Investing and comprehensive financial guidance (when done well), should yield 3 primary outcomes to the client and/or investor:
- Allow them to feel secure about their financial future
- Next, in spite of the vagaries and natural volatility of the market, to allow clients to feel in control of their future to the greatest extent possible
- Finally, to feel confident that they can reach the objectives and the primary financial goals that are important to them
Everything, literally EVERYTHING, at Wellspring Financial Partners is done to achieve those three outcomes. More than that, I can tell you quite objectively that of the 100-some financial issues that must be addressed by good advisors, every one of those elements being done in your investment portfolio and in the financial plans are to maximize the likelihood of achieving those expectations. Notwithstanding that recital, what is utterly astounding to me is to observe what other investors do that they think is investing. Instead, what I see is antithetical to wise, high-probability, successful investing. This letter lays out 10 of the worst investments that I see. I lay them out below and ask you to forward to friends and family so that they never do it, or to alternatively get out of those investments before they get killed or live sub-optimally for the rest of their lives.
Here’s what is NOT an investment:
- Options and short-term derivatives that are currently all the rage. You can buy – for pennies on the dollar – something called 24-hour options. However, these options are as close to investing as fentanyl is to a muscle relaxant. Technology is making it increasingly easy for retail investors to do options trading and yet ‘it’s just gambling’ (see article attached).
- Meme Stocks and other “hot social media darlings”. I was under the impression after numerous people got hurt in the GameStop / AMC meme stock mania that we were beyond his craze but recent meme stock efforts are alive in Bed Bath and Beyond, Yellow Freight, and Tupperware. Only fools go here and meme stocks trade on the belief that there is a greater fool behind you. Sometimes, the music just stops.
- Annuities are longevity contracts and variable annuities are insurance products – they are not investments. If you have a variable or equity-indexed based insurance product you are making someone rich, but it’s the agent that sold you this product. They remain the highest commissioned products in the insurance industry.
- Penny stocks. If someone brings you something from a thinly-traded exchange that is ‘too good to be true’, I’d encourage you to believe them. Data says they have average returns of negative 24% and 90% of them fail[i]. Penny stocks have the same chance of success as the ‘can’t lose investment’ of your just-graduated nephew. The 3 F’s of finding money for start-ups remain the same as they were 30 years ago: Friends, Family, and Fools.
- Traditional savings accounts are NOT investments. You might get 4%-5% now in this higher inflation environment, but they are not investments. Savings accounts are meant to keep you even with inflation. Investing is not staying “even” with inflation; it’s exceeding inflation and having more money to spend later in life.
- “Structured Products” are sold as equity-like return products with fixed income-like stable returns. However, every structured product is a derivatives product and on page 37 of the 98-page prospectus (you know what I mean) it will say “Well, we mean stable unless things really go to heck, then we bail out and you are left holding the bag”.
- Cryptocurrencies and Electronic Fungible Tokens are both still around and periodically get life breathed into them. My advice is that if you want to get rich on cryptos you should start one yourself. Anyone can do it. And that’s the problem.
- “Sector bets” means you are buying into one sector of the market and thus by definition excluding other areas of the market. Now, if you think you are the only one who wants to buy into Artificial Intelligence (AI) or have some insight that no one else has…then I will tell you that the data says your own intelligence is a tad short on neurons. It might be a good time to invest in healthcare and a bad time to invest in energy but, then again, just the opposite reality might be true. Both fields are made up of common stocks of companies, i.e. both are equities, and equities go up 8% – 11% per year on average (see article attached; a fairly recent 10-year return was 8.42% for USA companies and that’s promoting straight indexing – and keep in mind you are not straight indexing but “passive with a plus” factor). On any investment sector bet, you could hit a home run…or you could strike out. It’s just random…and good investing is certainly not random.
- Any Life Insurance product that is sold as ‘protection but an investment too’ – like Whole, Variable or Universal life products – are not investments. They are crappy investments because they are in the same traded stock and bond markets as everyone else, but they carry fees on average 100% – 200% higher than the average investment. If they were investments, then State Insurance Commissioners wouldn’t be regulating these investments – but they are. The term ‘for illustration purposes’ seems to have originated in the insurance industry because I never have seen results down the road as good as illustrations were when they sold the goods.
- Finally, concentrated positions are the opposite of diversification, and diversification has been called ‘the only free lunch’ (Harry Markowitz, Nobel Prize Winner) because it gives ‘risk-adjusted Sharp ratios’. In a presentation I attended last week, Robert Merton, PhD (also a Nobel Prize in Economics winner), called it ‘free alpha’[ii]. In mere mortal terms that means you get something good without paying for it. Concentrated positions are simply taking uncompensated risks. The only concentrated risk worth taking is YOU; your career, your life. You are a good bet, and you should invest in yourself. Outside of that concentration, stay diversified. For an interesting set of 2023, know that the seven TAN MAMA investments of 2023 fame (Tesla, Apple, Nvidia, Meta, Amazon, Microsoft, Alphabet) had an average return of 65% YTD through August 30, 2023…but data says that they will slightly underperform the market for the next 3, 5 and 10-years[iii].
Investing well is very hard, but it’s not mysterious and it’s certainly not based on luck. Instead, it’s based on sound principles, rigorously tested results, and discipline. Those three investment characteristics will successfully yield the desired three client outcomes time after time, just as they have done since the beginning of time.
It remains my deep and distinct honor to serve you well.
Patrick Zumbusch
Founder and CEO
[i] “Can You Get Rich Trading Penny Stocks? (Annual Returns Of Penny Stocks)” (Quantified Strategies, September 25, 203)
[ii] “Insights From A Thought Leader; Bob Merton” (Robert Merton PhD, Advance Conference, Dimensional Fund Advisors, September 21, 2023)
[iii] “Dimensional State Of The Union” (D. Butler, B. Skaff, Advance Conference, Dimensional Fund Advisors, September 20-21, 2023)
