The science of communicating balance
By Kyle Tetting
In addition to coordinating a weekly podcast, I spend considerable time listening to podcasts while commuting between Kenosha and Milwaukee. Podcasts and audiobooks during my drive allow me to stay engaged on current events and to dive deeper into areas that interest me. Some of what I listen to is financial, but the foundation of what I do for a living requires a broader understanding than just knowing the numbers.
I frequently listen to science and related topics. Some subject matter experts can eloquently describe their work and that of others – Neil deGrasse Tyson and Carl Sagan come to mind. But more often, I gravitate toward generalists. The generalists have foundational knowledge, but they better grasp how to convert the complex to the digestible. Their lifework is not in the underlying science, it’s in communicating science.
I see this as a significant aspect of my work as a financial advisor. While we must have a thorough understanding of the inner workings of markets and a deep knowledge of investments, at the end of the day, we have to be good investment communicators. Absent that communication, our clients might lose the why of investing and become more susceptible to the day-to-day volatility.
Consider the annual “Mind the Gap” study by Morningstar, which highlights the relative weakness in decision making by the average investor. In the 10-year period ending Dec. 31, 2022, the average investor underperformed the average investment by about 22%. What that tells us is that investments aren’t subject to fear and greed – while investors are.
According to the report, the average mutual fund and ETF across a variety of categories averaged 7.71% in annual earnings over that 10-year period. However, because individuals constantly reconcile market volatility and the decision to buy, sell or hold, the average investor in those funds earned just 6.04%. Decision making – actually, poor decision making – drove adverse outcomes.
In steps the role of proper allocation and education.
We advise investment balance not because it will outperform risk alone but because it provides a foundation for better decision making. Safe in the knowledge that our portfolios can withstand short-term volatility by providing access to less volatile alternatives, we can avoid the compulsion to react to bad headlines.
Interestingly, Morningstar researchers found that the more diverse and tactical the investment category, the worse the investor return tended to be relative to the investment. In part, investors tend to chase returns and run from risk, rather than invest for opportunity.
One of the smallest gaps between investor and investment returns was in allocation funds, where investors essentially surrender control of how the assets are allocated to the advisor. In essence, those investors captured better relative performance by focusing their efforts on an appropriate level of risk rather than on picking the best time for their investment.
That’s not a new concept to us. In fact, it’s really the foundation of what we do. As Bob Landaas put it in an article back in 2013, “Don’t try to game the system.” While there’s plenty of concern out there for investors, the Nobel prizes, academic research and hard data all suggest that the best strategy is to pick a plan and stick to it.
Despite what we know to be the best strategy, sticking to a plan remains as tough as ever. I can point to a large and growing list of reasons for caution, but at the same time, I can point to a similarly large and growing list of opportunities to pursue.
The underlying data supports the fact that most investors are just plain wrong on the timing of their moves. The better bet is to simply keep your safe money safe and leave the rest for growth. That’s certainly easier now because with higher interest rates you get paid for safety. But the foundation of balance remains the best way to both avoid the risks and capitalize on the long-term opportunities of being an investor.
Kyle Tetting is president of Landaas & Company.
Learn more
Why investments outperform their investors, a Money Talk Video with Kyle Tetting
Bad Timing Cost Investors One Fifth of Their Funds’ Returns, from Morningstar
Stronger tools to be patient, grateful, by Kyle Tetting
Balance beats timing (and uncertainty), by Kyle Tetting
The importance of humility in investing, a Money Talk Video with Art Rothschild
(initially posted Jan. 26, 2024)
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