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Not Much Meat on the Bone

investing investment returns money management risk tolerance Jun 06, 2024
Man holding head in hands watching the stock market

It’s becoming nearly impossible for investment managers to beat the public markets. We call this ‘alpha;’ the difference between what your investment manager is getting you from a return and what the general market is getting.

So why even bother with an advisor? Why not just find the cheapest possible way to invest in the market and let it ride?!

Here’s why…


Public markets are NOT the answer

Public stock markets - the TSX (Canada) and the S&P 500 or the DOW (USA) - are easy to replicate. You can invest broadly in these markets for half a penny on the dollar. The cost of ‘being in the market’ has never been lower.

There is an argument to be made that investors in their 20s - those without dependents and financial complications - should only be invested in the public market.

Let. It. Ride.

I tend to agree for those who a) have not been punched in the mouth by a shitty market and b) have the mental fortitude to stick through said shitty market. Finding the lowest cost alternative is a very viable option.

But for those of us who have watched our net worth drop by 25% in a year, who have seen the effects of interest rates going to 19%, or are soooo close to being able to hang it up and not work anymore, public markets are not our only answer.


Private is the way to go

Adding private investments to your portfolio is - I’ll say it - a MUST.

Did you know that there are ten times as many private businesses as there are public ones, that do $100,000,000 in annual revenue? Ten times! 🤯

A good advisor will help you get access to these investments, past the roadblocks that are in place for most of the investing public (for good reason).

As I write this, GameStop and AMC - everybody’s favourite ‘meme stocks’ - are on an absolute tear!!!  Why, you ask? Because - I shit you not - ‘Roaring Kitty,’ a Reddit blogger, returned to the internet after a two year hiatus to tell people NOW is the time.

It’s complicated, but a lot of people made a lot of money this week on his advice … 200%! The number of people who lost money the first time around dwarfs this number.

Public markets are full of emotion and irrational decision making, and literally anyone with a smartphone and a bank account can get involved. Markets are not efficient places, they can function as glorified casinos.

Private markets, on the other hand, are like boring casinos with a dress code, closing time of 8pm, and by invite-only. There is still risk involved, but the volatility is much less.


There’s more than stocks out there

Private or public, there is much more out there than stocks, folks.

In Alberta, diversification tends to mean owning oil AND gas stocks. If you’re really spread out, you can throw in some pipeline companies there too! 😂

Did you know …

  • You can own (an extremely small) piece of Taylor Swift’s latest album and get paid every time it streams on Apple Music?
  • You can be the owner of a tomato farm in Spain and participate in the profit of selling crops?
  • You can lend money to the European government to build freshwater pipelines, and earn a boring and consistent 7% while doing it?

It’s a longer story than worth telling here, but the benefits of diversifying in public markets is all but gone. The markets move up and down together - yes, there are exceptions, but for the most part, we left logic behind a long, long time ago.


Don’t sleep on volatility 

The US stock market has returned about 9% annually for the past 100-ish years. Pretty good, right? Most investors would be thrilled with this return.

But what doesn’t get talked about enough is the wild ride to get there. Warning: we are about to get nerdy here, folks - prepare for a flashback to Statistics 217…*shudders at the thought*. The standard deviation of the US stock market is 15%. This means that with relative certainty, you can expect a 30% swing in either direction in any given year. That 9% average return will require you to be cool with -21% or positive 39%, for no apparent reason.

The markets ROARED in 2023 with a positive swing up about 22%!

But … they were down almost the exact same amount in 2022. How soon we forget. If you were invested from January 1, 2022 to December 31, 2023, you made just over 2% total. 

Everyone was a genius in 2023, but the markets corrected in 2022. Honestly, as a financial professional, I don’t know which is worse, listening to the countless influencers telling people to ‘Buy when the markets are low’ or those same people saying, ‘See, look! Markets always go up!’ when they are roaring.

Deploying a strategy that doesn’t depend on the drama of the markets is worth the price of admission in working with a professional.

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