4 Real Principles for Successful Investing

Every investment firm and advisor has "3 secret keys" for investing success. However, there are no "secrets" to successful investing. Successful investors apply wisdom and discipline over long periods of time. In this episode we discuss 4 principles, backed by history, that every investor should employ to be successful. Now there are no more secrets :). They are:

1) Goals and objectives form the foundation of investment decisions. The best investors in the world all have specific objectives they use to build their portfolios.

2) The goal is to grow your assets responsibly over the long-term, not to “beat the market” short-term.

3) Get the big picture right: Asset Allocation

4) Taxes and fees matter

Transcript:

Hello friends. Welcome back to another episode of the Six Figure Investor. Today we're talking about foundational principles for successful investing. There's also known as the four things that Brian tells every client. Yeah. Also known as the Four Things Tell Every Client. But I think this is a little bit different.

I've, I've talked to a lot of prospects and clients lately, and the conversation always starts. Well, I went to one firm, they had a three-legged stool, and then I went to another firm and they had like a five legged Jack Rabbit. And everybody has some, some weird approach to investing.

So we don't have any three-legged any things in capital stewards. There are things that are well founded in research that work over time, and then there are things that don't. And these aren't the only four things that are out there, but these are definitely four things that we believe you must get right in order to be a successful investor.

And so that's what we're gonna talk about today. Ooh, I wanna be a successful investor. Tell me more. Well, then you should listen to this episode. Maybe after we're done recording it. 📍

. All right. What's up first? So the, first principle is that goals and objectives form the foundation of investment decisions.

The best investors in the world have specific objectives that they use to build their portfolios, and that may sound simplistic. They have specific objectives. Yes. Are you saying they have goals? Yes, they have goals. But what we talk about with clients is investible objectives.

And so what we have to do is take those goals and do the best we can to turn them into monetary objectives. I need. $500,000 in 10 years. I need a hundred thousand dollars in two years to buy a house. I need something like that. And, and life is difficult to plan, right? So not every single life circumstance can we write down on a piece of paper and put into a financial model and project against it.

But, but the better. We are at doing that, the more successful we will be and the more flexibility we have when, the proverbial thing happens that no one was expecting, because we're on track to meet all of our other goals, We can better care for that thing that we didn't expect.

The reason that people are more successful is because it's pretty easy to take long term returns, and we have history around what those things are for different asset classes. And put them against specific long term goals. It's, and, and have a high degree of confidence. There's no guarantees in investing, but we can have a high degree of confidence that something will work over a long period of time.

It's really difficult to just sort of invest and be happy all the time because I wanna make as much money as possible. And you have no idea, you know, what you're trying to accomplish. You have no idea even how to define what success is. And so eventually something will come along if you don't have good goals and object.

And something bad will happen in the market. You'll have a year like we've had this year and you know, and you'll wanna follow off the cliff, sell out, do a bunch of things that are irrational because you don't have any perspective on what you're investing for.

Know what you're investing for. Yeah. Number one. Yes. Yes. Great. Number two. Number two. So the goal is to grow your assets responsibly over the long term, not to beat the market in the short term. And you may have heard this a lot of places before but only 26% of actively managed US stock funds outperform their benchmarks over the past 10 years.

So about a quarter of professional investors. Beat their benchmarks. And the, the ability to pick. And you, you may say, Well, what if we just pick those that outperformed? Well, even fewer of them repeat over the next 10 years. So it's very, very difficult to pick stocks. That are going to outperform the market.

So should I buy Pepsi or, or should I buy Northrop Grumman or should I buy Coca-Cola or should I buy JP Morgan Chase or whatever stock that, that you wanna buy technology stocks, right? It's very difficult to do that. With success over the long term, what is much easier to do? Again, there's no guarantees in investing, but if we look at the s and p 500, we know that it's compounding somewhere between eight and 10% on an annualized basis, right?

And so if we can invest and achieve the compound growth rates that happen in the market that we've seen play out historically, we can accomplish some of those goals and objectives that we talked about with a much higher degree of certainty than we. Just trying to figure out if we're gonna beat the market this year or not.

So it's kind of like having an endurance mindset. It's, it's less about endurance and it's more about taking what the market will give you over the long term and not trying to do better than the market, because trying to do that is a very challenging proposition that F can accomplish. Okay. What's number three?

So number three, I call it getting the big picture, right? And there's a lot of research out there that shows that 88% or more of the investment return variance is driven by being invested long term in particular asset classes. And by the asset allocation decision, which is a fancy way of saying the percentage that we invest in stocks, in bonds, in real estate, in commodities, gold, et cetera, across the asset classes 88% of the return comes from being invested and then choosing what percentage we're gonna have in those particular asset classes.

Only a little bit of the return comes on top of that, which is security selection. So should I buy Coca-Cola stock or should I buy Pepsi stock and which one is gonna do better than the others? And so, The, the best way to approach investing in, in a way that we can achieve our goals and objectives with a high degree of confidence is to select an asset allocation and exposure to markets that are going to generate that long term compounding market return rate that accomplishes our goals and objectives.

And we can, again, we can do that with a high degree of confidence. It's really difficult to do security selection on top of that and beat the market consist.

In looking at this, my, If I was meeting with you, my question would be, why do I need to again, I think there's really two common things that folks find challenging. One is more obvious. Two, I think is more difficult to see until you're in those situations.

So the first. To get the asset allocation and the market exposures. Right. So most people, they say, Okay, well I know I want to be a long term investor, but what percentage should I be investing in stocks, in bonds, in real estate, in commodities, in all of those other things? Yeah. If that's gonna drive most of the market return, I need to get that right.

And you can do research online you know, you can do medical research online too, but when you, you know, have a medical problem, you go see a professional, right, Who's curated that research and understands it. Sort of explain it to you in a way that allows you to make a decision about the kind of treatment that you wanna pursue.

Right? So the same thing here. And, and then the second, the, the second reason that I, I think is less obvious is, It's, it's easy to say that you want to form goals and objectives and then be a long term investor towards those goals. It's much more difficult to do that when we have market volatility so we have a year, like 2022.

Markets are down a whole lot that causes people to sell and hold more cash, and we see that happening in the market. People. I think investors will swear, Oh, I never get out of the market. I'll never do that, except that investors now are holding substantially more cash than they were holding at the beginning of the year.

And the, and the question is, when will you get back in the market? And how do you keep yourself invested for the long term? Because we know that investing over the long term is how you achieve your goals. Even if you invested right before the financial crisis or right before covid happened, you are really happy investor today in the stock.

But if you sold at the bottom of either one of those crises and got out of the market then you would not be a very happy investor today because you would not be on track to accomplish your goals. And so having someone who's going to help hold you accountable and coach you through the process and make sure that you stay on track is another way that advisors add a lot of back.

And the fourth principle that we haven't talked about is. Taxes and fees matter. Yeah, so taxes and fees matter. I think there are some folks out there that are in , the taxes and fees are the end all, be all and nothing else should be important. Camp. And I do believe in, and we believe that reducing taxes and fees is really important in our portfolios are some of the most low cost portfolios that I'm seen in my.

But that doesn't mean they're the only thing that is important. But just taking half or a quarter of 1% out of your investment management fees over a 20 or 30 year time horizon is gonna be worth several hundred thousand dollars. And so when you think about retirement, for most people, that's a lot of money.

And so Reducing fees really matters for long term returns. And in areas of the market, like large cap US stocks or treasury bonds, some of those places where the markets are really deep, they're really liquid. And we could have exposure for basis points, we should have low cost core exposure.

And then there may be other areas of the market where it makes sense to, to pay for active management, right? But that tends to be really small allocations of a portfolio. And so we wanna minimize fees where we can. And then taxe. When we think about, you know this is another area that we talk a lot about the value out of what we're doing, Reducing taxes matters.

, if you're trading a lot in your portfolio and you pay short term capital gains tax, that's gonna be 10 or 15% more depending on what your income tax bracket is. Then the long term capital gains rates that you get by just holding securities for at least a. Making sure that you're realizing losses when we have down years in markets and having those losses to either offset future portfolio gains or offset your income.

It, it puts, you know, significantly more money back in your bank account this year and next year since we've had a down year. And so managing taxes and fees is really important and adds a lot of value over really long periods of. Makes sense. I mean all these things together to kind of indicate that the long term is really important.

Yes. Any, So, if you've watched any of our quarterly outlooks, right? Or you've had, or you've listened to me in a seminar or somewhere, you almost always see two charts at the beginning and one is a 25 or a 30 year chart looking at market returns. And the other is a 10 year chart looking at market returns because it's really easy for us to get focused on where's the market going to bottom right, When should I invest?

Gosh, the market's down a lot this year versus next. I have very few clients. I talk to very few people who have investment goals that are in the next six months or in the next 12 months. Almost always investment goals are for retirement or even if you're gonna retire next year, you're still probably gonna live for 30 years.

And so your investment goals tend to be in 10 years, 20 years, and 30 year time increments. So when we're talking about investing, we need to think about the long term, not get stuck myopically in the short term. Because a lot of. Sort of short term thinking is what causes us to make bad behavioral decisions and do things like sell out.

When, when we look at longer term returns and we stay focused on the long term, it helps us have a good investment behavior and achieve their kinds of returns that we want over the long term.

I would say in closing for this episode, these four principles, they're important every year, but I think they're particularly important in years where the market is going through a lot of turmoil. And we've had a lot of negative returns and there's this temptation and everybody feels it to sell out to reduce your exposures, to change your asset allocation if you have a well thought out investment plan, right?

So if you don't have an investment plan, then you gotta start there and you gotta get a plan. But if you have well thought out goals and objectives, and you have an asset allocation, that you have a high degree of confidence in is going to achieve the right compound returns over time then you should stick with.

And if you don't have confidence in that, then it's time to reevaluate your plan so that you can get to a place where you have a plan that you feel confident in, regardless of what's happening in the markets.

Well, Brian, today you talked about your foundational principles for successful investing, kind of the four things you talked about with every person that you meet with. But if somebody wanted to chat with you a little bit more about these principles and what they might mean for them individually, How can they get in touch with you?

Yeah, so the best place to do that is on our website. On the top right hand corner, there's a button that says Contact us. And you can schedule a meeting with me or with somebody on our team at a time that works for you. And we'd be happy to talk about investing principles, answer questions and if you've got some challenges in your portfolio, if you're not feeling confident in your plan then we'll grab you by the hand and sort of walk you through the process of evaluat.

And they can find you@thecapitalstewarts.com, the capital stewarts.com, and linked in the show notes below. We'll, we'll link it in the show notes below. You can also follow us on Twitter at the capital Stewart. Yeah, it's really spicy Twitter. Really spicy . All right. Thanks for joining this episode. Yeah, and don't forget to follow us on Twitter.

You'll add our extensive list of Twitter followers or or check us out on the capitals towards.com. Right? We'll talk to you next time.