Meaningful Returns

Aside from the occasional rabid deer, you’re not generally going to find one that poses any sort of active threat of violence. Eat everything in your garden? Sure. Gore you to death with their antlers? Not likely.

Yet, who am I to argue with the Center for Disease Control? As this article at Vox summarizes, the deer is actually the deadliest animal in the US.

Of course that’s not actually true, per se. Deer aren’t the deadliest; they just happen to be involved in the most deaths, relative to other animals. And it’s not particularly close. This is because deer are everywhere, and they get in the way of cars travelling 60 mph on a pretty regular basis.

I got to thinking about all of this in the context of investing, and it struck me that there are all sorts of parallels. Like actual bears (and sharks and alligators), we are significantly more afraid of bear markets (not ashamed of this play on words) than we are about the deer of the investing world, despite the fact that the deer are everywhere and are statistically much more likely to kill us.

But what are some of these investing deer?

• Investment expenses. Everyone pays these, but most people are almost completely unaware of them, and by design. The investment companies that run the ETFs and mutual funds that the majority of “regular” investors are invested in charge a fee to those investors, and the fee gets paid automatically out of the balance of your investment without you doing anything. And on one hand this makes perfect sense: you can’t run an ETF or a mutual fund for free. But you can run a really good ETF or mutual fund for ALMOST free (i.e. 0.15% or less). Meanwhile, I came across a portfolio recently with annual expenses of almost 3%. THREE PERCENT. And it’s important to realize that this fee is just to pay salaries at the investment company. You’re not getting any advice or guidance or personal attention for THREE PERCENT. Now, that doesn’t sound like a bear market that sees stock prices go down 30 or 40%, but the bear market doesn’t happen every year and is generally followed by a ton of growth, whereas 3% investment expenses HAPPEN EVERY YEAR NO MATTER WHAT. So don’t ignore them.
• Too much cash. “Come on, Jared.” That’s what you said in your head just then, am I right? But seriously, no matter what your appetite and need for risk is, you can have too much cash. Now, this is one of those areas where you may have a really strong emotional tie to feeling like you’ve got a certain amount of cash on hand, and that’s totally fine. BUT, you should at least be aware that cash over and above what you decide is appropriate for short term needs and an emergency fund simply acts as a drag on your long-term investment returns by losing its value in inflation every year.
• Trading. Yes, trading feels cool and gives you an adrenaline rush and an illusion of control, but it can be the deer eating your flowers and walking out into the middle of the road at 9:26pm. Of course, you need to make sure your portfolio is rebalanced at regular intervals and that requires trading, but beyond that, trading should be kept to an absolute minimum and should always be for a specific reason that follows your investment process. Why? Because trades cost money. They cost money in commissions to the custodians making the trades (think Schwab or Fidelity, etc), and in taxable accounts they can cost money in taxes, and perhaps most of all they can cost money in losing out on returns if we trade for emotional reasons.

Bear markets are bad, but we can never anticipate their arrival with any consistent accuracy. What we can do is be savvy investors who do everything in their power to keep from being casualties of investing deer.