How I Brought My Experience to Our Investment Philosophy

08/07/2020

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How I Brought My Experience to Our Investment Philosophy

By Facet Wealth Chief Financial Officer Lisa Rapuano, CFA®

Facet Wealth has 40+ CERTIFIED FINANCIAL PLANNERS™. And one investment philosophy.

This philosophy doesn’t play out as a bunch of ancient philosophers in robes spreading wisdom to eager acolytes. Instead, it’s a philosophy researched and designed by an investment committee with decades of collective experience building and constantly improving a lower cost model designed to take advantage of the ways financial markets work.

Lessons learned as a professional investor

The market cannot be timed, and if you do “get it right” once, you are likely not going to get it right on the other side.

I was a professional investor through the internet/dotcom bubble, the Y2K fear, 9/11 and the Great Recession. The best thing to do during any sort of financial crisis is to appropriately manage risk. It’s a good time to buy, but you have to buy smart, not as a speculator.

We used “buying opportunities” to increase exposure when the market was down and decrease it when it was up systematically, which I have learned is the only way to “time the market.” But buying in December, 2008 was very hard, and it made me feel stupid every day until the market bottomed in March, 2009. As the stocks I bought in December kept falling, I second guessed myself constantly.

However, when the market began turning upward in 2009, I was fully invested and was able to take advantage of rising prices. I could never have been fully invested when the market rose if I hadn’t started buying beforehand. Many, many of my investing friends sold too late, after the market was down, and then bought back in too late, after the market was up. If they had just stayed the course, they would have recovered a lot of paper losses and done much better overall.

Make no mistake: Active management is hard, and is not appropriate for most investors. I spent every day looking at companies and structuring a portfolio to try to outperform the market. I had access to sophisticated analytical tools and a team of researchers.

While I succeeded at this, I only succeeded because I was very different from the market and ran a concentrated, long-term portfolio that was very volatile. That kind of portfolio is only appropriate for high net-worth folks who have the majority of their assets invested across all markets with a low-cost diversified strategy. They could afford to use my account as an accent to their core portfolio. I didn’t have to keep a lot of assets in cash in case investors wanted to cash out; they understood they were investing for the long term.

One other key point: Fees matter! When I ran a mutual fund, we had a 1% management fee and a 1.25% 12-b1 fee. That meant I started the year 2.25% behind the market to begin with; I had to outperform the market by roughly 2.25% just to do as well as a low-cost index fund. There is literally no way to make that up consistently for most investors. (And, of course, individual investors will also generally incur transaction fees every time they buy and sell.)

It is not about being right and wrong about an investment, it’s how much you make or lose on that investment, and how that gain or loss compares to the market overall. Ultimately, portfolios are more important than “stock picks.” People love to hear stock stories, but generally if a pro tells their stories, people will be drawn to the ones that don’t work and avoid the ones that do.

Three lessons the pandemic has taught/reinforced

  • The market cannot be timed—in spades
  • Professionals are actually worse at forecasting the market than a random number generator
  • Individual investors who have appropriate guidance (stay the course, stick to your plan) and actually choose to follow it almost always come out ahead

Put simply, the key to success depends on the right plan, not the right stock picks. Work with a knowledgeable, unbiased financial planner to build and manage a plan to help you achieve financial wellness. That’s the real secret to investing.

Interested in learning more about our investment philosophy here at Facet? Head over to our lunch & learn to hear more. 

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