Trust and Investing
When it comes to stock market investing and financial advisors, trust is a big deal. Many articles have been written about trust by the financial profession. This article takes on this complex issue from a consumer’s point of view.
What to Trust
We can trust that the economies of the world will grow over time. If we do not trust the broad economies via the publicly traded stocks of tens of thousands of companies across the globe, then what is the purpose of investing? If the entire planet’s economies don’t grow, it’s Armageddon with zombies in control. The folks predicting this cynical scenario have seen too many “Dawn of the Dead” flicks or believe the financial media scare tactics. Because the future is unknown, uncertainty and negative news 24/7 distort much of the positive long-term benefits of civilization.
Case in point. My mother was born a mere six years after the Wright brother’s historic flight, and six decades later, she saw humans walking on the moon. We must take comfort in the evolution of the Wright Brothers’ short flight to Neal Armstrong’s Apollo rocket as one powerful reality (of many) and a direct reflection of the civilization’s positive motivations, technological innovations and long-term growth.
People Working Together
The world economies work for our benefit now and the future. Why should we trust that these economies will grow? There are two prerequisites, thinking long-term and trusting the hard working employees of the world’s corporate cultures. Investing in corporations all around the planet via broad domestic and international equity indexes, investors are interconnected to a web of powerful economic cooperation and collaboration. Company CEOs, their boards, the executives and the employees will always plan to grow (to think otherwise will get one fired). Trading goods and services have always been in civilizations’ best interest and active connection between people, cultures, and countries.
Adam Smith had One Human Characteristic Correct
Adam Smith’s famous book, “The Wealth of Nations” introduced incentives to explain how humans propel the engines of our capitalistic system. He said that individual “self-interest” benefited societies. As investors, we not only invest in company stocks, we invest in their employees too. Employees are “incentivized” by their contributions and ideas, whether it’s purely economic (to make money or profit), by thinking big, to raise a family or for the pleasure of working hard. For others, compensation is the sole motivator.
Does it matter what motivates the good people working in corporate cultures across our planet? We don’t think so. Knowing what exactly motives individuals working in corporations is immaterial. First off, the source of people’s motivations is as varied as the number of persons. We have no idea. For all we know, some corporate cultures and individual employees love their work and want to make a positive difference in the lives of millions of people worldwide.
We know incentives work for everybody’s benefit. Each employee in those tens of thousands of publicly traded companies must work together, collaborate, and be part of the business. As investors, we have an opportunity to benefit from this positive behavior. Trust the energy of entire economies and millions of the good-natured employees.
The Empirical Evidence for Long-term Stock Market Growth
From an economic point of view, John Bogle reports in his books that investors can rely on dividends, corporate earnings, and gross national product to create portfolio growth. He says avoid trying to “play the game” of speculation, and avoid professionals who do it on your behalf with your money. Instead, use the buy and hold strategy (http://video.cnbc.com/gallery/?video=3000380952). Do not trust any individual person or financial professional 100%, whether a stock broker, financial planner, insurance agent, CPA, or your uncle who knows investing.
In the next section, how do we protect ourselves from self-serving financial advisers who play this perilous and speculative game with our money?
Whom Can We Trust?
A qualified and competent adviser trained in investment management carries one of two designations: Certified Financial Planner (CFP) or Registered Investment Advisor (RIA). Commit CFP and RIA to memory and look for them on their business card. These designations permit the advisor to charge by the hour, called a fee-only. However, how do we actually know that this qualified professional is looking out for our best interests? Unfortunately, we don’t. Smith’s incentive system works for the adviser and against our best interests. Trust is lost because it relies on trusting or expecting that even a qualified adviser will look after our best interests.
If the adviser is firm about his or her self-interests and is vague about costs and wants to sell you something or offer “alternatives”, that’s a red flag. Walk away! He or she is not looking out for your best interests, but trying to use your money as income for himself or herself. Unfortunately, as consumers we have to watch out for advisers whom value the “casino” of commissions or trading costs.
How Do We Leave Trust Outside the Adviser’s Office Door?
Don’t we have to trust somebody? Of course, but the good news is that we don’t have to trust financial advisers. We are not talking about romantic trust. I know this seems crazy! But there is a catch, we need some knowledge and skills on what works in our best interests. Most of us have self-interests as Adam Smith wrote 240 years ago. Let us use Smith’s thesis on our behalf. Investors’ self-interest has three parts, based on our knowledge and skill as investors (Below is a very short version of the investing process that will take advantage and grow along with the world’s economic engines long-term. For a detailed explanation see my “Four Part Series on Investing Basics“):
- Invest our money in a passively managed, low-cost in a broadly diversified index stock and bond funds worldwide.
- The stock/bond split is roughly applied to our age (If you are 60 years old, about 60% of your holdings should be with bonds).
- Use Bogle’s buy and hold strategy.
The evidence is glaring: Vanguard is the largest and most respected investment company in the world with over 20 million clients and over $3 trillion in assets. Twenty million investors cannot be wrong. Vanguard will never sell you a product with a commission and they have no conflicts of interests because they do NOT play the game! Instead of trusting one adviser, how about trusting 20 million Vanguard investors?
Locating and working with an adviser involves some knowledge of the investment process, so you know with confidence that your interests are met. Searching for a competent adviser to do everything and charge low fees may be more complicated and risky than learning to do-it-yourself.
Trust remains a complicated topic, and I only presented one suggestion. The one trust topic not covered in this article is trusting in yourself. You may already know what a diversified portfolio looks like and not pay excessive investing expenses, but you might not trust yourself, or you well thought out plan, when the market gets shaky. You have to trust that your knowledge and skills will grow along with the world economies, and that your direct experience with your portfolio declining in value and then seeing it recover, is the best test of trusting yourself and your knowledge to date.
If you read the great books by John Bogle and his followers, William Bernstein, Jason Zweig, Bogleheads Guide to Investing, you too will begin to trust yourself and your portfolio’s potential for growth along with the world economies. Best of fortunes.
Online article: http://www.pbs.org/wgbh/frontline/article/how-do-you-know-which-financial-adviser-to-trust/