The Hidden What-If Cost

Yesterday, I shared a meal with a friend. He's a young guy who reminds me of how I was around 20. Like me at 20, he loves investing. And, like me at 20, he prefers to do it irresponsibly and overconfidently. Ah, so many similarities between us. Part of me wants to shake him out of it, but then again, I don't think anyone was going to shake me out of my ridiculous ways back when I was his age.

He revealed to me how he's lost a good chunk of change through his investing practices. Not "lost" as in the market is going down but will eventually come back up. Rather, lost as in, poof, it's gone. It's a lot of money to him, but he did have a good comeback for me. "Travis, you always talk about how we shouldn't do things that financially endanger us or our family. This doesn't put me in danger, and I don't have a family yet."

He makes a good point. He may be out thousands of dollars, but he won't go without food or shelter. He's a single guy with limited financial overhead. However, here's where I want to land this plane. I pointed out to him there's a far more significant consequence at play. It's the hidden what-if, commonly known as opportunity cost. Said another way, it's what he could have done with that money instead of what he chose.

Out of respect for him, I won't use his actual numbers. Let's pretend he made some investing choices that cost him $5,000. Or you could insert a different choice here. Maybe you spent it gambling. Perhaps you decided to have a wild night at the club, or that impulsive trip to _______, or pulled the trigger on that motorcycle you've had your eye on.

Sure, $5,000 less in your pocket may not ruin your life. That's a fair point. But the hidden cost? The opportunity cost is what you could have done with this $5,000 instead of losing it on risky investments. In the case of my friend, I used an apples-to-apples comparison. Since he's trying to make money by investing, I shared an alternative scenario. If invested the right way (broad low-cost index funds with a lot of patience), that $5,000 would be worth nearly $250,000 by the time he turns 65. So, correct, his loss didn't ruin his life......but the cost was quite steep.

We can insert other opportunity cost scenarios here, too. How many hurting families could we have helped with $5,000? How many hungry children could we have fed with $5,000? How much education could we have attained with $5,000? How much quicker could we replace our aging car with $5,000? How many amazing memories could we have created with $5,000? The list goes on.

Yes, it's only $5,000. But it's $5,000!!!! Whenever we make decisions, we must look beyond the direct costs. An opportunity cost assessment will show us our best choice. Follow that one!

Just Stick Your Head In the Sand

One of my clients reached out with concern yesterday. He recently saw that one of the most famous investors in the world shorted the stock market. That means he's betting that the stock market will crash. If the market goes down, he wins. If the market goes up, he loses. It's also worth noting that he's reportedly put 90%+ of his portfolio in this position. In other words, a very prominent investing figure strongly believes the market is going down....and he's putting his money where his mouth is. 

My friend's immediate response was that he, too, should consider selling his investments. This reaction is a very human way to approach investing. This is also where we get ourselves into trouble. The problem with timing the market is we have to be right twice. We have to know when to sell, then when to re-buy. It sounds easy. Sell it now when the market is high, and buy later when it is low. In practice, however, it's anything but easy. Let's say he was to sell now. How do we know the market won't go up another 10%, 20%, or 50% before it falls? Every time it goes up, he'll be more emboldened to stay out until it finally crashes, affirming his original decision to sell. Then once it does eventually crash, he'll need to know when to buy again. It's a scary place at the bottom. It's full of fear, uncertainty, and imbalance. More times than not, people who try this approach re-buy way too late, after the market has significantly recovered. The data shows people who try to play this game significantly underperform the market.

What's the alternative? Just stick your head in the sand. The wise, patient, and effective choice is to simply ignore the noise around us. Do nothing. Don't worry about it. Don't make any decisions. Don't let fear get the best of you. Just stick to the plan and trust the process. 

Check out the chart below. It shows the stock market's value, over time, since 1/1/2000. Since then, the stock market has crashed four times:

• 2001: Down 46%

• 2009: Down 54%

• 2020: Down 32% (in 5 weeks!)

• 2022: Down 20%

Yet, through all this mess, the person who just stuck their head in the sand would have approximately 3.2x as much as they started with (more than tripled your money!!!). This doesn’t even include all the dividends you would have received along the way (which averaged 1.9%/year during that stretch). You wouldn't have lost a wink of sleep, spent any time dealing with your investments, or worried in any shape or form. This is the way investing should be. Head in the sand. Trust the process. Just live a meaningful life!

* For whatever it’s worth, this is exactly what I’ve done in my own life. I started long-term investing in late 2000, and have never once sold one penny of one investment. It’s an extremely simple and tremendously effective way to handle our investing. And no, I didn’t lose one wink of sleep when I lost 1/3 of my life’s savings in a five-week stretch in 2020 or 1/5 of it in 2022. We take the bad with the good, period.

Ron Popeil Would Be Proud

When working with clients on investing, I stress the importance of simplicity, consistency, and patience. We choose broad, cheap funds. We make contributing a habit in our life. We remember how long our time horizon is.....so we don't freak out about the volatility along the way.

Years ago, I helped a young client set up her investments just this way. We selected one of the best index funds in the world, we automated it, and she understood the big picture. Aside from that, she did absolutely nothing.

Fast forward many years, this person had long moved on from my coaching services. I randomly ran into her on the bike trail. During our brief chat, we touched on her financial progress. In this exchange, I asked her how she felt about the recent stock market craziness.

"You told me not to stress out about the stock market, so I don't even think about it."

"Yeah, that's a really great approach! I'm glad you feel good about it....just as you should! How do your investments look?"

"I haven't logged on in a few years. You said it was all automated, and I don't have to do much, so I haven't. In fact, I don't even know my account login."

"You're right. No reason to obsess about it. But maybe you should at least know how to log in to your account!"

I encouraged her to get her login information and record it somewhere safe, so she can get into her account if/when she needs to (such as changing the amount automatically being contributed."

A week later, she calls me somewhat in a panic, very excitable. "Travis, do you know how much money is in this account!?!?!" She shared the number, then shared her utter disbelief. It was far more than she had imagined it would be. I explained this is exactly what happens when we make it simple, consistent, and patient. Her monthly contributions were now just a normal part of her monthly budget, and this plan is fully integrated into her life. Yet, it's made a massive difference in her journey. These are all ideas and numbers we talk about in our meetings, but it's another thing to see it materialize right in front of your eyes. This is one of the challenges of finance. Numbers on paper never feel real. Part makebelieve, part too-good-to-be-true, part I-wish-this-would-go-faster. I couldn't be prouder of her mindset and progress. Keep it simple. Be consistent. Be patient. Don't lose sleep over it. Just living her meaningful life. That's what it's all about.

Set it and forget it. Ron Popeil would be proud!

The Stock Market Is Melting....or Is It?

Per usual, there's been a lot of talk about how bad the stock market is. According to the prevailing narrative, it's "risky," people have lost a lot of money, and it's not wise to put money in it. Whenever I wander into these types of conversations, I always ask why people think that. Inevitably, the answer is some form of "because it's lost so much money." 

First, I'm not belittling anyone here. I understand perfectly well why people have this impression of the stock market. If you watch the news, they consistently report the big red arrows pointing down......but rarely show the big green arrows pointing up. It's doom and gloom. If it bleeds, it leads. 

There's also the reality that the 21st century has started a bit (er, a lot) rocky. Over the last 23.5 years, here's what we've experienced:

• Y2K

• Tech bubble burst

• Worst terror attack in US history

• Multiple wars

• 2nd worst recession in US history

• Housing market collapse

• Global pandemic

• rampant inflation

• 4 stock market crashes (-46%, -54%, -32%, and -25%)

Pretty insane, right?!?!

So when people feel like the world is melting and the stock market is an absolute disaster, I get it. But what's the truth? Through all that, over 23.5 years, the stock market is up 6.7% per year. If you would have invested on 1/1/2000, your money would be worth 4.6x what it started as. You more than quadrupled your money. Re-read my list of chaos above.....then digest that the market has gone up 4.6x through all that. Crazy, but true!

Perspective matters, as I love to say. Our world takes simple, practical, and effective ideas, and perverts them into urban legends and half-truths. Truth matters, but there's so much noise in the financial world that it's hard to see it sometimes. 

Whether you're investing in your work's 401(k)/403(b), your IRAs, or other types of stock market investing, remember this concept, and don't lose any sleep at night! In the world of meaning over money, losing sleep over investments is not leaning into the meaning. You got this!

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Yesterday, we released a podcast episode about the same topic. If you have a friend who enjoys reading, please consider passing along the blog post. If you have a friend who enjoys listening to podcasts, please consider the same. You can find it on Apple, Spotify, or wherever you listen to podcasts. 

Note: The figures mentioned above are based on the S&P 500 and include the reinvestment of dividends.

Being Right vs. Getting it Right

While serving a client yesterday, I was in a team meeting for a project we’re working on. It’s a complex project that intersects with several different departments. For that reason, it’s always helpful to bring the team together to get a second set of eyes and fresh perspectives. One woman, who is very new to the company, pointed out a few logical inconsistencies with my work. After discussing for a few minutes, it was clear she was right. I could tell she was confident in her perspective, yet hesitant to tell me I was wrong. Though it’s never fun to be wrong, I greatly appreciated her shining a light on this issue. To ensure she and everyone else would continue to feel comfortable, I let them know my perspective on the topic. “I’m in the business of getting it right, not being right.” From that point forward, the feedback and discussion opened up and the project was the primary beneficiary.

It’s not easy, but I try to make this my motto in life. Being right does me no good when I don’t get it right. It’s a fruitless endeavor with our pride being the only winner. This is actually one of the main characteristics I look for when interviewing prospective coaching clients. If they are in the business of being right, they can never reach their full potential. In fact, it will be a brutal coaching journey, full of butting heads and stubborn disagreements. On the other hand, if they are in the business of getting it right, there’s no limit to what they can accomplish.

When I think about this idea, a few different angles come to mind:

• Just because something used to be true, it doesn’t mean it’s still true today. Investing is a huge example of that. Most people invest the same way today that they did 25 years ago. After all, it’s the way it’s always been done. What they don’t know is there are far better ways to invest today. Ways that didn’t exist 25 years ago. Easier, cheaper, better, simpler, and more streamlined ways. This highlights the importance of continually learning and evolving as our environment evolves.

• We often get so engrained in the way we see something, we aren’t willing to consider that perhaps there’s a better way. This is a common occurrence in my line of work. If someone were to consider that I may be right about something, they have to simultaneously consider that they may have been wrong for the past 5, 10, or 20 years. This is a tough pill to swallow…..so many don’t. If we can humble ourselves to consider we may be wrong, we open ourselves up to the truth.

• Sometimes we are right about something……but there’s more to the story. We know the truth, but it’s a half-truth. These can be deadly, as we get a false sense of confidence and let our guard down. These are pervasive in the financial world. There are a lot of universal truths people pass back and forth, but they are often only half truths. If we’re hungry to learn, we can find the missing pieces and get a fuller understanding of the real truth.

This is hard, but worth it. I haven’t always got this right. Strike that. I often got it wrong for many years. But the more I learn, the more I realize I don’t know. As you settle into your day, I challenge you to be in the business of getting it right, not being right. I promise it will change your conversations, your relationships, and yourself.

Retiring Your Kids?!?!?!

I’ve seen this topic pop up from time to time in the past, but it seems to be gaining steam these days. Perhaps it’s a natural byproduct of more and more people understanding the power of compound interest. Mix that with people’s desire to hoard and the common belief that money=happiness, and it’s a perfect recipe for “winning.”Here’s the idea. If you, as a parent, invest $x today (or $y per month) when your child is a baby, you’ll effectively be able to “retire” them. In other words, if you build up enough investments early enough, there will be a huge sum of money in there by the time your kids reach their 40s, 50s, or 60s…..so they will be able to retire without having to put in any of the actual work themselves.

The math is true. You can absolutely do this. It’s quite possible if you really want to do this. I can even teach you how if you care to know the math. My question is this: Why would you want to ruin your children? Part of being an adult is having to figure it out. Do good work, be productive, serve others, be disciplined with our giving/saving/giving, invest consistently and patiently, and live a meaningful life. When we attempt to retire our kids through investing, it’s like asking our kids if they want to put a puzzle together, but you already put 90% of the pieces together for them. The point wasn’t to complete the puzzle, but rather the process of putting it together. That’s where the meaning lies.

I’ve seen so many people get absolutely ruined by having tons of money dropped on them early in life (or knowing early in life it will be dropped on them in due time). Some of it was planned, some was accidental, and some was situational. But in most cases, regardless of the reason, the meaning, motivation, and purpose can easily be zapped from their lives. Yes, they have wealth…..and wealth can buy a lot of things. But at what cost? I’ve seen the cost and I wouldn’t wish it upon my worst enemy. I thought the previous sentence might be an exaggeration, so I considered changing it. But after further contemplation, I’m not sure it is. When we completely remove the need to be productive, especially at an early age, it does a number on us mentally, emotionally, and psychologically.

Don’t ever forget the importance of the journey. It’s far more valuable and rewarding than the destination.

Have Your Cake and Eat It, Too

A few days ago, I met a woman in Thailand who is familiar with our podcast. It was shocking that she knows who we are - especially on the other side of the world - but her kind words were uplifting and encouraging. One of the things she said struck me. She loves how we continually talk about and teach the importance of being financially responsible……while also living with meaning and enjoyment.

She went on to share how this mindset makes all the difference. It’s easy to put our mathematical hat on and make the ”best financial decision.” Doing so takes no effort and no thoughtfulness. We simply do the math and make whatever decision results in us having the most money. Unfortunately, when we let math guide all of our decisions, we turn into fun-hating robots. We hoard our resources, say “no” to anything fun, and constantly wonder when enough is enough (spoiler: it will never be). Conversely, living financially responsible AND with meaning allows us to disconnect ourselves from constantly making mathematical decisions.

Yes, let’s save, give, invest, and practice frugality in the various areas of life. These are inherently good things and our life will most certainly be better for having done them. However, let’s also take that trip, buy that thing, make that memory, eat that meal, and go to that event. These things add so much richness to our life. It’s about balance and intentionality. When we get it right, we truly can have our cake……and eat it, too.