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  • Jason M. Ray

Why is it so easy to lose money??



Individual investors are wired to lose money in the stock market over time.


I always find pleasure in reading the Goldman Sachs, Blackrock, Morgan Stanley, LPL Financial, and other large bulge bracket money manager’s yearly outlooks. “2020 Outlook: The year for ____________ (insert cliche noun).” Each year I applaud the armies of analysts at each respective firm; who all provide terrific projections and assumptions related to capital markets and investing.


This information is hardly useful for individual investors who have behavioral biases and are unconcerned with capital market assumptions.


Most economic and financial theory (used in the aforementioned outlooks) is based on assumptions that individuals act rationally when investing. History and research has proved otherwise. Cognitive errors and emotional biases cause individuals to act irrationally, especially with their finances. Past experiences, beliefs held, stubborn attitudes, loss aversion, the status quo, and the illusion of control all contribute to people’s inability to invest efficiently. For example, Ellen Langer from Harvard found that people would pay MORE for a lottery ticket if they could choose the potential winning numbers rather than a random number generator. Let’s agree to chalk that up to an irrational illusion of control. With all of these possible errors and biases, how should people invest for the long term?

Instead of focusing on metrics that assume rationality from individual investors, we should invest in themes. Themes can be things that are important to us, like sustainability and diversity. Themes can also be larger, global trends that are currently underway, like cannabis legalization, online learning, digital currency, and e-sports (to name a few). These trends are gaining in popularity across the world, with more consumer dollars going towards each on a daily basis. Consumer spending is by far the largest contributor to US and Global growth, so why wouldn’t you invest what consumers are buying more of?


Defining what’s important to you is the first step to create a thematic portfolio. Next, identify trends that you can relate to. Finally, position your dollars behind your beliefs and applicable trends. While this method will integrate the cognitive and behavioral aspects of investing into your actual investment returns, it is not easy to access or find the most appropriate investment vehicles!


As I’ve written about in past articles, the dominance of investment platforms like Robinhood, Acorns, Betterment, and Wealthfront provide easy access to investing. The Millennial Thematic ETF(ticker: MILN) is available across all of these platforms. While the name sounds great (themes!!!), be careful, as this ETF carries a .99 correlation to the broader S&P 500 stock index. That .99 number means that MILN and S&P 500 have returns that are almost exactly the same (and IVV, the S&P 500 iShares product is much cheaper). I could name 1,000 more examples like this, which would illustrate all of the noise and lack of transparency in today’s investment management industry.


The appropriate investment vehicles for your beliefs and opinions may come in different forms — in a fund, a company’s stock, a private investment, real estate, commodity, or a charitable donation. Identifying the right vehicle is the key to success and making sure your views are expressed appropriately.


The best way to ensure efficient access to these types of investments, is to work with a financial professional that you trust (insert Zenith Solutions :)


Jason

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