2899: Know Thy Investing Self by Nick Maggiulli of Of Dollars and Data on Long-Term Investment Success

[00:00:00] [SPEAKER_01]: This complex financing talk is very challenging. Do I get my depot ever?

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[00:00:26] [SPEAKER_00]: This is Optimal Finance Daily. Know Thy Investing Self by Nick Maggiulli of OfDollarsAndData.com.

[00:00:36] [SPEAKER_00]: And I'm your host and personal finance enthusiast, Diana Merriam. Now let's get right to it as we optimize your life.

[00:00:47] [SPEAKER_00]: Know Thy Investing Self by Nick Maggiulli of OfDollarsAndData.com.

[00:00:54] [SPEAKER_00]: There's a great line that comes from George Goodman's The Money Game. Note that Goodman went by the pseudonym Adam Smith.

[00:01:03] [SPEAKER_00]: Quote,

[00:01:05] [SPEAKER_00]: The first thing you have to know is yourself. A man who knows himself can step outside himself and watch his own reactions like an observer. End quote.

[00:01:16] [SPEAKER_00]: Knowing yourself as an investor will be far more important for your long-term results than even the most perfect portfolio.

[00:01:25] [SPEAKER_00]: Why? Investing is primarily a behavioral exercise, not an analytical one.

[00:01:32] [SPEAKER_00]: Despite all of the data that OfDollarsAndData prides itself on displaying, behavior beats analytics in the investment world.

[00:01:41] [SPEAKER_00]: To demonstrate the importance of this, I'm going to tell you a personal story about my history with one asset in particular.

[00:01:50] [SPEAKER_00]: Gold.

[00:01:51] [SPEAKER_00]: I used to hold 5% of my net worth in gold.

[00:01:55] [SPEAKER_00]: But after examining the data and questioning myself, I realized I had to get out.

[00:02:01] [SPEAKER_00]: Why was I in gold to begin with?

[00:02:03] [SPEAKER_00]: There is some evidence that gold can play an important role in a portfolio due to its lower correlation with equities and bonds.

[00:02:12] [SPEAKER_00]: When the S&P 500 goes zig, gold generally goes zag.

[00:02:18] [SPEAKER_00]: As a result, there's a small rebalancing bonus that you could have earned, historically, by holding some gold.

[00:02:25] [SPEAKER_00]: However, though it plays well in a portfolio, gold is a very volatile asset by itself.

[00:02:33] [SPEAKER_00]: The highest one-year real return for gold since 1976 is 120%.

[00:02:40] [SPEAKER_00]: And the lowest is negative 41%.

[00:02:44] [SPEAKER_00]: More importantly, you'll notice that gold can have long stretches of negative returns.

[00:02:50] [SPEAKER_00]: To be exact, from 1981, it took about 32 years before gold was back at its all-time high.

[00:02:59] [SPEAKER_00]: And that is why I had to get out of gold as a long-term investment.

[00:03:04] [SPEAKER_00]: Can you imagine having 5% of your net worth in an asset while watching it drop by 70% in value over the course of multiple decades?

[00:03:15] [SPEAKER_00]: I realized I could not.

[00:03:18] [SPEAKER_00]: And I sold last week, thankfully, at a profit.

[00:03:21] [SPEAKER_00]: The fact that I've gone back and forth on gold a few times over the last few years illustrates why I shouldn't own anything this volatile.

[00:03:31] [SPEAKER_00]: I've accepted my nature as an investor and will ignore gold as a long-term investment for the rest of my life.

[00:03:39] [SPEAKER_00]: Rebalancing bonus be damned.

[00:03:42] [SPEAKER_00]: Ironically, Michael Batnick, my favorite investment writer, recently put 10% of his net worth into gold as a short-term investment based on pricing trends.

[00:03:53] [SPEAKER_00]: My decision to abandon gold could either work out in my favor or be an expensive mistake.

[00:03:59] [SPEAKER_00]: But I'm okay with that.

[00:04:01] [SPEAKER_00]: How to know your investing self better

[00:04:03] [SPEAKER_00]: The problem with trying to know your investing self is that you have so few data points to go on.

[00:04:10] [SPEAKER_00]: Large market drawdowns happen rarely.

[00:04:13] [SPEAKER_00]: And some investors, me included, have never experienced anything of this magnitude.

[00:04:19] [SPEAKER_00]: Despite the difficulty in determining how you will react to a 30%, 40%, or 50% decline in equity markets,

[00:04:28] [SPEAKER_00]: there are likely clues into your behavior.

[00:04:32] [SPEAKER_00]: For example, consider the following questions.

[00:04:35] [SPEAKER_00]: Do comments around the stock market from your friends or colleagues make you want to check your portfolio?

[00:04:40] [SPEAKER_00]: If you lost X amount of dollars, where X is 50% of your equity allocation, would you feel okay still owning stocks?

[00:04:51] [SPEAKER_00]: Note, this has to be done in actual money terms, not in percentage terms.

[00:04:56] [SPEAKER_00]: Losing 50% sounds bad, but losing $500,000 sounds far worse.

[00:05:03] [SPEAKER_00]: Always convert to dollars when thinking about losses.

[00:05:07] [SPEAKER_00]: What kind of event would have to occur for you to sell?

[00:05:11] [SPEAKER_00]: Such as full-fledged nuclear war, super-volcano eruption, etc.

[00:05:17] [SPEAKER_00]: This sounds extreme, but it may get you thinking about how you would feel so you can admit if you have a selling point.

[00:05:23] [SPEAKER_00]: And, are there any assets that you could never own based on their volatility?

[00:05:30] [SPEAKER_00]: Despite all of these questions, it will still be difficult to know your investing self.

[00:05:35] [SPEAKER_00]: Or, as Fred Schwed once said,

[00:05:38] [SPEAKER_00]: Like all of life's rich emotional experiences, the full flavor of losing money cannot be conveyed by literature.

[00:05:47] [SPEAKER_00]: End quote.

[00:05:49] [SPEAKER_00]: While investing with real money may be the only way to actually understand your investment nature,

[00:05:55] [SPEAKER_00]: I don't recommend doing anything that could ruin you financially.

[00:05:59] [SPEAKER_00]: However, taking a small percentage of your portfolio and putting it into more volatile assets

[00:06:05] [SPEAKER_00]: may be worth the investment, even if you incur small losses.

[00:06:09] [SPEAKER_00]: The knowledge you gain from this exercise could save you far more in the future.

[00:06:15] [SPEAKER_00]: Best of luck in finding your true investment self.

[00:06:23] [SPEAKER_00]: You just listened to the post titled,

[00:06:25] [SPEAKER_00]: Know Thy Investing Self by Nick Majuli of OfDollarsAndData.com

[00:06:32] [SPEAKER_00]: And I'll be right back with my commentary.

[00:06:34] [SPEAKER_00]: Buy low, sell high.

[00:06:37] [SPEAKER_00]: It's easy to say, hard to do.

[00:06:39] [SPEAKER_00]: For example, high interest rates are crushing the real estate market right now.

[00:06:44] [SPEAKER_00]: Demand is dropping and prices are falling, even for many of the best assets.

[00:06:50] [SPEAKER_00]: It's no wonder the Fundrise flagship fund plans to go on a buying spree,

[00:06:55] [SPEAKER_00]: expanding its billion-dollar real estate portfolio over the next few months.

[00:06:59] [SPEAKER_00]: You can add the Fundrise flagship fund to your portfolio in just minutes,

[00:07:05] [SPEAKER_00]: and with as little as $10, by visiting Fundrise.com slash OFD.

[00:07:11] [SPEAKER_00]: That's F-U-N-D-R-I-S-E dot com slash OFD.

[00:07:17] [SPEAKER_00]: Carefully consider the investment objectives, risks, charges, and expenses

[00:07:23] [SPEAKER_00]: of the Fundrise flagship fund before investing.

[00:07:26] [SPEAKER_00]: This and other information can be found in the Funds Perspectus at Fundrise.com slash flagship.

[00:07:34] [SPEAKER_00]: This is a paid advertisement.

[00:07:37] [SPEAKER_00]: I appreciated when Nick pointed out, quote,

[00:07:42] [SPEAKER_00]: Investing is primarily a behavioral exercise, not an analytical one, end quote.

[00:07:48] [SPEAKER_00]: While it is important to have knowledge about investing,

[00:07:52] [SPEAKER_00]: this knowledge should be applied within the context of what you know about yourself.

[00:07:57] [SPEAKER_00]: I joke that I'm a lazy investor, and it's because I mostly ignore my portfolio.

[00:08:03] [SPEAKER_00]: I have a 100% stock allocation in total market index funds.

[00:08:08] [SPEAKER_00]: I don't have to think about rebalancing, and most of my contributions have been automated.

[00:08:14] [SPEAKER_00]: I very rarely look at my investments, and so every time I do, I'm pleasantly surprised at the number.

[00:08:21] [SPEAKER_00]: I also have a very long time horizon, and I don't anticipate I will touch my investments for another 30 years.

[00:08:28] [SPEAKER_00]: I'm sure I could be optimizing and squeezing out slightly better performance if I fussed with my portfolio.

[00:08:36] [SPEAKER_00]: And over time, I'm sure I'll make adjustments, especially as I get closer to drawing down on my portfolio.

[00:08:43] [SPEAKER_00]: However, as strange as this sounds, I believe the pillar of my investing strategy is that I don't look at my investments.

[00:08:52] [SPEAKER_00]: I view the money that I invest as a tax that I'm paying to my future self.

[00:08:57] [SPEAKER_00]: It's not my money now, and I have no claim to it.

[00:09:00] [SPEAKER_00]: So I can ignore it just as I would ignore your portfolio.

[00:09:04] [SPEAKER_00]: It's none of my business.

[00:09:06] [SPEAKER_00]: When people watch the roller coaster of their investments,

[00:09:10] [SPEAKER_00]: they often talk about how they lost money when there's a market correction.

[00:09:14] [SPEAKER_00]: And the emotions of that loss often cause them to fuss with their investment strategy.

[00:09:21] [SPEAKER_00]: I know I would do that too, if I thought of that money as mine.

[00:09:24] [SPEAKER_00]: So I'm sticking to my ignorance is bliss strategy.

[00:09:29] [SPEAKER_00]: And that'll do it for today.

[00:09:31] [SPEAKER_00]: Have a great day and rest of your weekend.

[00:09:33] [SPEAKER_00]: And I'll see you tomorrow as usual, where your optimal life awaits.

[00:09:36] [SPEAKER_00]: Bye-bye.