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Most investors measure success in the stock market by gains and losses. And, of course, it’s always nice to see your account balances moving in the right direction. But the benefits of financial markets go well beyond making positive returns. In this episode of Dentist Money™, Reese and Ryan explain why returns don’t tell the whole story and reveal the lesser-known reasons to invest in public markets.
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 co-host and friend, Sir Ryan Isaac.
Ryan Isaac: Hello Reese. We are very good friends indeed. I’m glad you introduced me that way because we are talking about friendship.
Reese Harper: I can’t believe that we are so in sync. It’s amazing.
Ryan Isaac: NSYNC? You’re like the Lance Bass to my Timberlake.
Reese Harper: Who is that? No it’s the other way around.
Ryan Isaac: Well, in the spirit of today’s topic I did some searching online. I searched for “things that come to mind when you hear the word friend.”
Reese Harper: It sounds special. I’m starting to get nervous though.
Ryan Isaac: Well, you should be because I found my responses in Yahoo Answers—the most reliable search engine. So Yahoo Answers touched my heart a little bit, and I’m going to share some of these with you. The first person who responded said that “a friend is someone who knows the song in your heart and sings it to you when your memory fails.”
Reese Harper: That’s a little judgmental of people who are older I think. I don’t think she realized that she threw someone under the bus that has Alzheimer’s.
Ryan Isaac: I think she meant well. I thought you would like it. I’ll keep testing. Then we have an answer from Emily on Yahoo Answers. I just thought I would give her a little bit of credit. She says “a friend is somebody who is always there for you; who you have crazy times with; who you can confide in; and who you love more than you love yourself.” Classic Emily, right? Actually she got one “Like” for that comment which is good for a Yahoo site. Lastly we have ol’ Megan, and Megan said, “to me a friend is the person I go to tell my secrets to, who is there through thick and thin and won’t leave my side when they are most needed. A friend is honest and fun to be around. They help you through guy troubles and heartbreak, but they make you laugh and cheer you up.”
Reese Harper: Amen to that. Guys are such jerks sometimes. I really appreciate you sharing that with me today, Ryan. What should we do now? Do you want to have a hug or maybe a fist bump?
Ryan Isaac: We can fist bump it out maybe later. I’m good for now. Let’s move on to our topic today if that’s okay with you now that we have talked about friendship according to Yahoo Answers. We are going to help our listeners today understand why the stock market is their friend.
Reese Harper: Right. Because you know what they say—the stock market knows the song in your heart and sings it to you when your memory fails. That’s exactly what they say.
Ryan Isaac: In all seriousness though, if we are going to do a poll and ask people what comes to mind when you hear the term “stock market,” we’re probably going to get a lot of negative answers. It’s just that phrase that brings a lot of negative connotation. We want to give our listeners reasons to think good thoughts about the stock market, because it’s really a powerful force that can help people build wealth over time.
Reese Harper: Yeah, and the idea for this topic came when I was watching CNBC early in the morning yesterday doing my rowing.
Ryan Isaac: Are you training for a rowing competition?
Reese Harper: Yeah just me and my little girl are in competition to see which fish on the screen will go fastest.
Ryan Isaac: So you’re not preparing for a rowing competition, but you watch CNBC in the morning while rowing?
Reese Harper: Yeah I just woke up in the morning and did my rowing because it helps me prepare for a very long day when I sit down in a chair and move my fingers on the keyboard. Anyway, CNBC they were discussing the trade of the day, which helps investors juice up their returns. The advice was very heavy on emotion and super light on common sense, as usual. Because we all know you can’t outsmart your peers and gain average returns and avoid the downside of the market, right? It’s pretty easy to do, so you might guess in the short term that what somebody says on CBNC can be right, but it’s not that sustainable. You don’t get to just turn on the TV and get your tips and figure it all out. Here’s the truth, and then we’re talking to talk about some really important stuff today. The way the market works is much different from the way that it’s portrayed on TV, and media programs are not bad, in some cases there is good education, but they’re trying to get good ratings which is really hard to do unless you make things sensational and bring a lot of emotion into it. And they will admit to that, and that’s why they always focus so much on big returns or the trade of the day. But there’s a lot of other reasons why you should invest your money, and they don’t always have to deal with returns. And I want to clarify one important thing because this is something I’m kind of passionate about. The term “stock market” is not a very accurate term. Markets, or better stated a financial market is probably a better term because stocks are just one thing you can buy inside of a financial market. So don’t just associate all of your public investments with stocks. It’s kind of like going to the grocery store and saying that you’re going to the meat market. You can buy a lot of things from the store—I like to get a lot of different things: specialty cheese, specialty drinks, Kettle chips, Boars Head meats. My wife is making me start to get these organic ones that don’t have as much hormones in them. Boars Head don’t have nitrates, but they don’t have as much other crazy stuff in them. There’s these little poppy seed muffins that are good to get on Sundays; they come four in a case. They are fresh and not preserved. Potato rolls.
Ryan Isaac: But what you’re saying is there’s a lot of stuff there!
Reese Harper: Yeah, there’s a lot of stuff at the market, but you don’t call it the meat market. I don’t call it the poppy seed muffin market; I call it the grocery store. In this case, the market—or a financial market. There’s a lot of things you can buy in the financial market. I just want our listeners to be a little more savvy because it bothers me when our listeners say, “I don’t invest in the stock market.” You can buy stocks and bonds. Anyway, moving on.
Ryan Isaac: It’s a good point. Basically, we don’t just want to lump every public investment out there into the same camp and call it “the stocks.”
Reese Harper: Yeah, I would prefer that everyone call it a financial market. So let’s be clear about that—moving on. But we will call it a stock market for purposes of the headline so that you guys will open this podcast, because it has a much higher open rate when we write stock market. If I just put market or financial market no one would click on it, and it would be confusing. Now you have the context of my obsession. Moving on.
Ryan Isaac: It’s fine, and I’m going to say it seventeen more times. So—there’s other places you can put your money to get nice returns. We want to talk about that. You can put your money in private business holdings (buy another practice), commercial real estate, farm land, precious metals—the list is big, but there are unique benefits, which are often overlooked, that financial markets offer to investors.
Reese Harper: Yeah, beyond just returns.
Ryan Isaac: Yes beyond just returns. We’re going to talk about five of them today. So let’s get started on a list of reasons why the stock market is your friend. The first reason is that financial markets allow you to invest in small, precise amounts on a regular basis.
Reese Harper: Yes! This is one of the most powerful concepts of a financial market. You mentioned a few different types of private investments. So let’s say you want to invest in some commercial real estate, how long would it take you to save up and make a purchase?
Ryan Isaac: You need a pretty good amount—usually 20-30% down about right?
Reese Harper: At least ten, probably twenty. It just depends on how big it is and how much you make. If we all had to invest in these large-scale projects, our net worth would always be at risk, but financial markets allow investors to buy very small quantities of investments– $1,000, $500, $5,000, $10,000, $50,000. And you can set up these automatic investment plans and invest as frequently as you want. That type of investing makes it possible for investors to benefit from downturns in the economy because they can continue to buy small amounts as they earn more money. No one really knows when those down turns will happen, so as they do occur it’s nice to have enough money so that every month as you have access cash you can keep buying. Everyone gets the benefit of having their money invested over a longer period of time, which really helps compound interest kick in. If all we could do is put in big chunks of money, we would have large amounts that would be sitting in cash and not invested, and when we did invest our net worth would just be at risk in these big private opportunities.
Ryan Isaac: So you’re saying the moral of the story for point number one is that the stock market, or financial market, allows you to build wealth in a more predictable or steady way because you can invest money every month over a long period of time.
Reese Harper: Yeah, and you can call it a stock market. People just know that if I start razzing you about calling everything the stock market then—
Ryan Isaac: Refer to minute three of the podcast. The second reason the stock market is your friend is that while your money is in the stock market, you can have it back at any time. You have immediate liquidity. Principle number two—liquidity.
Reese Harper: And this means that you can convert your investments into cash whenever you need to. It’s pretty much instantaneous which makes it way different than private investments, which we talk about. If you have $250,000 in a mutual fund and you need ten grand tomorrow, you can sell ten grand of your fund and get the money within a couple days. You don’t have to sell the whole $250,000. You could also borrow against it at a really competitive interest rate, so it’s very liquid; it’s easy to access, and that separates a financial market from a lot of other private markets.
Ryan Isaac: You’re not going to be able to that with the dental practice or some real estate that you own. It’s not to say that private businesses or real estate investments don’t have their benefits obviously.
Reese Harper: Oh yeah, that’s where you’re going to create a lot of your wealth from.
Ryan Isaac: It’s just that liquidity is not one of the things they offer. The next reason why the stock market is your friend is it allows you to have broad diversifications with your investments.
Reese Harper: Totally. I think this is one of the most important, but probably least understood concepts in investing. The beauty of properly structured financial markets is they allow investors to have portfolios that are very diverse using relatively small amounts of money—when I say small amounts it could still be millions. But you could also get a large amount of diversification for 5-7 grand or ten grand. So you could have your money in one simple account that includes a CD from a bank. Inside of that account you could have a CD from a bank, a municipal bond that is for roads in the city that you live in; you could have a loan from a German government, shares of Facebook or shares of a shopping mall. You could have goal or even futures for the price of corn, or lean hogs. So in one account you can have all kinds of different things, and that’s where this whole idea about not calling it the stock market, because most people when they think of stocks are thinking of something extremely volatile—they saw on the news it went down. But there’s a lot of ways to achieve really broad diversification without having your money tied up in something that will drop 40-50% in a recession.
Ryan Isaac: Yeah, and I think a lot of that has to do with the next reason we’re going to talk about which people don’t understand—the stock market is your friend because the odds are on your side over time, right? As long as you don’t try to game it, and as long as you give it enough time, the odds are on your side.
Reese Harper: Yeah, and what we mean by that is any asset that you buy that has the chance to appreciate or go up, if you hold it long enough it might change in price; if I buy a house it’s going to change its value every day, but over a long period of time real estate appreciates and it goes up in value. So do a lot of assets—stocks go up in value; real estate goes up in value. A lot of things that you buy through a financial market will appreciate; they have what’s called an expected return. It’s a predicted positive return, and that might sound simple enough but a lot of direct investments and small businesses—if you take the average of all those things—you hear that study about the statistic that will range anywhere from nine out of ten small businesses fail to eight out of ten small businesses fail. The probability of business start-ups is not a positive expected return. If it were, a lot of people would be starting businesses, but the expectations is that a lot of them will fail. If you take all of the companies combined in a market, and you average them all together, the market has a positive expected return. And a lot of things can’t make that same claim.
Ryan Isaac: So what you’re saying—if you look at how the market performed from 1926-2014, the SMP 500 which is an index of the largest 500 companies in the U.S.—they earned 9.9% return on average. Corporate bonds earned 6.1%, and government bonds earned 5.7%. So basically if you start early enough, the returns in these markets should be sufficient to hit your goals.
Reese Harper: Yeah that doesn’t mean the value of your portfolio won’t ever go down. Those numbers are averages, and markets don’t work where you get the average every year.
Ryan Isaac: You don’t get 9.9% every year for your thirty-year career.
Reese Harper: No, you’ll roughly get anywhere from 70% one year to negative 50% in order to get that 10% return. And if you don’t want that kind of movement, then you have to buy other things in the financial markets that don’t have that kind of movement. And you have a choice. But if you want that kind of return over time, then you have to own the asset that gives you that average return and accept the movement that you’re going to get from owning it. Or volatility that Ryan likes to call it. Fancy word.
Ryan Isaac: The final reason why the stock market is your friend is that financial markets allow you to save time—your own personal time.
Reese Harper: Yeah, this is another huge benefit that people overlook, especially dentists. They discount their time when they look at different investments. Like we talked about a few weeks ago in the John Elway podcast. But there’s a lot of things you can do with your time, and dentists have a value of $500/hour or more with their time. I’ve seen dentists spend countless hours managing different investments, and if you invest in a side business or start managing commercial property, there’s a time commitment involved in that. You can end up managing people and phone calls and making day-to-day decisions, and there’s usually a certain commitment that you’re making to operate the business when you invest in something. On the other hand, if you invest in a financial market or a public exchange like a bond or a stock—that investment is totally passive. It doesn’t require any of your time, effort, or mental energy. You just fund the investment and let it go to work.
Ryan Isaac: All right my good co-host friend. I’m the co-host; you’re the host. We are friends. That’s good work—thank you for recapping all that.
Reese Harper: Thank you for listening to those five reasons.
Ryan Isaac: I’m glad you got on the rower yesterday and you turned on CNBC, although you might have rowed today.
Reese Harper: No, did not ride this morning.
Ryan Isaac: So you’ll be squatting later.
Reese Harper: No.
Ryan Isaac: You’ll be speaking to a group of dentists in Provo, Utah.
Reese Harper: And getting home really late. Carry on.
Ryan Isaac: A day in the life. Now CNBC, the advice might not always be the greatest, but at least you gave the idea for the show, so I’m grateful for that. And you know, I think people do get so fixated on returns, so it’s good to hear all the other reasons why the stock market or the financial markets are a good place to invest your money.
Reese Harper: Yeah, they’re super powerful. You get the promise of a positive expected return over the long run. You can invest in small amounts; they give you instant access to cash if you have an emergency, and they allow you to stay really diversified. And they don’t require any of your time, so you can focus on doing what you’re good at which is taking care of your patients and growing your practice.
Ryan Isaac: Yeah, and in our opinion these advantages make it well worth paying someone to help manage your investments.
Reese Harper: For sure, and again it just makes it passive. Any investment whether it’s private, real estate, mutual funds or the market, it’s important to consider how your time is leveraged. This is one of the easiest types of investments to leverage your time with.
Ryan Isaac: Definitely. I think we’ll wrap it up there, but before we go I’m going to ask you—what comes to mind when you hear the word friend?
Reese Harper: I’m trying to figure out if I should say a joke or if this is for real.
Ryan Isaac: Let’s keep it seriously.
Reese Harper: I don’t do jokes very well unless I’m prompted in my head by a really heightened emotion—so I would say that the friend for me probably is someone that supports you and accepts me for who I am—lets me be myself and doesn’t make me change a ton of stuff about myself. People who make me change all the time I tend to feel like—
Ryan Isaac: They’re not your friend.
Reese Harper: They’re my coach or like an advisor. A friend is just like I don’t have to worry about myself when I’m around them.
Ryan Isaac: That was a serious response. You should actually go post that in Yahoo Answers.
Reese Harper: I already did—go look at it in 1996.
Ryan Isaac: That’s solid. Thanks for joining us everybody—remember to leave us a review on the podcast. If you want more information you can go to dentistadvisors.com. You can sign up for our free newsletter or schedule an appointment on our calendar. And as always we’ve got our phone number on our website; give us a call, and we’d be happy to chat.
Reese Harper: Carry on.Investing