Ep #30: What Are Our Investment Philosophies?

Benjamin Haas |



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Benjamin Haas  00:02
Hi everyone and welcome to A/B Conversations where we will help you CFP your way out of it. A podcast where you get into the minds of a couple Certified Financial Planners on how we think and feel about everyday financial planning questions and what should really matter most you. A healthier financial life starts...now! Hey Adam, welcome back to this week's podcast. A/B Conversations, episode 30 I believe. It's like a round number we should highlight that. 

Adam Werner  00:39
That's crazy. 

Benjamin Haas  00:40
Welcome back. I think we got a great one here today. We often talk about, 

Adam Werner  00:46
Hey, temper expectations. It's an OK one. 

Benjamin Haas  00:51
It's going to be great. You know, A/B conversations, we are financial planners; we talk about financial planning all the time. The question we get then is, you work with investments, right? Investing is important. We will of course highlight that today but we don't think investment advice should be independent of financial planning for many, many good reasons. So let's hit on today, the planning aspect of things, then the behavioral side of things, the service side of things, all wrapped up in how do you and I, how does the Haas Financial Group think and feel about investments? What are our philosophies? 

Adam Werner  01:29
Yeah, okay. Yeah, I love it. 

Benjamin Haas  01:32
And it's going to be great.

Adam Werner  01:35
It's going to be great, it's going to be awesome. Everybody strap in, here we go. I heard recently, it was just like a one or two sentence kind of high-level overview of why the focus on investments is sometimes just rife with peril and it was from a planner. We like to eat our own cooking and it was, if you were attempting to beat the market, and hey, great news, you beat the stock market, but by the way, you didn't accomplish any of your goals along the way. Are you truly happy? The flipside being - you didn't beat the market from an investment standpoint but you were able to meet all of your goals? You know, are you happy? And we would hope that answer is yes.

Benjamin Haas  02:17
Absolutely. Yeah and so that's a great way to kick this off. The reason we say planning has to start with it and we have to be aligned towards goals is that you need to have an understanding of what you're actually trying to accomplish and that just comes back to risk and return. Let's start with, I would say core philosophy. Number one, it's at some sort of asset allocation.

Adam Werner  02:40
Yeah, it's the don't put your eggs all in one basket and then much deeper than that, there are many different, we call them asset classes. Stocks, bonds, commodities, whatever, there's so many of them but getting that allocation correct to us, is the most important part. If you are owning a large cap value fund. Great. Get that percentage, right. It's not as important to get the best large cap value fund you can because it's going to change from year to year. There's not one that beats every other fund in perpetuity. 

Benjamin Haas  03:22
Yeah and there's more than 1,000 of them so it's going to be impossible to get that one right. So that's well said and I think we would also say that within the context of financial planning, we truly believe that risk is quantifiable. It is a known thing. This is not heads you win, tails you lose. And right, I'm either going to make a lot of money or it could all go away tomorrow. Risk is quantifiable. You brought up a good one. Security selection is not everything but I think when it comes to that idea of asset allocation, that can change over someone's lifetime too based on their phase of life. It's not to go into details on a three-bucket theory that we follow but it is to make sure that you have the right amount in each bucket and that's really the idea of asset allocation. And it's not just us, we're fundamental in the way that we approach this. Modern portfolio theory is a thing that's been around for 70 years. Security selection has been proven that it doesn't really generate all this excess return on a regular basis. So just it's supposed to be vanilla, right? It's supposed to be like watching paint dry.

Adam Werner  04:32
Yeah, we are not Oz behind the curtain when it comes to investments, right. There's no secret sauce, there's no silver bullet. We are certainly intelligent and we know what we're doing but fundamentally, we believe that the market is going to do what the market is going to do generally, as long as we get the high level correct and we have the proper discipline along the way. That's worth a lot.

Benjamin Haas  05:00
When we meet someone for the first time or we're asked to weigh in on investments, this is part of our, we'll say, issue recognition, right? I know we've got a couple examples. I'll go with the most recent one that we saw. Someone that owned a lot of different investments and they were all in the same account. But we see this too. I've got this fidelity account, I got this Vanguard account, I got this account over here, I'm diversified, right? Well, when you dive a little bit deeper into that, if they all track the same index or they are kind of owning the same things. It's like going to the grocery store and getting granny smith apples here and then you go to a different grocery store over here and get the same apples. You're not really diversified and we'll often see that.

Adam Werner  05:45
Yeah, so I don't like to say it but there's often the phrase that I use that is, at any point in time, somebody should be unhappy with at least one of their holdings in their account because they are not all meant to do the same thing and react to the inputs of the market exactly the same while some are zigging, others are zagging. That's the point.

Benjamin Haas  06:09
Yeah, asset allocation is supposed to help give you the greatest shot that you have to get to the goal that you want to have. Not that you go through this horrible experience and then you have this great experience and you're on that roller coaster ride. 

Adam Werner  06:21
That's it. Our hope with diversification is that it smooths out some of that roller coaster ride so it doesn't feel as that big steep drop of a roller coaster. 

Benjamin Haas  06:33
So issue recognition, number two. We'll often meet people who actually have no idea the amount of risk they're taking or it certainly isn't aligned to their expectations and God forbid you were in a portfolio that you shouldn't have been in March of 2020. Yeah, that's often the biggest kind of red flag for us in what they are invested in if it does not align with how they approach risk and how they would be able to tolerate risk if things got ugly. We've certainly met people through that process, right when they say, this isn’t acting how I think it should be acting and again, we dive deep and say, Well, here's why. Yeah, this is the risk that you're actually taking. It's like, I don't want all of that risk so what should I do differently? Yeah, aligning somebody's risk tolerance or at least their appetite for risk and part of that comes through the planning process, right? If we can determine, here's what you would need to see of return over time to be able to accomplish your goals, we can back our way into that. That's certainly how we would approach it rather than the other way around to say, here's what I think the market’s going to do over a long period of time and market again, stocks, bonds, whatever, and then say, what can I accomplish? That's not the way that we would approach planning. Tell us what your goals are and then let's figure out how to invest in an appropriate way. Yeah, that's actually a really good way to kind of summarize that, asset allocation, diversification, it's a risk return, right? Do your best with a security selection but get that asset allocation and make sure it fits what you're really looking to do. 

Adam Werner  08:17
Yeah, we wouldn't want somebody to feel like they need to sell at a point of volatility. Now you get an, I kind of locked in a worst-case scenario. 

Benjamin Haas  08:25
Let's use that as a really good pivot to I think, the next layer of investment management to us and that is dealing with our emotions. Dealing with behavioral finance, how people may react to a couple different things and I think that starts with just whether we're working with people or not. Sometimes the question will be usually based on some sort of headline, shouldn't I be doing something different? Shouldn't I get out of the way of this? We'll call that just market timing. 

Adam Werner  08:59
And that's natural to want to feel like you are, again, I'm going to use the word beating the market, right? I'm doing better than what I'm seeing on TV, I'm going to outsmart these millions of other people that are trying to do the exact same thing. It's just over long periods of time, it has been proven to be pretty impossible to try to time things on both sides. If you're trying to not catch the falling knife, right, getting out of the way, you also then have to decide when to get back in and that's equally as difficult. 

Benjamin Haas  09:35
Yeah, there's just so much that can go wrong with trying to time things and I guess I often go to the fact that just news is there and headlines are there to solicit some sort of emotional reaction and it's really hard to make money when you're panicking. It's also really dangerous to feel like, oh man, I have to jump on board with this one thing because it's the next hottest thing. There are too many things that can go wrong with that.

Adam Werner  10:03
Well and what we've seen too in our experience with the market and investments is, there's no way to really know, with all of these different variables, which one holds the most weight at any given time, right? We go back to the election and now, this is just me speaking, that feels like a lifetime ago, right? That doesn't feel like that happens five months ago? November, five months ago. That was a topic of conversation that came up over and over. We did two podcasts on it I believe that, you know, was a singular focus because that took up the most headline news. But when you distill it down to the market perspective, that is one of hundreds, if not 1,000s of different variables that get weighed in to how things react, how companies are going to be profitable or not, over time that it's just impossible to pinpoint any one variable and say I'm going to make a decision based off of this one thing, it can work out. Sometimes that's accidental because all these other variables are also doing that thing behind the scenes but more often than not, it's hard to do and probably shouldn't be doing it. 

Benjamin Haas  11:12
Yeah, I do always kind of remember this very visual scenario where that fire alarm goes off in the movie theater and are you the person that's going to be like, knocking over old ladies on the way out of the movie theater or are you the person that's actually going to pause for a second and go - Wait, fire? Like, is there smoke?

Adam Werner  11:35
We noticed a bunch of high school kids out in the lobby, they probably pulled the firearm.

Benjamin Haas  11:40
Yeah, so it's just a good visual of just pause, just take a deep breath and that's part of the reason we're here philosophically. We believe it's not to get in and out of the market, it's to pause and try to digest what is actually happening, recognizing that headlines are there. They're going to drive our emotions and last year was just such a good example of how quickly things felt like they were changing and the markets going here, it's going there. We had 10, 5%, market pullbacks between April 1st and the end of the year. During that recovery, there's been 95 in the prior 75 years so it was just unbelievable amounts of moves that if you really were trying to time things, you probably got burned. So philosophically, stick to the plan. It's your lifeboat, right? Don't jump out of that lifeboat even if you're taking on a little bit of water. 

Adam Werner  12:36
If this horse isn't sufficiently beaten, then I'll add this little story. It's very satisfying to be able to take a phone call from a client that may have previously been worried or just concerned or just anxious when the market is experiencing periods of volatility and going through several or enough of those 5% corrections to the point where now we get the phone call and it's not, hey, I'm scared. What are we doing? It's paying the markets down? What are we doing to take advantage of this? It's just flipping that mind? Yes, to be more opportunistic and for me, that's one of the most satisfying pieces of just the behavioral side of what we do and it's just a slight change in mindset. That makes all the difference, not only for your mental health, but financially, it's the right thing to do. 

Benjamin Haas  13:25
Yeah, really well said. So let's pivot to the last thing. I would say if planning kind of helps us with asset allocation, risk reward and then there's a big component of what we do that's just dealing with behavior and trying to sift through news and make sure that we're doing the right things. The last part is just good service and I would say, top of the line for that should be just being thoughtful about rebalancing accounts. I'll throw that one to you to kind of describe what I mean by rebalancing. 

Adam Werner  13:58
Yeah, it's an incredibly prudent thing to do from a financial management or an investment management standpoint and it's as simple as we talked about asset allocation. If this is the percent that we want in large cap stocks and this is the percent that we want in bonds and this is the percent we want an international at any point in time, those things are not going to all go up or down at the same level. At a certain point, you're going to sell your winners and buy your losers. You're going to go back to your original target allocation and just rebalance back to square one. Again, you're just locking in your gains on the things that have done well and historically over time, the things that have not done well usually revert to their mean over time. 

Benjamin Haas  14:44
I hope people get that right, that the only returns that matter are the ones you get to keep and it's not to make investing sound like gambling. We certainly wouldn't want to do that but if you have some winners, you take your chips off the table and you put them in your pocket or you move it to a place that's going to be way less volatile. I think just that simple mechanism over time, especially as people get close to retirement or they're needing to live off of their portfolio, it's a prudent thing. It's not to have this fear that I am missing out on some sort of potential future gain. It is to make sure that I'm able to keep and therefore use when I need it.

Adam Werner  15:24
Yeah so I think the last part of all of this is the fee side of things, how are you actually compensating that person? And we have very strong opinions when it comes to this side of the equation. We strongly believe that you should be paying for advice and not necessarily paying commissions or transaction costs for products.

Benjamin Haas  15:49
Yeah, a strong opinion indeed and think about why that is. I think if you're truly in partnership with someone or you're truly working through a planning process, it's to make sure you're sitting on the same side of the table. So that if you're making money they're participating in, that if you're losing money then they're participating in that. It's not that you were told, hey, go do this, you paid some lump sum fee for that but then there's no service behind it. I would take that one step further. Most people don't really understand how they're paying somebody or dive into the actual expenses of the portfolio. Maybe we can have just a quick conversation on is it active management, is it passive, is it different share classes versus other share classes? It's really important we would want to educate people on, what are you actually paying for here?

Adam Werner  16:41
Yeah, you said it or did I say, did you say? Or did I say it?

Benjamin Haas  16:45
One of us said it.

Adam Werner  16:47
The only returns that matter are the ones you keep and clearly the higher your fee hurdle, right? If you're paying more in fees up front, then you have to earn more to be able to overcome that. So yes, we certainly believe that in certain areas, passive investments or ETFs or index funds, when information is just widely abundant, it makes sense to just buy the basket rather than going out and picking a couple of those granny smith apples that you're going to own. 

Benjamin Haas  17:16
Way to bring that back around. Yeah and to the same point, there are certainly places where there's a lot of research and expertise that would need to go into understanding what should be in some sort of mutual fund, you know, I think about fixed income and good management teams there where information isn't as abundant and readily accessible. So it's just, again, one of those things. If we're going to talk about our philosophies, it's to try to keep fees manageable and really only pay for what's really important to you and that should be advice. And for most people some sort of service. 

Adam Werner  17:51
So I don't want to kind of derail the end here but we've often seen people come to us and not really understanding what they own or how they're even paying somebody. If they're not necessarily paying for that advice and they're paying through a product or a mutual fund. There are different share classes of mutual funds. I'm not going to go down that road but the point is, that equates to how they are compensated. The advisor or the financial professional and oftentimes, we see that it's not clear because it's not transparent, they don't see it, they're not writing a check for it. It's not a fee line item in their activity on their statement. So that's part of what we do is just educating, here's what you own. Here's what that means to you. How do you feel about that? 

Benjamin Haas  18:35
I guess we can wrap that all up into the idea here that, again, planning is what's really important to us and we think investing comes out of that. We take a very fundamental approach, all these philosophies I think are very fundamental in nature. And even from that standpoint, we did not hit on, you know, being independent advisors means that we're allowed to go gather all this information from all these different institutions to funnel that down into what we think is best for our clients. But at the end of the day, we're here to help kind of recognize issues and educate people to when it comes to, what should they be doing, what shouldn't they be doing, and how should they be paying for it? 

Adam Werner  19:12
We're not as behind the curtain. We don't have the secret sauce. We don't have the crystal ball but we do believe you. Figure out what your goals are, let's align your investments to help you meet those goals and the fundamentals can be the fundamentals. Let's keep it simple and just be opportunistic, when the market is being volatile and be disciplined all along the way. 

Benjamin Haas  19:37
Bingo. I told you this was going to be a great podcast. 

Adam Werner  19:41
I don't know, I didn't love it. 

Benjamin Haas  19:44
Well, thanks for participating and eloquently talking about our philosophies. I appreciate your time and I think you were great.

Adam Werner  19:53
And thanks for having me. Likewise.

Benjamin Haas  19:56
We'll see you on number 31 sometime soon.

Adam Werner  19:59
All right. Goodbye.

Benjamin Haas  20:05
Hey everyone, Adam and I really appreciate you tuning in. Please note that the opinions we voiced in the show are for general information only and are not intended to provide specific recommendations for any individuals. To determine which strategies or investments may be most appropriate for you. Consult with your attorney, your accountant and financial advisor or tax advisor prior to making any decisions or investing. Thanks for listening!

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