I think it freaks people out, but I’ve said this before—if somebody were to give me a price on my house every minute and second of every day, I would see the change in value on how fast that fluctuated, it would start to freak me out. People don’t get a quoted price on their house every minute. They don’t get a quote on their dental practice.
Ryan Isaac: You had five cancellations today so the value of your practice went down.
Reese Harper: Your collections are off trending this hour.
Ryan Isaac: Your hygienist quit, and so now it’s worth less than it was yesterday.
Reese Harper: But they don’t get that kind of appraisal. You do get that on a public market, which creates the liquidity. It allows you to withdraw money quickly and contribute at a specific point in time at a fair price. That appraisal system—the market, all these people that get together and say what they think a share of a company is worth is a worth benefit to people. It lets them to have access to cash at any given point in time. You can’t get that kind of liquidity out of your house or your dental practice or anything. It’s very different than gambling. Unlike gambling, the casino and the player are not agreeing upon the prophet that the gambler is going to make if he comes every day for ten years—you’re going to have a gain. He will lose money.
Ryan Isaac: Well they kind of agree on their own profit. You come here every day for ten years, we’ll agree that we’re going to make .5% on you. Myth #1 busted then: the stock market is not like a casino unless you treat it like one. How about one on market timing? You’ll hear this all the time—people will say, “I’d rather just feel it out and when I can tell things are getting bad then I’m going to pull my money out. Then I will wait, and when it gets good again I will put money back in.” Good investors should beat the market or at least try to beat the market. I always think it’s interesting if you look at the data recently just from 2008 and you see when that huge bear market officially ended the end of February or March 2009, and if you went back and looked at news articles from March 2009, I don’t think there would be anything that exciting that would make you think, “now I’m going to put my money back in.” I was looking last night at a database of articles, and it wasn’t until like 2012 when people started asking the question: is it time now? Are we okay? Can I put money back in? Which is up 140% by the time—you kind of missed the boat. Do you want to talk about that a little bit?
Reese Harper: I think that’s a great point. I seriously just had this conversation two times yesterday. So it’s really fresh on my mind. It’s so easy in hindsight—I had someone tell me that they sold a piece of property and invested some money back in the middle of this year, and yesterday they told me—and this is a pretty big chunk of money and they are getting to retirement right now. This person told me, “I had this feeling that I knew I should have waited before we invested the money from this sale of the property that they sold. I should have spoke up; I didn’t trust my gut, and now look where we’re at. I’ve lost all this money from July until October.” The point of this is the last time they looked at their account was at the end of September and that was a down period for them, so they went from July until the end of September 2015, and about half their money was in bonds and half was in equities. We made a good decision to have a portfolio that was designed for the next fifteen years, because they are barely withdrawing 3% out of this portfolio. So we’re not withdrawing a lot of money. This portfolio is down a little bit from the point they entered until now, and they are so upset because they should have trusted their gut. So I asked the question: if you knew that, why didn’t you tell me? Because as a financial advisor, I had no idea that we were going to get some Chinese economic slow down GDP and then we are going to have a pull back in the U.S. market. And did you know that the market in October is almost recovered to where it was? And they said, “oh well I haven’t seen what happened recently.” And their account was almost completely back to where it was when they entered in the middle of the year, but they really think that they’re down 10-12% and it’s over. The thing that was surprising to me was—it could have been the opposite and it could have kept going down and I wouldn’t have made any different investment decision, but it’s funny that it did recover and they didn’t realize that. But it’s also interesting that that person really did feel it and knew it was going to go down. So I asked, “If we wouldn’t have done it, when would you have called me in the last ninety days and said you want in now?” What day would it have been? And they said, “Well I don’t know it’s kind of hard to say.” I wasn’t being argumentative; I was trying to illustrate the point of how hard this is to pick it.” And they told me they didn’t know. And I asked: Would you have even called me yet? Did you know that market’s recovered, and have you been looking at that closely? This person told me—if I’m honest about it, I don’t know that I would have called back yet. And I said well, you would have had to have called me in the last nine days, because the market moved very quickly in the last two weeks, and you would have had to have picked a point where that was the right timing. And I guess the point of this whole story is that I’ve seen it be much easier in hindsight to say, “I should have done this with my investments. I should have got out at this point, should have entered here.” But you don’t have to get it right just once—you don’t have to just say, “I’m getting out.” Because that’s a little bit easier, when everything is hitting the fan. It seems easier, but you have to get it right twice. You have to get out, and you have to decide when to get back in. As you pointed out, there wasn’t even good news in the Bull Market until 2012.
Ryan Isaac: And even when there is good news, is there really even good news on TV? Even when things are going well.
Reese Harper: Not until way after the news, and in context we can look at it and say, “wow look at how good this has been.” But in the moment—that’s where people if they do treat the market like they know when to get in and out of an equity market, that really is like gambling. That’s not investing.
Ryan Isaac: I know we were kind of on this point for a little bit, but I wanted to bring up two things: what about the scenario, because I always think this is interesting. What happens when people feel that way—I can tell when they need to get out and get back in—and you actually get it right? What’s more dangerous? Getting that wrong or getting that right? When I hear those stories—because we’ve met people like that, we have friends and people you know that have guessed something right and it was a total lucky guess and they know it and you know it. But psychologically it does something to you where you start to feel like—I could probably do that again.
Reese Harper: I think ultimately getting a guess right permeates this myth that, “I am smart and I can see the future when no one else can.” And the reality is whether it’s a major economic event, a geographic catastrophe, terrorist attack—there’s a lot of things that no one can see. I mean accounting records even on publically traded companies—when you see their accounting reports on any statement that you’re reviewing, you’re going to feel like it’s incredibly clean and easy to decipher. The reality is, behind all those numbers there’s people, human errors and preparation for these statements that they have to release. And it’s really hard, and I just think people kid themselves when they start trying to make decisions about the stock market. I just think guessing and getting it right can be damaging.
Ryan Isaac: We will end on this point I found from a blog. It quoted a stat that said over the last 110 years the stock market has averaged three 5% corrections per year. So over 110 years, you have three 5% per year, one 10% correction per year, and one 20% correction every three and a half years. And his point was—good luck figuring when those things are supposed to happen. It’s so frequent on average that it’s just a hard game to play. But we will move on. The next one we hear kind of a lot sometimes is someone for the first time will be thinking about savings rate as a percentage: how much should I really save every month? I have collections and net income; there’s some money left over and they will set up a 401K and max it out. Maybe they will put their wife or husband on payroll and both max that out. And then they will think that’s enough because they fund their 401K. You’ll ask: you have net income, where is it going? Is it paying down debt? Is it just sitting in a bank somewhere? I think because of a lot of the education in finance that I read all the time will just talk about saving in a 401K or a company plan—probably because it’s written for employees a lot. But there’s this myth that that’s enough: a 401K or a simple IRA, max it out and you’re fine. Take your match; accept your match and that’s enough.
Reese Harper: So you’re saying ultimately the myth is that my plan is enough: I set up a 401K plan so I’m good to go.
Ryan Isaac: Yeah, that that’s enough savings. Do that for twenty years, and I’ll be okay.
Reese Harper: Yeah and the hard part is that in theory if you started early enough and you were putting enough in and that happened to be a high percentage of your income—that could be. Saving money is definitely not just a product of doing artificially what some plan says you can put it in as a max, right? Your 401K says sixteen five, that’s what I do, and that has nothing to do with what your savings rate should be. You need to look at your income and determine how much of that net income needs to be put away either through debt reduction—and when I look at savings rates I’m not looking at just the money that you put into investment accounts. You’re looking at if somebody earns $250,000 and at the end of the year they have had money pile up into their checking account and they put extra payments towards debt, and they have put money into a retirement account—that’s all savings rate but it needs to be measured, and you need to keep that rate at a reasonable level. It’s got to be higher usually than what the 401K minimum can provide.
Ryan Isaac: I think we have a tendency to believe that people with bigger account balances or the “rich people” get better investments, right? We have good perspective seeing clients—we have dentists getting out of school and saving their first fifty grand, and then we have people that are in retirement age with millions of dollars in accounts. People are surprised sometimes when I tell them that their investment accounts look really pretty similar to the guys that are already retiring.
Reese Harper: I think it can change statistically when people get to very large estates, but I read an article recently that I like more—it said that the uber wealthy often have room to speculate, and they do at their own expense in most cases. And I think that ultimately, the best investment portfolio for someone with $50,000 or $100,000 isn’t dramatically different for someone who’s got millions. You get to tens of millions and a hundred million, and it just becomes a little bit different decision pragmatically.
Ryan Isaac: The amount of private assets you’ll buy into and things like that change.
Reese Harper: But it is remarkably similar, and I think the simpler you can make your portfolio the better. And even the wealthier you become, the simpler your portfolio is the more control you have over it and the easier it is to make tax decisions.
Ryan Isaac: I think mentally too—emotionally just wrapping your head around what it is in the first place and understanding it.
Reese Harper: I mean we run the same portfolios for people who have millions as we do for people that have tens of thousands, and I believe strongly in that. There’s no real difference. Now your cost can reduce sometimes—the more money you have sometimes it’s easier. A fee that someone charges you to take care of your money, or a fee that you pay online to someone to manage your money—that will reduce slightly, but the underlying investments don’t change dramatically if at all.
Ryan Isaac: That was solid. Thank you. What about when you hear this, “I don’t need any help with my investments. I don’t need any help with any accounts. It costs too much money to get help with anyway.” That’s another subject that we could probably talk about by itself, but you hear that sometimes: I don’t need any help. When I see things in the media or watching the news or reading articles, there’s so much information out today. It’s supposed to be empowering. It’s easier to know more than it was ten years ago about this stuff. And as a whole I like to see that in our industry because for a long time information was just hard to come by. You had to go to a broker to get information for something, and they were kind of the gateway. And everyone can know that stuff now, and I think it’s empowering. It helps people, but I think it also creates, especially in dentists that we meet a lot, that it’s unnecessary to ask for help or get help, and that it’s going to be perfectly fine on my own.
Reese Harper: I think most people are used to seeing people get taken advantage of by this information gap that exists between finance people and non finance people, and so in a lot of cases it would be better if people just didn’t get help, piled up money in their checking account, kept their expenses low and just didn’t talk to anyone about it. It would put a lot of people in a better position if they just didn’t go and get help, so I can understand. I see more damage than good when I look at the industry as a whole—to be candid. I can understand why people would not want to do that if they have had a family member or friend. Same token, I think wading through information is very time consuming and the longer that people spend doing that, the less time they have to actually be productive with their lives, make a good living and be balanced. So I think at some point you’ve got to say, how much time am I spending, and do I have the competency to actually analyze this stuff on my own? Will I do it the right way? Getting help doesn’t necessarily mean, and I have seen it a lot—I feel like if you get the right help you end up being further ahead than trying to wade through things on your own. But you need to be cautious on how much you pay for help.
Ryan Isaac: You do, but I think it depends on where you are at in your career and your situation, too. I just got this question yesterday from someone that called and wanted to know how we work and what we do, and that was the first question: why do I need somebody? And we don’t have an immediate answer to that, because the answer might be that you don’t need anybody. And I don’t know because it just depends—are you ten years into your business? Are you worth $500 or $1,000 per hour? Do you have multiple locations and twenty employees?
Reese Harper: I think as a general rule—the earlier you are in life, the more you should focus on education. Follow what you have been doing for the last ten years of your life and keep reading and learning. People jump in to getting advice and becoming too sophisticated too early on, and I think that creates a lot of problems. They over complicate their balance sheet; they get too much advice; they structure things that they don’t really need to be doing. I’m surprised at the complexity I’ve seen when someone has a $500,000 net worth compared to someone who has a $5 million net worth. There are people with $5 million net worth that are much less complex. We’ve got this guy that’s been unfortunately taken advantage of by a lot of advice purveyors, and then he’s got an overly complex situation, and his net worth is not very high. And he doesn’t really have a need for all the complexity, and so education is super important; financial literacy is important, and be cautious of people selling you ideas, strategies, services that are not really based in education. I feel like somebody can follow that advice and be better off.
Ryan Isaac: One more, we’ve got a couple minutes. The last one—you actually brought this up earlier. You said there’s this idea that the market is this rigged system. It’s this super computer that just spits out random numbers, and maybe the banker is the one making money—the Wall Street vs. Main Street kind of mentality.
Reese Harper: You see that with politics right now unfortunately really hits home, and I think this resonates with a lot of people who feel like there’s a class of people that have the financial system rigged, and everyone else gets taken advantage of. And at some level there’s some truth to that, and I don’t think it’s factual to say that the market is a dehumanized computer that’s running and not behaving rationally. There’s still a lot of evidence to show that over a reasonable, even short-term period, the market behaves very much like the group of buyers and sellers that it really is. It’s people that have needs for liquidity and have needs for growth, and when those people combine and get together, things get priced very fairly. It’s just not somebody tinkering with a computer, and you just have to learn enough about the simple way investments work so that you don’t feel like you’re being taken advantage of.
Ryan Isaac: And you hit on this earlier and through this podcast—a lot of the key to this is take the time to understand what a market is in the first place. I think that’s where a lot of people go wrong is they come into it with the expectations that it’s this thing that can or should be manipulated and beaten, and outsmarted. Really if you take a little bit of time and get some education like you said on what it is, what it has to offer, and what are the risks and costs, and take what it has to offer with as little risk and as little cost as you possibly can, I think you’ll be happy with it. It’s expectation though.
Reese Harper: Yeah, it’s an incredibly powerful tool that allows people to take their savings and have it grow at a reasonable rate of return as long as they apply good science and actually don’t treat it like the gambling machine that most people do. And other than that, I think it’s one of the best creations. Our country is the pioneering country when it comes to financial markets, and it’s created millions of jobs and a lot of impact. I think people just need to understand how it works so they don’t get destroyed by it.
Ryan Isaac: I have a feeling this is going to be less popular than the actual Myth Busters—slightly. But I think these were some good busted myths.
Reese Harper: Carry on.Behavioral Finance