The World’s Best Investment Advice

The World’s Best Investment Advice

Hollis Walker: This is Away from the Noise, a podcast for financial advisors and their clients. Hello, this is Hollis Walker with Jan Blakeley Holman, director of advisor education at Thornburg Investment Management. Welcome back. Thanks for joining us for Away from the Noise. Hey, Jan, how are you?

Jan Blakeley Holman: I’m doing well, Hollis. How are you?

Hollis Walker: I’m doing great. Jan, our podcast has a new name, doesn’t it?

Jan Blakeley Holman: Yes, it does Hollis. And our listeners were probably surprised to hear you introduce this podcast as Away from the Noise instead of #NowMe. Now I’ll give you some background in this to explain what’s happening here. I think most folks know that Thornburg is headquartered in Santa Fe, New Mexico, known as The City Different. And it’s a city that’s not usually as crowded and noisy as other parts of the country where you’ll find headquarters of investment management, and financial advisor firms. The name “Away from the Noise” emphasizes the fact that our location allows all of us–our investment professionals and thought leaders like me–to focus on our work more than what everybody else is saying and what’s going on elsewhere. So that’s why we’ve changed it to Away from the Noise.

Hollis Walker: Thanks, Jan. A few weeks ago, we recorded a podcast in which you discussed the world’s worst investment ideas. Now, there always seemed to be two sides to all things and you wanted to share the world’s best investment ideas. So why don’t you begin with the third best investment idea?

Jan Blakeley Holman: Okay, sounds good to me, Hollis. But I want to give you a disclaimer here and say that the three best investment ideas are actually ideas that are as old as the hills, if the hills are old. I’ve chosen them because they’re simple. And they work year in year out. So here we go. Are you ready?

Hollis Walker: Yes.

Jan Blakeley Holman: Okay, coming in third, become an expert in the value of compounding. Albert Einstein said this: compound interest is the eighth wonder of the world. He, and I’ll add or she, who understands it earns it and she or he who doesn’t pays it.

Hollis Walker: Seriously? Albert Einstein said that?

Jan Blakeley Holman: Absolutely.

Hollis Walker: Wow.

Jan Blakeley Holman: You might remember in the 1980s, there was a Suze Orman type person who was a nationally recognized expert on personal finance. And her name was Venita VanCaspel. And she had a great example of compounding. And here’s what it was. Assume you had a choice of working 35 days with a pay of $1,000 each day, or working for a penny the first day and doubling that amount each day for 35 days. Which would you choose?

Hollis Walker: I’m not sure. But I think that $1,000 a day sounds pretty good.

Jan Blakeley Holman: Well, you know what it does, because it’s kind of easy to calculate, Obviously $35,000 at the end of 35 days. Not bad, I’d take it. But what’s amazing is a result with the second choice. By the end of 35 days, if you got a penny the first day and doubled that amount each day for 35 days, you would have $339,456,652.80

Hollis Walker: Wow, are you sure? Did you use your calculator to figure that out?

Jan Blakeley Holman: No, I used Venita VanCaspel’s calculator.

Hollis Walker: Taking Venita’s word for it, okay.

Jan Blakeley Holman: It was probably an abacus back in the 80s. I know that that sounds insane, but it’s not. Remember the first day you have one penny. The second day you’ll receive two pennies. Plus you have the one penny you had from the first day. The third day you’ll receive four more the fifth day you’ll receive eight more and on and on and on. That’s compounding. Each day, the pennies you’re receiving are growing by 100% and being added to what already was there. In the case of fixed income investments like bonds, you get compounding or the effect of compounding because you earn interest on the investment. And if you reinvest that interest into a bond like investment, you’ll receive interest on the investment and the interest that you earn. Likewise in equities, let’s assume that you reinvest your dividends that you receive. When you own equities you’ll participate in the potential for market appreciation of your securities or mutual funds or whatever you have. And then the dividends you are paid on those investments will be reinvested into other equities, which will pay dividends and on and on and on.

Hollis Walker: Sounds good to me.

Jan Blakeley Holman: It is good. And in fact, it’s great.

Hollis Walker: Okay, so what’s number two?

Jan Blakeley Holman: Number two is to make use of dollar cost averaging. And systematic investing. Holis I know, we’ve talked about dollar cost averaging before. And as you know, it’s an investment strategy that worked forever. If some of your money is taken out of your paycheck, every time you get paid, and put into an investment, like an employer sponsored retirement account. And if it’s being invested in securities, mutual funds, or ETFs, that fluctuate in price, you are dollar cost averaging, because you are buying the same dollar amount of the investments at different prices. So when you average those out, your cost basis is typically going to be lower than the current market value. And that’s the goal of dollar cost averaging, it’s to end up with investments that have a lower cost basis, then, what’s happening in the market.

Hollis Walker: Let me get this straight. If I were spending my money, investing my money in cans of beans.

Jan Blakeley Holman: Yes.

Hollis Walker: And I bought a can of beans every day. At the end of six months, I would have paid less for each can of beans, then I would have if I were trying to like strategically invest it at different times?

Jan Blakeley Holman: Okay, that’s an interesting… First of all, I think you’d have a bad case of gas. Okay. But that aside, we have to make the assumption for it to be like dollar cost averaging that you’re buying the can of beans at different prices.

Hollis Walker: Yes.

Jan Blakeley Holman: Okay. So then when you have all your cans of beans, which you can have them, I don’t want them. And you add the price of each of those cans together and then divide by the number of cans, you will have a cost per can that will probably be higher than your lowest price you paid.

Hollis Walker: Yes.

Jan Blakeley Holman: But lower than your highest price you paid. Does that make sense?

Hollis Walker: Yeah. So that’s dollar cost averaging with beans, right?

Jan Blakeley Holman: That’s right. But think of the power when it’s with securities instead of beans.

Hollis Walker: Interesting. So what’s the goal of dollar cost averaging? Give me a little rerun here.

Jan Blakeley Holman: The goal of dollar cost averaging is to end up with investments that have a lower cost basis than the prevailing market price. Cost basis is not important if you in fact putting money into a retirement account, that’s tax deferred. Because from a tax standpoint, cost basis doesn’t matter, you’re going to be taxed on anything you take out of a tax deferred account at whatever your tax rate is. Conceptually, the benefit is that you are buying as the security fluctuates in price. And they do fluctuate in price. As we know right. Now, I also said something about systematic investments. And systematic investing is simply another form of dollar cost averaging. But it’s when you want to invest a large sum of money, a lump sum. Many people would be concerned about bringing some lump sum of money from an inheritance or a bonus or whatever, and just plunking it into the market. So instead, they might want to do something that we call, as I said, systematic investing. And that’s where you put the lump sum of money in some vehicle that’s very liquid but pays some rate of return. And you can imagine that that was much more profitable as an investment parking place in the 80s and the 90s than it is today. But the point is, you put it in something that will give you some kind of return while you’re systematically investing a regular amount into the market itself or the investments you’ve chosen, which again are fluctuating in price.

Hollis Walker: So if I inherited $100,000 instead of just putting it in the stock market immediately, my advisor might say, let’s park that in a money market account and then every month we’ll shoot X number of dollars into the market.

Jan Blakeley Holman: You got it.

Hollis Walker: Okay. Hey, I’m learning.

Jan Blakeley Holman: Okay, now I need a drumroll. You want to know the world’s best investment advice?

Hollis Walker: Yes.

Jan Blakeley Holman: Stay the course. I know, it probably sounds boring. But it’s not. It’s important that I point out that I’m assuming that the investor has a diversified investment portfolio, that they have a cash reserve, that they’ve put six to nine months worth of expenses in and that they have some investments that mature over the short term, like two years or so. And then they have investments that are invested for five years and longer. Staying the course is really critical because of all the noise we have to deal with as investors. Think about the debt ceiling. I mean, are you sick of the debt ceiling?

Hollis Walker: Yes, I hope that never happens again, but we know it will.

Jan Blakeley Holman: It’s always the same. It’s a bunch of posturing and hot air and meh. It’s just so terrible. But imagine, if you’re a person who’s you know, not familiar with financial type subjects like that, which is somewhat obscure, and you’ll hear all this, if they don’t decide on a compromise, we’re all going to go down the tubes financially. I mean, it could cause somebody to want to take money out of their investments because uncertainty is such a problem for investors. It’s such an issue. Staying the course means you have to not listen to all that stuff that is being fed to us as like the end of the world. And just keep on focusing on the long term goal, which is to achieve this amount of money for years when you’re not working anymore, or to be able to have some pool of money to educate your children, etc, etc. If you move in and out of investments, you’re probably not going to achieve your goals, because you’re always behind, you’re always making decisions after the fact after the market starts moving after the market’s gone down. So the point is just stay invested. And then the ramification of that is you’re letting your investments compound. So there they are.

Hollis Walker: So we just kind of made a big circle there. We came back to compounding. Okay, Jan, it’s time for Ask Jan. Here’s our letter. Dear Jan, as a cryptocurrency investor, I’m always surprised to hear you tell listeners, they should avoid it. Can you provide more reasons why? Sincerely, I’m a believer.

Jan Blakeley Holman: Hearken back to 1965 or so “I’m A Believer” was a Monkey’s song. So that means you must be Mickey, because all the rest of them are deceased. So let me put it this way, Mickey. I think I’ve covered these points that are obvious issues with crypto, but I will again. First of all, there’s no regulation. That’s a problem. Regulation protects investors. We want investors to be protected because as an investor, you are taking risk when you invest in something that’s not a treasury security. You are taking risks. You don’t want to take additional risk in investing in something that is like the wild wild west and that is crypto. Second, it’s difficult to access your funds in crypto, if you forget your password, which is something like 85 characters in length. That’s a problem. Third, crypto is not a fungible commodity. Since fungible commodity is not an expression we use every day. Do you use it every day, Hollis?

Hollis Walker: I thought you were talking about fungus.

Jan Blakeley Holman: No, well could be but fungible commodity is a currency that can be exchanged for something else of value. If you can’t use crypto to pay for everyday things, unless you convert it into a form of currency that you can use to pay for everyday things. That’s a problem.

Hollis Walker: Yeah, sort of like having gold bricks in your closet. You can’t take them to the grocery store.

Jan Blakeley Holman: Right. And they’re really heavy. So if you don’t want those water filled little weights, you might want to do some crunches with bullion. Finally, we are seeing a common thread with crypto exchanges, and that is that the people who oversee them are commingling your money ie the investors money with the money if there is money of other companies they own. We’ve seen In the situation with FTX. And now we’ve seen it with Binance. They’re two crypto exchanges where in fact, the leaders of those exchanges needed to move some money into a different one of their corporate accounts in order to shore that up. So they didn’t have money of their own. So they just took investors money. And as problems continued, that money disappeared. The bottom line is money is being stolen, investors are getting ripped off. And until crypto is regulated, stay away. Now you as an investor may think that crypto’s a way to get rich quickly because you’ve heard stories at cocktail or mocktail parties, but it’s not a get rich, quick scheme. For some people it has been, I think people coming in now may be bag holders, you need to build wealth in investments that are regulated, where you can see the person behind the curtain. And you know what’s going on, and you know that there’s an entity, like the SEC, that’s watching out for you, instead of being the person who’s providing the money, and you have no idea where it’s going. So I’d say this to our friend Mickey, the last, in this case, man standing. I may be overly conservative when I talk about crypto, but it’s important that investors be treated fairly and respectfully for the risk that they are taking.

Hollis Walker: Amen sister. That’s all the time we have today. You’ve been listening to Away from the Noise with me your host Hollis Walker and Jan Blakeley Holman, director of advisor education at Thornburg Investment Management. If you’d like to hear more episodes of Away from the Noise, you can find us on Apple, Spotify, Google podcasts or your favorite audio provider, or by visiting us at thornburg.com/podcasts. Jan can also be found on LinkedIn. If you like us, subscribe, share us on social media and leave us a review. Until next time, thanks for listening.

This podcast is for informational purposes only, and should not be relied upon as investment, legal, accounting, or tax advice. It is not intended to predict the performance of any investment or market, and is not a recommendation, offer, or solicitation to buy or sell any security or product, or adopt any investment strategy. Past performance is not an indication of future performance. Investing involves risk including possible loss of the money you invest. Consult your investment advisor before making any investment decisions. The information contained herein has been obtained from sources believed to be reliable. However, Thornburg Investment Management makes no representations or guarantees as to the accuracy or completeness of the information and has no obligation to provide any updates or changes. The views expressed are subject to change and do not necessarily reflect the views of Thornburg Investment Management. This podcast is for your personal and non-commercial use only. You may not use it in any other manner without the prior written consent of Thornburg Investment Management. Thank you for listening.