AWM Insights Financial and Investment News

Where do you start when building an investment plan? What are the first steps and what’s most important? Should we maximize returns and let our investments run our lives or should we let our needs, wants, and wishes drive how we invest? Where do taxes fit in?

You have only one net worth and one effective tax rate. Thinking about your investments separate from taxes is never optimal. You will end up paying higher taxes than is otherwise necessary. When you are wealthy and you ignore the tax implications of investments, you leave money on the table that could have been used for greater impact. It’s that simple and it’s still missed by many in the ultra-high net worth space.

Aligning your financial resources to the things most important to you is vital before even thinking about what type of investments to make. Matching your investments with desired outcomes brings a better and more customized experience to the individual.

Have questions for an upcoming episode? Want to get free resources, book giveaways, and AWM gear? Want to hear about when we release new episodes? Text “insights” or the lightbulb emoji (💡) to Brandon at (602) 704-5574 to join our new AWM Insights Network. On an iPhone? Click HERE to join.

EPISODE HIGHLIGHTS:

• (0:57) Where do we start when building an investment plan?
• (1:17) How to optimize for your one net worth and your one effective tax rate.
• (1:35) Your financial structure is your net worth but it additionally incorporates the future. Human capital is valuing and accounting for future earnings.
• (2:30) Your financial asset stack is all your available resources which include cash, publicly traded stocks, public trades bonds, illiquid private investments, human capital, pensions, social security, and homes. 
• (3:15) Aligning your asset stack to what you want to accomplish in life is the key to a successful investing experience.
• (4:11) Give money a job. Use your assets in the most effective way possible to achieve the priorities you want to accomplish. 
• (4:25) If you want to pay for your newborn daughter’s wedding 30 years out, you don’t need those dollars now. This gives you the opportunity to invest in private equity and capture an illiquidity premium.   
• (5:30) Having the full picture of your financial stack and matching it to your priorities allows you to be specific and deliberate in how you are invested.
• (6:46) Time and duration is important in investing but so is tax efficiency. Optimizing where and how you hold assets avoids leaving money on the table.
• (7:56) We want tax-efficient assets to be in taxable accounts. 
• (8:09) Higher taxable income investments can be put in Roth accounts which takes full advantage of their tax-free qualities.
• (8:45) Be careful of someone selling you outperformance in the public markets like stock picking or sector rotation. The real value comes from the planning aspect of investments, not from beating the market. 
• (9:18) If you’re in illiquid investments like private equity, venture capital, or real estate you should be getting an illiquid premium. A return above what you could get in the public markets.
• (9:58) How do we think about the private side?
• (10:30) Illiquidity planning is not given enough attention and must be planned for. 
• (11:15) Private investment data does support active management and average returns are actually not very good.   
• (11:32) We love the top-tier managers in venture. Getting access is the critical aspect. It is a relationship-based game.
• (12:11) You can really get hurt going down the path of venture or private equity.
• (12:30) If you strike out when selecting investments or managers you can end up way worse off than just investing in a tax efficient low cost way in the public market.
• (12:58) More access to private investments is getting easier but it is potentially going to hurt people too.
• (14:00) You should be putting money where you are rewarded for the type of risk. A careful approach and intentional selection can be very rewarding. 

Tax planning is the backbone of the family office. A tax team focused on minimizing your taxes is a must-have for families to optimally grow wealth and then sustain it multi-generationally. These opportunities are often missed because most Americans invest money only in their company 401k or an IRA. But for anyone high net worth, taxes are the biggest cost to control.

The highest tax brackets also present the numerous opportunities in tax planning. But to take advantage your tax advice needs to be integrated with the rest of your team. Ignoring the costs of taxes by using a separate CPA is not efficient and will end up resulting in paying more in taxes than is otherwise necessary.

Have questions for an upcoming episode? Want to get free resources, book giveaways, and AWM gear? Want to hear about when we release new episodes? Text “insights” or the lightbulb emoji (💡) to Brandon at (602) 704-5574 to join our new AWM Insights Network. On an iPhone? Click HERE to join.

EPISODE HIGHLIGHTS:

• (0:55) Integration of tax planning is the backbone of a multi-family office and is also the least appreciated.
• (1:05) Most investment advisers cannot legally give tax advice. This comes at a big cost to any of their clients that are high net worth. 
• (2:05) Just being tax aware is incredibly powerful. You have one net worth and one tax rate which just means all roads lead back to the single tax return filed each year. 
• (2:27) Keeping tax drag as low as possible in your investment accounts, leaves more money to compound and grow. 
• (3:00) Sometimes these opportunities are small in any given year but over a lifetime of savings, the impact can be incredible.
• (3:17) It’s very easy to find little savings when you’re doing tax planning. 
• (3:28) Tax loss harvesting is a prime example. This year has been one where taking advantage of this tax planning strategy will save clients money in the future.
• (3:59) Minimizing costs, which taxes are the biggest cost within a financial structure, results in maximizing returns. Other costs or frictions include trading costs, expense ratios, and fees.
• (5:15) Most people in America don’t need to worry about taxes. They save their money in their company 401k and IRA accounts where tax loss harvesting doesn’t do anything.
• (5:46) Great question to ask your advisor: when do you take a look at tax loss harvesting? Most advisors just do it at the end of the year which is a missed opportunity and you're missing out on tax savings.
• (6:30) CPAs aren’t in your portfolio looking at your situation daily. They won’t be able to take advantage of tax loss harvesting like an integrated team does.
• (7:26) CPAs that are not integrated with your investment team are going to miss advantageous tax planning strategies because they are only looking at your situation at a single point in time during the year.
• (8:08) Asset location is another tax strategy that boils down to putting tax-efficient assets in taxable accounts and tax-inefficient assets in deferred accounts. You shouldn’t have the same holdings in every investment account you have.
• (9:30) Are you familiar with a back-door Roth IRA or non-deductible IRA conversion?
• (10:40) If you start early, the results can be dramatic when taking advantage of these opportunities to reduce the tax drag on your wealth.
• (11:03) Giving cash to a charity is wasted impact because there are simple ways to give even more through gifting appreciated securities. The tax code encourages you to do this. 
• (12:02) Donor-advised funds are an incredible tool to maximize charitable impact and even foundations at a certain level of wealth.
• (12:48) Your team should be focused on minimizing taxes and when you’re high net worth there is a lot of opportunity and flexibility to be more efficient here. Growing wealth effectively must include reducing costs and taxes is the biggest of them all.  

Family office is the buzzword in the industry these days. The problem is not everyone is staying true to what a family office does and many are not keeping clients at the center of what’s important.

Anyone with sports or business experience understands the value of the team. The integration, independence, and individualization of you advisory team provides you the opportunity to maximize your wealth. Each family is different and deserves a truly customized plan. Not the cookie-cutter solution most of the industry offers.

Have questions for an upcoming episode? Want to get free resources, book giveaways, and AWM gear? Want to hear about when we release new episodes? Text “insights” or the lightbulb emoji (💡) to Brandon at (602) 704-5574 to join our new AWM Insights Network. On an iPhone? Click HERE to join.

EPISODE HIGHLIGHTS:

• (0:40) If you worked hard and made a lot of money, do you even need an advisor? 
• (1:00) Athletes and business owners understand the value of the team more than anyone. 
• (1:23) Should I have a single family office, multi family office, or hire a broker?
• (2:04) Integrated, Independent, and Individualized are the 3 I’s that you should demand from your team of advisors.
• (2:25) Integrations means your investment plan and advisor is integrated with your tax plan and your tax advisor. The left hand must be talking to the right hand.
• (3:14) If you are not integrated then you are not optimized and missing out on maximizing opportunities to build wealth. 
• (3:40) It is tough to argue against having taxes done in house. Anyone arguing against this doesn’t get it. Anyone saying you should keep everything separate everything to have checks and balances doesn’t get what a tax CPA actually really does. 
• (4:03) An audit CPA will check to make sure your investments are legit and money is accounted for properly. Someone filing your taxes isn’t doing this.
• (4:40) A team of professionals within a multi-family office will have superior knowledge over a single family office because of the multitude of different situations that will arise and the problem solving to find solutions. This learning is limited in a single family office.
• (5:05) Independent multi-family offices are vanishing each day with private equity buying many firms over the last year. Rockefeller and wirehouses have hijacked the multi family office name and are not independent.
• (5:46) Independents have the ability to go find the best solution. This is in investments, taxes, estate planning. It is an open playing field with no restrictions on finding solutions.
• (6:42) Large institutions become restrictive due to compliance requirements and you can only select things from an approved platform.
• (7:20) These big firms are so afraid of liability they are not able to give best in class advice that is the truly best solution. 
• (7:55) Private equity money coming into the independent RIA space removes the alignment of doing whats best for client to doing whats best for the returns of the private equity. Lines get blurred and you are not really independent when you serve shareholders first.
• (9:20) Taking capital from outside equity changes the duty of loyalty to the private equity investors. Ask yourself if your advisory firm is keeping you at the center what’s important.
• (11:23) No two clients are the same. Individualization and customization is incredibly important for everyone but especially for Ultra High Net Worth. 
• (11:40) The downside of the single family office is their is only one situation that keeps coming up. You never see different things or new perspectives. In a multi-family office you get a vast amount of experiences you train you problem solving skills and gather experience.
• (12:30) One example of individualization is charitable intent. Some people have none, some people want to give everything away. Some just want to benefit their kids and grandkids. Individualization in just this area is necessary and a cookie-cutter solution isn’t going to cut it here.
• (14:00) One size fits all solutions aren’t the best solution and most of the industry still operates in this way. A true multi-family office does not. It’s entirely customized to your family.

How do you establish a family legacy that transfers to the next generation? This is the most difficult task ultra-high net worth families will face. Of course, technical expertise is important when creating a legacy that will last generations, but the next generation must be prepared to steward wealth. Waiting until it’s too late is the worst thing you can do as a wealthy family.

If transferring your family culture is important to you, the right team with the right experience can prepare your family for generational wealth transfer decades before it actually happens. 

Have questions for an upcoming episode? Want to get free resources, book giveaways, and AWM gear? Want to hear about when we release new episodes? Text “insights” or the lightbulb emoji (💡) to Brandon at (602) 704-5574 to join our new AWM Insights Network. On an iPhone? Click HERE to join.

EPISODE HIGHLIGHTS:

• (0:54) Why do you have an advisor? From just starting out up to ultra-high net worth ($30MM+), what is different in the advice? 
• (1:11) Mo money mo problems. With more wealth, the situation can become complex.
• (1:37) Tax planning is essential for everyone but for UHNW it can be a huge impact. 
• (2:09) For UHNW, should you set up a foundation, or is a donor-advised fund better?
• (2:58) The estate tax and estate planning allow you to leave more to your second generation or leave more to charity.
• (3:25) If you’re wealth is illiquid, being thoughtful about how to manage that illiquidity is vital. 
• (3:54) Real estate is an illiquid investment that can take days or months to turn into cash.
• (4:15) Determining how you set priorities and who is making decisions is an incredibly important part of the process. This is a complex and unique situation for each family.
• (4:46) There are two categories, technical expertise is the most obvious and involves the expertise and team of experienced and qualified individuals. 
• (5:15) An example of technical expertise: our tax team found a $150,000 missed QBI deduction for a new client because of more eyes and more expertise for the client.
• (6:40) The second category is the transfer of wealth. The family governance concept is crucially important to avoid the “shirtsleeves to shirtsleeves” problem where generational wealth is squandered.
• (7:36) The next generation is an afterthought in almost all wealth management. 
• (8:11) Waiting until it’s too late to educate the second generation is a huge error because, by the time they are in their 20s or 30s, they have already established much of their principles and values on money.
• (9:02) Our clients, whether on the field or in the boardroom are the best in the world at what they do. We want that same mindset to bleed into every aspect of life. High performance in every aspect of life maximizes the impact you can make in your life and the legacy you leave behind. 
• (10:42) If multi-generational wealth is important to you, get to the core of how that is going to happen. Technical expertise is a must but there has to be a focus on the transfer of wealth and a stewardship focus for the second generation.
• (11:20) Future episodes will focus on the principles and values to help the generational wealth transfer.

You should be investing, but that doesn't mean you have to settle for a poor investing experience. The broker selling you the next hot stock or Jim Cramer telling you to “buy, buy, buy” will not deliver the good experience nor the optimal returns you deserve.

Too many investors hear about the newest hot stock on the golf course or in the locker room. They then go out and buy it. This is the worst way to invest because there is no foundational plan. 

Actively implementing a sound investing process involves minimizing taxes, reducing expenses, and eliminating frictional costs to your returns. It also keeps emotions in check and reduces anxiety or uncertainty. This is the process of building a bullet-proof financial structure. 

The foundation for multi-generational wealth starts with focusing on what is controllable and through this process the value system is created, which can then be repeated generation after generation.

Have questions for an upcoming episode? Want to get free resources, book giveaways, and AWM gear? Want to hear about when we release new episodes? Text “insights” or the lightbulb emoji (💡) to Brandon at (602) 704-5574 to join our new AWM Insights Network. On an iPhone? Click HERE to join.

EPISODE HIGHLIGHTS:

• (0:47) Over the past few weeks we’ve gone over the lessons of embracing market pricing, don’t outguess the market, and not chasing past performance. Embrace the power of markets working for us.
• (1:18) Don’t pick stocks. The data is proven you will underperform the index.
• (1:43) Jim Cramer yelling buy, buy, buy about stock or a Goldman broker pitching the next IPO is all nonsense.
• (2:15) What are the things you can actually control in the investing process?
• (2:48) Taxes are a huge impact and should be considered in investment decisions.
• (3:00) Expenses in the form of expense ratios you pay for mutual funds or ETFs. Keeping these low will help them not to eat into your returns.
• (3:55) Putting the focus and emphasis on what you have control over leads to higher confidence of achieving priorities. You don’t have to guess which way the market is going daily, weekly, or even monthly.
• (4:10) Financial structure is having a sound in place that provides the foundation for investing. It is what gives the discipline to shoot down the golf course chatter about a hot stock or mutual fund.
• (5:21) The right process will give you better expectations of success because of the discipline created in that very same process.
• (5:49) Only optimizing for costs won’t result in better returns. Optimizing for the value created should always be the standard.
• (6:40) Chasing lower costs is directly correlated with poorer outcomes. Qualified advisors add value far above their costs.
• (7:06) Trades are usually “free” but there are still implicit costs like the bid-ask spread. These frictional costs seep out of your returns over time.
• (8:00) Expense ratios, trading costs, and taxes are all frictional costs that hurt the growth of your investments. The compounding effects over long periods of time cannot be ignored.
• (8:57) Global diversification and discipline must be foundational to your investment philosophy. It’s too easy to wander off track if you don’t establish the discipline.
• (9:35) The end client/investor is always in control of their financial structure. You have to be an active participant in this process.
• (10:25) Your assets both human capital and financial capital should be managed in a way that gives your the best chance of success to meet your goals. This is the customization and investing experience you should expect.
• (11:25) A better investing experience means higher confidence in reaching your goals. It is optimizing for you the individual family, not for standard deviation or market volatility.
• (11:47) The foundation for multi-generational wealth starts with focusing on the controllable and establishing a value system that can be repeated generation after generation into the future.

Recessions, high inflation, or all-time market highs are usually the only times investment news makes its way into mainstream media. Financial news is really incentivized to instill fear or greed and is only entertainment at the end of the day. Ignoring this noise is paramount to a better investing experience and zooming out to the big picture can help keep market adversity in proper perspective. 

Emotions, or the behavioral side of investing, costs the average investor over 3% a year when it comes to growing wealth.  No one can completely ignore the pain of losing money or the animal spirits when the markets are doing well. Staying objective, sticking to your plan, and avoiding emotional mistakes are must-haves if you want to grow wealth efficiently. A good advisor prepares you before market adversity hits and then communicates in a way you can understand through markets like we have now. 

Have questions for an upcoming episode? Want to get free resources, book giveaways, and AWM gear? Want to hear about when we release new episodes? Text “insights” or the lightbulb emoji (💡) to Brandon at (602) 704-5574 to join our new AWM Insights Network. On an iPhone? Click HERE to join.

EPISODE HIGHLIGHTS:

• (0:47) How should you deal with the market gimmicks of the media and the news cycle?
• (1:15) What are the human elements of investing and our portfolios?
• (1:35) The technical side of investing is what most people think is the most important part of investing. The emotional, pyschological, or behavioral side is arguagly more important.
• (2:10) Withstanding the behavioral challenges of investing over your lifetime will determine whether you have a good or bad investing experience. 
• (2:39) The emotional side of investing must be taken into account, not just the financial science and math.
• (3:00) “Be fearful when others are greedy and greedy when others are fearful.” This famous quote by Warren Buffett is his advice on the emotions of investing.   
• (3:26) It’s very easy to put money into investments when things are going really well.
• (3:50) Nobody likes losing money and panic costs many investors dearly. An advisor that is objective and nudges you to invest for your long-term goals even during stressful markets and coaches you to stick to your plan adds tremendous value and a better investing experience.
• (4:15) The financial media industry is built to encourage trading, overly focus on the short term, and certainly have no incentive to help you to achieve your individual priorities.
• (5:35) It is normal to have the psychological response to down markets. It is also the job of the advisor to look for risks in very good up markets. 
• (6:09) Objective advice and answering questions with the data and the science and according to your long-term goals is what affords a better investing experience where you only focus on the big picture.
• (7:10) The news outlet are encouraging you to do something and most of the time that is not in your best interest. 
• (7:30) Ask the question of the motives behind TV, social media, or newspapers that want to scare you and then offer their answer of what you should do. It is usually transactional with a benefit to themselves.
• (7:45) Confirmation bias and where you get your news from is important to always be aware of. Ask yourself, what if I’m wrong on this take? What does the data and facts dictate. Trying to remain impartial is a skill in itself. 
• (9:00) What happens when the Federal Reserve raises rates?
• (9:10) How long will inflation stay high?
• (9:30) We don’t make decisions based on predicting the near term future. This would be emotional decisions and not aligned with your long term plan. 
• (9:55) Your plan and portfolio should already be ready for events like we have today. You should be ready and prepared for adversity. 
• (10:50) Decisions should be made to achieve priorities and goals in life. Updates to the plan are constant and ongoing but shouldn’t be made emotionally. Thoughtful advice that maximizes your chances of long-term success will always improve your odds to live the life you want to live.
• (12:00) Average equity investors underperform by -3% over 30 years. This is the cost of the emotions and the behavioral component of investing. This is panicking and selling when you shouldn’t and includes the expenses of trading. It doesn’t even account for the tax bills when you liquidate a portfolio.
• (13:03) The cost of underperforming over 30 years when you start with $100,000 is a difference of $1.2 million. You could end up with $2 million if you stay the course and stick to the plan. But the average investor couldn’t do that in the study so ended up with $789,000. 
• (14:00) This doesn’t mean you should stick your head in the sand but take information in context. Rely on the priorities that drive your plan and be aware of people encouraging you to be constantly buying and selling. 
• (14:50) March of 2020 was a perfect microcosm of staying the course and tuning out the noise. So many people panicked and were selling fear in the media. The people that stuck to their plan and listened to the objective advice were rewarded.
• (15:40) It doesn’t mean you shouldn’t ask questions but focusing on the what has worked in the past and not making emotional decisions has led to amazing results.

“Don’t put your eggs all in one basket”

Everyone has heard this saying but are you doing it as efficiently as possible with your investments? Don’t fall in love with one single investment category because this overconcentration is an unnecessary risk. 

Intelligent diversification is implemented across countries (ex: US, Developed International, Emerging Markets), asset classes (ex: stocks, bonds, real estate, alternatives), and also factors (ex: relative value, small-cap, profitability). 

This diversification reduces the uncertainty of hitting the priorities that matter to you and avoids devastating outcomes that resulted from the lost decade in the US, the Japanese stock bubble, and the crash of US real estate during the Great Financial Crisis just to name a few. 

Have questions for an upcoming episode? Want to get free resources, book giveaways, and AWM gear? Want to hear about when we release new episodes? Text “insights” or the lightbulb emoji (💡) to Brandon at (602) 704-5574 to join our new AWM Insights Network. On an iPhone? Click HERE to join.

EPISODE HIGHLIGHTS:

(0:44) We commonly say the only free lunch in investing is diversification but why is it a free lunch?

(1:05) Diversification is easy to misunderstand when it comes to investing in risky assets. Don’t put all your eggs in one basket seems logical but the details of how you diversify intelligently will have an enormous impact.

(1:20) Jim Cramer is commonly featured on CNBC and tells people to buy one stock from each sector of the US economy (tech, industrials, etc). This isn’t smart enough diversification.

(2:10) In public markets, there are thousands of companies within this opportunity set. 

(2:55) Identifying the winners within 1000s of companies has been proven to be a loser’s game when you look at the chances of outperforming over 1, 3, and 10+ year time frames. 

(3:47) Don’t fall in love with one single investment category. 

(4:00) Other countries have grown faster than the US even though the US has done well.

(4:20) When building portfolios, we look at the opportunity set. We want roughly 60% of equity investments in US but the other 40% should be diversified into international developed and emerging markets. 

(4:35) Home country bias is evident across the globe and it is the reality that investors tend to overweight whatever country they live relative to the market capitalization of that market in the world economy.

(5:43) The lost decade is a decade of poor returns for the S&P 500. Large cap US stocks performed terribly and didn’t make investors any money.   

(6:17) Emerging markets did amazing and returned over 400% during the lost decade for US large-cap stocks.

(6:50) Country returns are difficult to predict ahead of time. US markets have been a great place to invest but other markets almost always top the US when it comes to annual returns. 

(8:05) Given what happened over the last decade, international and emerging markets 

(9:07) If you have an advisor that is only comfortable putting you in US stocks because it is easy to communicate, is a really lazy approach. You deserve a globally diversified portfolio.

(10:10) You deserve this kind of portfolio because it delivers a higher level of confidence in achieving your priorities. Uncertainty about meeting priorities is reduced with global diversification.

(11:10) The distinction here you are not rewarded for trying to guess the region or stock that will outperform. With smart diversification across global equity markets, you increase the chance of achieving the returns necessary to meet your future needs. 

(12:25) A client asked if large-cap growth outperforms? No, it actually doesn’t. The data shows it underperforms large value over the long term.

(12:53) US real estate is very popular and many people believe it always does well. The reality is in 2019 it was in the middle of the pack, in 2020 it was in last place, and in 2021 it was in first place. There is a lot of randomness in these annual returns so you want to participate across many asset classes.

(13:20) Even the US real estate market is more than just residential real estate.

(13:30) You don’t just want the S&P 500. During the lost decade of 2000-2009 it lost 9% cumulatively over that decade. Large value companies over that time returned 48%. Emerging markets were up over 400%.

(14:31) Diversification should be done intelligently across the globe, asset classes, and within the factors discussed in last week's episode. 

(14:56) You need to have an investment strategy you understand. It takes more work to understand true diversification but an advisor that has your best interest at heart will spend the time explaining why it matters.

Investing in index funds or ETFs is a great place to start, but can you do better?

There are segments of the stock market that have proven over time to deliver better results than the averages. This is backed by almost one hundred years of data and research across time periods and found in markets globally.

Exposure to these parts of the market, known as factors, in a cost-effective way can provide higher expected returns rather than just settling for market returns. The caveat is that you have to be a long-term investor to capture these premiums and the patience required for most investors is maybe the hardest part. If it was easy every investor would be doing it. 

Have questions for an upcoming episode? Want to get free resources, book giveaways, and AWM gear? Want to hear about when we release new episodes? Text “insights” or the lightbulb emoji (💡) to Brandon at (602) 704-5574 to join our new AWM Insights Network. On an iPhone? Click HERE to join.

EPISODE HIGHLIGHTS:

• (1:17) What are the actual drivers of returns in the public stock market? Why is there compensation for putting your money at risk?
• (2:25) If you want to get into the details and go deeper on investing, text 602-704-5574 for a longer conversation.
• (2:55)) An index approach is the epitome of letting the markets work for you.
• (3:13) A broad index market approach is a good place to start. However, there is evidence in the research of other factors that drive returns.
• (3:55) When you analyze the data there are groups of companies that perform differently than the whole.
• (4:08) The data shows there are parts of the market that underperform the general index and parts of the market that outperform the index. These are well researched and acknowledged factors in finance. 
• (4:51) Company size is one factor measured by big companies versus small companies.
• (4:57) Valuation or relative value is another factor and is based on paying less money today for future earnings. If you pay a substantial premium for future earnings the evidence shows your returns could be better if you instead bought at a discount (lower relative price).
• (5:09) Profitability is another factor that is intuitive. Companies with higher profits tend to outperform companies that have lower or negative profits.   
• (6:10) These groupings of similar stocks continue to show up in the data in a persistent way. Meaning they show up across time periods, across the world’s stock markets (not just the US), and across the different market cycles. For a factor to be valid, it has to be sensible and backed by the data. It can’t be an opinion and it has to be cost-effective to implement.
• (6:36) These factors also have to be cost-effective to capture. If the taxes generated eliminate any benefit then the factor isn’t valid for the investor. Trading costs can also eliminate the benefits of other researched factors. 
• (7:38) Small companies are defined as having a smaller market capitalization. Market capitalization is the number of shares multiplied by market price. This is the size of the company or what the market determines is the fair market value of what a company is worth. 
• (8:39) If you rank the smaller companies (smallest 10%) versus the biggest companies since 1928, they have outperformed by almost 2% per year. An extra 2% compounded per year for that many years delivers staggering differences in wealth.
• (10:23) The price of a stock comes down to what you pay for the future earnings of a company. If you pay a lower relative price you are considered a value company. A higher relative price is a growth company. Relative price always relates to their expected future earnings.
• (11:27) Early-stage technology companies tend to fall into the growth category.
• (12:18) Do these factors show up over shorter time periods? 
• (12:35) There will be periods where the factors underperform and that can be thought of as the cost to pay for higher expected returns than the index.
• (13:05) If you can generate between around 2% for small caps and 3% for relative price, that is 5% of additional performance, why don’t we go fully into small-cap value?
• (13:23) Comparing it to baseball and hitting. You can’t expect the factors to hit every year but you do want to give them more at-bats so the odds over time are in your favor. 
• (14:31) The third factor is profitability. The group of profitable companies have higher rates of return over long periods of time when compared to the group of less profitable companies. 
• (15:40) Multi-generational investing allows for these factor premiums to be captured because of the long time periods and patience that can be assumed.
• (16:15) These factors also provide diversification when implemented together. When one factor is underperforming another factor may be outperforming. This reduces dispersion of returns and lowers volatility.
• (16:50) These factors implemented in your portfolio can target higher expected returns than just settling for what the market index will give you.
• (17:07) Don’t run out and buy the first small value fund you find. Make sure you choose a good manager that uses a systematic approach index like approach.
• (17:45) You don’t have to play the game of which sector of the market will do well. Rather you can own a well-diversified portfolio that over time has proven to provide statistically better returns. This is a great investing experience that lowers uncertainty and increases your chances of achieving your priorities.

Results are what matter at the end of the day. We want to play the game that gets us the best results. The evidence presented in the last several podcasts has made it clear what you should focus on as an investor if you want the best results.

Average returns in capital markets have produced phenomenal results. Allowing the market to work for you in the long term can generate shocking results.   

Do you have a strong financial structure? Are your short term priorities protected from bad markets, acute distress, or high inflation? Are you underinvesting for your long-term priorities? Do you hold too much cash? A clear and quality financial structure addresses every single of these concerns and increases financial wellness. This is how you build a better investing experience.

Have questions for an upcoming episode? Want to get free resources, book giveaways, and AWM gear? Want to hear about when we release new episodes? Text “insights” or the lightbulb emoji (💡) to Brandon at (602) 704-5574 to join our new AWM Insights Network. On an iPhone? Click HERE to join.

EPISODE HIGHLIGHTS:

• (0:27) Play the game that gets the best results. Picking stocks and attempting to time the market does not have the odds in your favor.
• (0:58) What do you get by allowing the market to work for you?
• (1:29) What’s the data show? A single dollar invested in the S&P 500 in 1926 and let it ride until 2021 (95 years) would have grown into $14,076. 
• (1:49) This is a phenomenal rate of return so the question becomes why don’t we just accept that?     
• (2:06) There are ways that can target higher expected returns than just the average but the key is to make sure they’re evidence-based. Most strategies don’t have any evidence to back them up.
• (2:25) Picking stocks and market timing don’t have any evidence to generate reliably better returns. 
• (3:01) Everyone should work with an advisor. The reason most investors don’t receive good returns is because of behavioral issues. They panic and sell at market bottoms, fear losing money so hold too much cash, and get emotionally attached to their positions.
• (3:14) Professional athletes have coaches, executives have coaches, and it makes sense to have an advisor that serves as an investment coach.
• (4:03) A lot has happened over the last 95 years including wars, crises, and revolutionary inventions but if you stayed a long-term investor in the capital markets it was a really good thing for you.
• (4:25) Inflation fears are elevated right now but to put inflation in perspective, inflation turns the one dollar into $16. That is a tremendous loss of purchasing power if you don’t invest in the capital markets to outpace it.
• (5:12) Fearing inflation and pulling your money out of the market is the worse thing you could do. Even just putting it into T-bills or short-term treasuries would have allowed you to narrowly outpace inflation.     
• (5:33) One of the best places to put your money to beat inflation is the capital markets. The data and evidence show you are rewarded over the long term for taking risks.   
• (6:17) Markets don’t always go up and to the right. Investors must understand markets will go down and accept the risks and volatility to get the higher expected returns. 
• (7:15) Capital must be put at risk to get the higher expected returns. Smaller caps are riskier and so should be expected to produce higher returns over the long term.       
• (7:49) Markets climb a wall of worry. If you appreciate the data and the opportunity of bear markets you will be rewarded in the long term.    
• (8:16) A coach (advisor) can reframe what’s important and why you’re investing in times of adversity. 
• (9:12) Markets rarely ever deliver close to average returns. Only 7 times in the past 96 years has the market returned between 8-12%. Annual returns are always very different than average. 
• (10:19) For our clients, market volatility does not worry us because we put the right financial structure in place that has been planned for these market periods. 
• (11:15) Not having the money or liquidity when you need it is poor financial structure. That is a big risk that isn’t necessary.
• (11:52) Protecting essential spending or an adequate protective reserve is crucial to a strong financial structure. When you have this you can put the rest of your money at risk in private and public markets to target the better expected returns.
• (13:15) An adequate protective reserve allows you to stay disciplined and put money to work efficiently and deliver a better investing experience for the long run.
• (13:55) Are we trying to generate the absolute largest return and ignoring priorities?
• (14:34) Establishing a strong financial structure allows you to take on more opportunities in the capital markets. 
• (15:02) Sitting on a ton of cash usually doesn’t align with priorities. Tying priorities to financial resources eliminates much of the fear of losing money in the short term.
• (15:45) It is a powerful thing to reduce the risk of meeting short-term priorities and increase the odds of achieving long-term priorities. This is building a strong financial structure.
• (16:20) Sitting on cash for too long can be a huge risk to priorities and usually indicates a lack of building the financial structure of the family. 

Can you trade on the market inefficiencies and come out ahead after costs and taxes?

The evidence is clear and it isn’t good news for the market timers. These market timers are investors and advisors that promise to get out at the top and then get back in at the bottom. It sounds great in theory, but because the public markets are so efficient, the evidence is clear that it isn’t possible over the long run. Many investors have poor investment experiences because they try to accomplish the impossible rather than focusing on the things that they can control.

Jumping in and out of the market is a fool’s game and that shouldn’t be thought of as a negative at all. It’s an opportunity to reframe and focus on what you can control when it comes to investing. This includes tax efficiency and minimizing costs, but also goes deeper into diversification and properly protecting your financial house from uncertainty. 

Have questions for an upcoming episode? Want to get free resources, book giveaways, and AWM gear? Want to hear about when we release new episodes? Text “insights” or the lightbulb emoji (💡) to Brandon at (602) 704-5574 to join our new AWM Insights Network. On an iPhone? Click HERE to join.

EPISODE HIGHLIGHTS:

• (0:28) Athletes at the highest level know they are playing the game at a different level than the amateurs. This is the same in the investing world. 
• (1:10) Not trying to outguess or time the market. Don’t outsmart yourself here.
• (1:29) Eugene Fama. famous for the efficient market hypothesis. famously quipped “I’d compare stock pickers to astrologers but I don’t want to bad mouth the astrologers.” 
• (2:15) The outright number of competitors playing the “investing game” are intelligent and skilled adversaries with everyone on a level playing field of information.     
• (3:21) Markets are not perfectly efficient, but it is the best model to explain what is happening that has been created so far. 
• (3:30) Can you actually trade or invest on market anomalies and come out ahead? The answer in the data is no. Not when you factor in the costs and taxes.
• (4:30) A great question commonly asked is “where is the market going?” No one has a crystal ball to answer this question and if somehow they could accurately predict the market, they would be making money off of it and not divulging their secret power. 
• (5:00) Going to the evidence proves over and over again that it is a fool’s game.
• (5:42) The cost of missing one week in the market at the wrong time can cost you as much as 15%. 
• (6:48) If you jumped out of the market during the global credit crisis, which many did amidst the uncertainty, missing just 6 months was a massive cost in lost wealth.
• (7:31) The positive of all this is the fact that market returns are actually very good. Getting those expected returns and focusing on improving them with tax efficiency and reductions in the costs that erode returns is a good use effort.   
• (8:04) Missing out on the factors that improve performance combined with the power of compounding can factor into leaving massive amounts of your wealth on the table.   
• (8:34) Market timing can be extrapolated out to emerging markets or real estate. Are you costing yourself by not being in certain markets? 
• (9:03) If you got a 20% return, is that good? Well, what did the market do? You may have cost yourself money because another market did even better than that.        
• (9:30) When market timing, you have to be right when you get out and then also when you get back in. You can play this same game across all markets.  
• (10:25) You have to be right at the outset, then you have to guess how long it will last. Then you have to be right when getting back in and to what market. If you get any of these decisions wrong you have created a massive cost to yourself.
• (12:30) You still want to participate and buy good companies. Right-sizing the investment is the key to avoiding when to get in and when to get out. 
• (13:40) In March of 2020, few people predicted the market would recover so quickly with tech outperforming. Then the dynamic changed in late 2021 with tech crashing and underperforming.   
• (14:50) If you missed the 3 months of the COVID crash by pulling out all your money before the decline. You actually would have missed out on 30% of gains by being right about a global pandemic. 
• (15:22) It sounds good to avoid the losses and get out and then get back in but playing this game will cost you money in the long run. 
• (15:30) If you want a better investment experience turn your focus to what you can control. Don’t try to outguess the market and don’t chase performance. A data-driven investing experience lets markets work for you and grow your wealth. Don’t get in the way or let your broker get in the way. The capital markets have done this for over a hundred years.