Last Friday, Netflix released the highly anticipated Stranger Things 2. In the show a group of middle schoolers start to investigate the disappearance of one of their friends, Will Byers. Their investigation leads to the discovery of some dark secrets. Most importantly, they discover another dimension exists in their town, which they call the “Upside Down”.
The “Upside Down” is an alternate dimension existing in parallel to the human world. It contains the same locations and infrastructure as the human world, but it is much darker, colder and obscured by an omnipresent fog. Some truly evil creatures live in the “Upside Down”.
The majority of people are stuck in what I’ll call the financial “Upside Down”. The financial “Upside Down” consists of widely held beliefs that are destructive to building wealth. Below are a few examples of those damaging behaviors and perceptions.
“Upside Down”: Everything the financial media puts out is true and/or relevant to you.
The financial media tries to get as many clicks, views, watchers as possible because that’s how they make money. The media preys on emotions such as fear, greed and happiness.
“Upside Down”: Belief that all “advisors” have your best interests in mind.
This one is tricky because a lot of “advisors” are actually financial sales people. They only want to make themselves rich. Here are some good questions to ask before working with an advisor.
“Upside Down”: More action in investment accounts leads to better performance.
Ripping up the script every time an investment goes down to chase the latest hot stock is a recipe for disaster. This leads to the exact opposite of the one thing everyone knows about investing; buy low, sell high. Less action usually means more success. Investments need time to work. To quote Nick Murray “Timing the market is a fool’s game, whereas time in the market is your greatest natural advantage”.
“Upside Down”: Complexity is good.
In reality, complexity sounds good. I’m paraphrasing something Phil Huber wrote recently when I say: investors want advice that sounds good, but what they really NEED is sound, good advice. If you can’t sum up your investment philosophy in a sentence or two, it’s probably too complex.
“Upside Down”: The more something costs the better it is.
Unfortunately for investors, complexity and cost go hand in hand. Consider this from Jason Zweig: “If there’s a cheap way and an expensive way to solve an investing problem, stick with the cheap one. The typical hedge fund gouges clients but produces mediocre returns. As for mutual funds, a recent study found that each 1% increase in annual expenses reduces performance by 1.6%; managers may be taking on more risk to overcome the drag of higher costs.” – Are You a Better Investor?
“Upside Down”: Investment returns are the most important factor in creating wealth.
An individual’s savings rate is vastly more important than the investment rate of return is. Check out my brother Brendan’s post on this topic.
“Upside Down”: This is what investment advisors do:
Most people’s perception of their investment advisor is that they are “Wall Street”. This is such a dangerous perception. An investment advisor’s main job is to manage their client relationships. All advisors need to know their stuff. But, the most important traits of an advisor are: good listening skills, empathy and preventing clients from making big mistakes.
Investors would do well to escape the financial “Upside Down”, it’s a dangerous place to be.