Defined and dependable investment principles are the foundation for any successful financial plan. At EWA, we appreciate the ability to discuss our principles in conjunction with Nick Murray– a former financial advisor with over 50 years of experience in the industry. His book, “Simple Wealth, Inevitable Wealth” is sent to each of our new and existing clients, as it conveys many of our shared investment philosophies and principles. Here are some of the top takeaways from “Simple Wealth, Inevitable Wealth.”

1.)    Equities Don’t Make People Wealthy, People Make Themselves Wealthy

The most important variable that you ultimately control in your financial plan is not necessarily where the funds or equities are invested, but your behavior. As an example, the S&P 500 averaged 8.21% in the twenty year time period from 1993-2013. If the S&P averaged 8.21%, then why did the average equity investor only average 4.25% in that same exact time period?

Investors generally follow their peers by diving into the market at the top and fleeing at the bottom. Murray claims that building wealth is simple, not easy. Simple in the fact that assets properly allocated in a diversified portfolio historically have proven successful over the long-term. It’s not easy, however, to avoid the short-term “noise” and market volatility. People “make themselves wealthy”, in this case, by staying true to their long-term plan despite potential short-term hiccups. Once you are in the market, stay in the market!

2.)    Be An Owner, Not A Loaner

Owners grow wealth, over the long term, through stock ownership. Lenders may own stocks for a short period of time, trying to time in and out of the market. Nick often says “wealth is a transfer from the impatient to the patient,” and the idea of being an owner coincides with patience and long-term investing.

Fixed income securities, in their own right, have a purpose in a financial plan as a potential failsafe– to help prevent having to take a distribution from equities while they are at a paper loss. However, fixed income securities are not to be counted on for sustained long-term portfolio growth due to purchasing power and inflation risk.

3.)    Great Advisors Focus on People, Not Necessarily Money

A common misconception about a great financial advisor is that he or she is simply responsible for managing investment accounts, seeking the most amount of return with the least amount of risk taken. The truth behind great advisors is that they are oftentimes managing people and their behavior as well, not simply their accounts. Questions that great advisors need to consider that have nothing to do with rates of return include: What account are you liquidating from if you need to take a distribution? How big of a house will you purchase? How are you balancing competing goals of financial independence while also enjoying life today? The behavior associated with having a written financial plan that’s calibrated as life happens is crucial to a successful advisor/client relationship.

4.)    This Time Is “Not” Different

We often hear, be it on news outlets or articles, that “this time is different,” suggesting action should be taken to your financial plan based on political or economic circumstances. While these types of events in the short-term can seem detrimental to your financial plan, long-term data suggests otherwise. If one invested $1,000 in the S&P 500 in 1926 and simply let it accumulate, that original $1,000 would be worth $14.1M in 2021. Despite political, geopolitical, and economic concerns during that entire time period, long-term equity growth was still achieved.

5.)    Don’t Mistake Volatility and Risk

Many often consider the words “volatility” and “risk” to be interchangeable, when really they have very different meanings. Volatility is a short-term concept that passes with time, whereas risk is on-going. Volatility actually refers to positive and negative swings in the market, when mostly the word has a strictly negative connotation.

6.)    Understand Your Behavior In Regards To Losing

The behavioral finance theory of  “Loss Aversion” dictates that losses feel worse than wins feel good. This is true in almost all aspects of life– but particularly financial planning. A negative swing in the market and seeing your portfolio decrease on paper tends to feel worse than a positive swing in the market and seeing your portfolio increase on paper. This theory brings our philosophy of having a long-term time horizon for invested funds full circle. Understanding that short-term volatility is normal and expected, and that paper losses are only losses on paper, is crucial to a sustained, successful financial plan.

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Equilibrium Wealth Advisors is a registered investment advisor. The contents of this article are for educational purposes only and do not represent investment advice.

Stock markets are volatile, and the prices of equity securities fluctuate based on changes in a company’s financial condition and overall market and economic conditions. Although common stocks have historically generated higher average total returns than fixed-income securities over the long-term, common stocks also have experienced significantly more volatility in those returns and, in certain periods, have significantly underperformed relative to fixed-income securities. An adverse event, such as an unfavorable earnings report, may depress the value of a particular common stock held by the Fund. A common stock may also decline due to factors which affect a particular industry or industries, such as labor shortages or increased production costs and competitive conditions within an industry.  For dividend-paying stocks, dividends are not guaranteed and may decrease without notice.

Past performance is no guarantee of future results.  The change in investment value reflects the appreciation or depreciation due to price changes, plus any distributions and income earned during the report period, less any transaction costs, sales charges, or fees. Gain/loss and holding period information may not reflect adjustments required for tax reporting purposes. You should verify such information when calculating reportable gain or loss.

This content has been prepared for general information purposes only and is intended to provide a summary of the subject matter covered. It does not purport to be comprehensive or to give advice. The views expressed are the views of the writer at the time of issue and may change over time. This is not an offer document, and does not constitute an offer, invitation, investment advice or inducement to distribute or purchase securities, shares, units or other interests or to enter into an investment agreement. No person should rely on the content and/or act on the basis of any matter contained in this document.  The tax and estate planning information provided is general in nature.  It is provided for informational purposes only and should not be construed as legal or tax advice.  Always consult an attorney or tax professional regarding your specific legal or tax situation.