You Have Three Choices…

If you read my post about Looking In The Mirror from a few days ago, you know that I’m fairly jaded about the value that most investment firms can add for the average investor, especially investors still brainwashed into thinking the value of the investment adviser is solely to beat the market.

The intent of the post was definitely not a knock on the financial planning process or the value of having an investment professional in your life, rather it was a commentary about how myopic the pursuit of the perceived value has become. It was also a commentary about the legacy wirehouse firms of Wall Street. They are no longer the place most (if not all) investors should be using, because of the inherent conflicts of interest laden in their business model: A product distribution model in adviser’s clothing. The post was really about a call for common sense & simple reflection.

That being said, without any real call to action all you’re left to do is meditate, which, while useful, doesn’t exactly pay the bills.

Now, there are thousands of vehicles & strategies to try to accomplish anything you could possibly want under the sun. Wall Street’s appetite to sell you anything is insatiable. I mean if brokers are busy schlocking Emerging Market Debt Funds to yield-hungry grandmothers, there’s officially nothing sacred. We all remember the Enron traders, don’t we?

So what do you do?

First off, at it’s most basic level if you are investing, there are really only three levels of expectations you should probably have for your money:

  • Alpha – trying to kill it with market-beating returns — You’re focusing on return.
  • Something I call AlphaBeta – saving it from collapse or actively mitigating mood swings — You’re focusing on risk.
  • Beta – betting the world isn’t going to end & keeping it lean on fees — You’re focusing on being the market.

All of them in some mixture probably belong in your portfolio. All of them will have limitations. That’s the most important thing to remember about picking any strategy or investment guru to manage your money — the limitations.

Value investing is not the holy grail, it’s simply one-half of the coin. Small caps aren’t going to save your large portfolio. Momentum is not the chalice of champions.  Dividend investing doesn’t always pay. Risk parity isn’t perfectly plucky at pulling rabbits from a hat. And doing nothing but buying and holding isn’t going to be the second coming for couch potatoes providing rock hard portfolios for future spending.

Once you break the investing world down into these three basic elements, it becomes a much smaller place. And if you use these three basic elements as your compass, I think you’ll have a much more clear reason for why you are investing in the strategy you’re considering.

And yet somewhere along the way, you’ve been sold on the notion that your broker and their firm should get paid to manage all of it trying to beat the market, without any sort of look at the limitations…

Without any expectation on the limitations of their business model…

Without any expectation of the limitations of reality…

So, let this serve as your wake up call. The world is a very small place, with very few real choices, and very few opportunities for you to be part of the 1%. Once you accept this, your life will be simpler.

Once you do, you’re 99% of the way to nirvana; with limitations.


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