Would You Rather?

Would You Rather?

August 31, 2023

My kids often play the game, ‘would you rather’ where they will pose interesting (and often challenging!) questions around preferences of one thing versus another. Quandaries like, ‘would you rather be able to see 10 minutes into the future or 10 years?’ or ‘would you rather be in a coma for 1 year or jail for 3 years?’

While we don’t think in these terms per se, when you are making decisions around your investment portfolio, you are engaging in an exercise of would you rather.  Would you rather own KO or PEP?  Would you rather have a more secure 5% return from treasuries or a less certain but potentially higher 8% return from stocks?  Would you rather take a nice vacation this summer or have more money in retirement?  Would you rather put money into your kids’ 529 college savings plan or get a subscription to Netflix?  Each decision we make involves trade-offs and considerations around an uncertain future.  For example, do we even know we’ll live long enough to enjoy the retirement money we are investing today, or are we better served enjoying today the fruits of our labor?  What is the optimal balance?

Here is a would you rather for you: Would you rather earn 1% more than the market but be stressed about your current and future finances, constantly watch the daily ups and downs of stock prices, dedicate a lot of time to watching financial news, etc., or earn 1% less than the market and have very little worries about your current and future financial situation, dedicate virtually no time to following the daily vacillations of the market, and in general be at peace and be able to sleep well at night?

The Purpose of Investing and The Role of the Financial Advisor

 To answer that question, you need to examine why we do what we do when it comes to our money.  What is the point?  The purpose?  The goal?

 Here is what investing is not all about: 

  • Investing is not a contest between you and some arbitrary index made by a committee of people you have never met.
  • Investing is not about owning the latest fad stock – especially as it makes the financial news headlines and is likely peaking by the time the masses hear about it (think SPACs, EV stocks, etc. that went public, shot up, only to drop 50%, 60%, 70% or more in the following months and years).
  • Investing is not gambling (you often hear investing referred to as gambling where the market is rigged – see "Is Stock Investing Akin to Gambling" newsletter on this) where the goal is to quickly double your hard-earned money quickly or possibly (and more likely) lose much of it.
  • Investing is not a day-to-day activity where you react to whatever headlines are blaring at that moment, be it political, macro-economic, social, or otherwise.

 So, what is investing?  What is the point?

  • Investing is the allocation of capital today with the intention and expectation of a reasonable return over the intended investment time frame (which could be from days to decades).
  • The goal of investing should be to support and enhance your lifestyle, your specific goals and circumstances, both short and long-term (to pay your mortgage, save for retirement, etc.).
  • Investing should be a methodical, slow, and even ‘boring’ activity if done right (whereas some financial shows have countdown clocks down to the second, as though the stock market is a football game with an endpoint in 28 minutes and 13 seconds left).
  • Investing should be done with confidence, patience, discipline and peace of mind.

The advent of the internet and the proverbial (and now literal) ‘500 channels’ has served many great purposes, but making the average saver a better investor is not one of them.  If you asked most consumers of financial information if the market has been volatile lately, they would scream ‘YES!’ Why, because financial pundits get higher ratings the more dramatic they make the stock market sound. Thus they regularly highlight the latest crisis or seemingly dramatic stock news. 

But from an objective, factual basis, the US stock market has actually been incredibly calm recently, despite the headlines of bank failures, the debt ceiling drama, etc.  VIX, a measure of volatility, is trading near historical lows, and the S&P 500 has not had a 2% or greater move in over 6 months, one of the longest stretches in over 25 years.  Yet if financial news outlets came on the air and said, ‘everything is fine, just keep saving some of your paycheck, put it into a well-diversified portfolio of equities if you don’t need it for 3 or more years, put it into bonds or cash if your time horizon is shorter, and go for a walk or hug your kids.  Have a good day.’  Ratings would plummet and they’d be out of a job. 

This is not just a theoretical exercise; you have the chance to decide here forward if your days are full of stress, financial news watching, obsessing about each daily price move in the stock market, or what the latest fad stock is that you are missing out on.  Or you can choose to live a life of calm and confidence and peace of mind.  If you choose the former, you will likely – and ironically – have worse outcomes since all that consumption of information will invariably make you act in the wrong way at the very wrong time.

Which would you rather?