I have four children that, beginning about 10 years from now, will most likely be heading off to college. Owing to this, I've been reading up on college in general. The articles I have looked at discuss things like school rankings, admission rates, student debt loads, cost/benefit analysis, etc.
I love this sort of research because it can help to inform my decisions. I can then pass that information onto you good folks. Hopefully, it is of use.
By many reports, the cost of college has gone up radically over the course of the past few decades. Meanwhile, according to some, the quality of education has fallen. Wanting further clarification on that, I found an article talking about attempts to improve the higher education system in our country. The author described these efforts, which he clearly regarded as ineffective, with the metaphor "screaming into a hurricane."
Colleges, led by the top institutions with their many multibillion dollar, tax free, endowments, have a good gig and they know it. People tend to believe a college education is crucial to their children’s future. In the main, I think that is a reasonable position.
Consequently, parents will frequently work with their kids to help them choose the best college they can get into. Here’s where things can break down. Often, in our society, the best of anything means the most expensive, at least to a lot of people. The problem is, in reality, expensive is not necessarily better.
The higher education industry, for reasons that should be obvious, is in no hurry to dispel this notion.
This got me to thinking about my industry, which can be broadly thought of as financial services. Since the day I walked into a stockbroker training program on Wall Street in 1995, I have been indoctrinated into the financial quasi-religion of rate of return (ROR.)
This is the belief that the single most important thing, when it comes to investing, is the rate of return we are able to garner on our money. I agree that achieving a strong rate of return is important. However, isn’t the risk we incur in attempting to achieve that rate of return also important? And why is such short shrift given to the rate of savings? That, indeed, is something that is rarely discussed.
Again, I am not against working to achieve a good ROR, quite the contrary in fact. I simply want to reveal some of the risks of endeavoring to achieve a rate of return beyond the average. Here are some things to consider:
- Counting on a higher than average rate of return, so that we can retire in style or live the life we have always dreamed of, may leave us in the position of certain large pension plans that are facing heroic shortfalls. That would not be good.
- Saving more money and working toward a reasonable rate of return might not sound alluring, but might it not be a more mature philosophy than chasing rates of return that are, perhaps, less than realistic?
- With regard to investing, words like exclusive, exotic, private, boutique, limited, unique, etc., almost always mean more expensive. How might this affect the actual rate of return? Oh, and what about the concomitant risk with some of these offerings?
- Every year, roughly 80% of mutual fund and hedge fund managers are beaten by passive indexes like the S&P 500. Fund managers are expensive, index funds are not.
- Fund managers are generally considered to possess the top investment minds in the industry. If they cannot consistently beat the average growth in the market, what chance do the rest of us have?
Unfortunately, we have a "special us" bias. That is the voice in the back of our minds that tells us we are special; we will be one of the handful of folks that can outperform the market over the long haul. I believe this voice can lead us astray.
How will I be led astray, one might ask? What’s wrong with dreaming big, another might wonder?
The answer, where investing is concerned is, nothing. There is absolutely nothing wrong with shooting to be within the top five or ten percent of investors, as long as you are ok with underwriting risk that could potentially put you in the bottom five or ten percent.
This is the reality that many individuals do not want to speak about or think of. The ranks of the bottom percentage of investors are filled with the broken bodies of the people who aimed for the moon but came to rest at the bottom of the sea.
I don't want that for me and I don't want it for you. Why underwrite unnecessary risk for a chance to be an unlikely outlier. Why scream into a hurricane?
Instead, save more.
Saving and investing more can be achieved by making a plan and acting on that plan. Consider consulting an investment advisor you trust to help.
Take more positive action now.
Scott R. McGimpsey November 29th, 2017
This material was prepared by Scott McGimpsey and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources, however, we make no representation as to its completeness or accuracy. Neither Summit Brokerage Services Inc. nor Scott McGimpsey is engaged in rendering legal, accounting, or other professionally services. If such assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any federal, state, or municipal tax penalty. Moreover, a diversified portfolio does not assure a profit or assure protection against loss in a declining market. UNIFIED PLANNING GROUP is an independent firm with securities offered through Summit Brokerage Services Inc., Member FINRA, SIPC