263 | Let’s Talk About Prudent Investing (7 Steps to Wealth, Step 6: Invest)

[INTRODUCTION]

Hilary Hendershott: Well, hello, Money Lover! Welcome to my 7 Steps to Wealth podcast series. If you’ve already heard this introduction to the series and you don’t wish to hear it again, please just fast forward about two minutes. If you haven’t heard it yet or want to hear it again, here we go.

Hilary Hendershott: Many years ago, as I was digging myself out of financial oblivion and creating healthy money habits for myself for the first time, I realized that if I could master this thing called money, I would have something very valuable to share with the world. I mean after all, there is plenty of information about money out there in the world, yet most people still struggle with it. So obviously something is missing in the zeitgeist about money.

Hilary Hendershott: And there came a time in my financial life where I started to look more financially healthy than damaged. There came a time when my bank accounts started to contain 6- and 7-figure balances. There came a time when I could set big, really abundant goals for my business, work toward them, and reliably achieve them.

Hilary Hendershott: The way I would say that now is, I got into right relationship with money. I stepped into having power and influence with money. So as part of sharing the lessons I learned with money, I looked back on what I had accomplished–from where I was now, with a high credit score, a multi-million dollar home that my husband and I own, and a multiple 7-figure net worth–and I asked myself, “What are the exact steps I took to get here?”, “What specifically did I do differently to change my financial reality?”, and “How exactly did my money mindset and financial beliefs change?”

Hilary Hendershott: And I created a framework called the 7 Steps to Wealth. I’ve published that framework many times, in many formats. Episode 208 of this podcast contains the entire framework in one episode; it’s a great audio resource. There’s an interactive, multimedia eBook you can download if you go to the show notes for today’s episode. And I would love for you to do that. We talk about the 7 Steps in my Money Love Notes newsletter, which you can also subscribe to in the show notes.

Hilary Hendershott: But what I’m doing now is an entire episode on each of the 7 Steps. The 7 Steps in order are: Decide, Plan, Speak, Ask, Earn, Invest and Protect. I’ll publish this series with the steps in order, but not necessarily every week. So the point is to do a deep dive on each individual step because knowing the steps makes no difference. You have to actually put them to work in your life. So if you’re looking for a different step than the one I’m talking about today, and that step comes BEFORE today’s step, just look around in the recent episodes I’ve published. If you’re listening to these as they air, and you’re specifically interested in a future step, it’s coming.

[Episode]

Hilary Hendershott: Well, hey there, Money Lover! All right. The 7 Steps to Wealth, Step 6! We’re on Step 6. And doesn’t it feel so good? And the truth about Step 6 is it takes a minute to wrap your arms around it, but once you learn it, it is a lifetime skill, so it’s worth it. Buckle up, here we go.

Hilary Hendershott: Everything we talked about up to this point puts a huge responsibility on you. It requires actions that you need to take honestly, consistently, and continuously. It is a responsibility, right? But this step, this step is really about–in an educated way–releasing the reins a little bit and letting your money do the work for you.

Hilary Hendershott: Really, it’s like allowing yourself to stand on the shoulders of giants, because the truth is, investing in a very smart, very inexpensive, very high expected return kind of way is so easy for us today versus even when I got started in this industry in the year 2000, it just wasn’t–these kinds of opportunities were not ubiquitous, they weren’t transparent. We really have a tremendous opportunity. So please, please, please reach out and take it.

Hilary Hendershott: Step 6 is investing. But before your eyes glaze over, just hear me out, because investing your money builds wealth over the longest time periods, assuming you do it with borders and boundaries in place, right? You got to put those bumpers up when you go bowling, right, and it’s the same way with investing. Don’t go, willy nilly.

Hilary Hendershott: Don’t go off half cocked. You just want to stay in the lane. And staying in the lane in this case is better than going outside the lane. So if you want to build wealth, true, lasting wealth, stay checked in with me. Okay? So I promise this won’t be your typical investment conversation. I’m gonna try not to bore you. Please, just take a second, suspend any preconceived notions about the stock market and investing, and put whatever baggage you carry about this topic on the shelf for now.

Hilary Hendershott: We’re going to talk about investing your money in a way that helps you reach your financial goals and achieve financial freedom. That, of course, is a long term strategy, and the data tells us if you do it right with those bumpers in place, it pays off.

Hilary Hendershott: And that is because of the magic of compound returns. You can earn compounding interest on your money most easily and obviously through investment vehicles that invest in lots of companies.

Hilary Hendershott: That’s called diversification. We really tend to lean on ETFs, which are exchange traded funds or mutual funds in the form of index funds to do this. Okay? So you can buy an ETF or a mutual fund that is an index fund. Beware! You can also buy an ETF or a mutual fund that is not an index fund. And I’m kind of giving away a little bit of the secret right now. We’re gonna be talking about index funds in this episode. What are compound returns? Oh, my goodness!

Hilary Hendershott: Well, let’s start with linear returns. Linear returns would mean that your money would go from 1 to 2 to 3 to $4. Right? Let’s say your money increases linearly every year.

Hilary Hendershott: So you invest $10,000, next year 20,000, the year after that it goes to 30,000, the year after that it goes to 40,000. Now let’s talk about compound returns. Okay? So you’re gonna invest your money and let’s just talk about the pace at which that balance doubles. It won’t be yearly. I’m just–again–using simple examples. But if your money is growing in a compound way…

Hilary Hendershott: You invest $10,000. Now, after a hundred percent returns, which is like I don’t know, somewhere close to a decade, somewhere between 7 and 10 years. But again, we have many decades to invest. $10,000 goes to 20, 20 now goes to 40, 40, goes to 80. 80, goes to… 160. And then 320, and then 640. Right?

Hilary Hendershott: That’s compound returns. I think you’ve probably heard that adage that if you start with a penny and double it every day, you end up with a million dollars in a month. I know I’ve used that example on this podcast before; I’m pretty sure you’ve heard it. So I’m not gonna go Google it and look it up, or do the math right now on the fly. But those are compound returns. You earn compound returns simply and in a low cost way by buying index funds.

Hilary Hendershott: Okay. Let’s slow down a bit.

Hilary Hendershott: I am kind of oversimplifying the concept of investing. I don’t want you to get lost in the weeds or the complexity of it. We are investing in your pro rata share of the profits of the companies that we all do business with every day, and a lot of other ones, right?

Hilary Hendershott: To be honest with you, in my own portfolios that I build for clients, there are like 12,000 to 15,000 companies. Yes, we’re investing in all the companies that I and you do business with, and a bunch of other ones. And it doesn’t matter, because each company is full of really smart, competitive, ambitious people; executive teams; CEOs; product people, who really want to create shareholder and investor value.

Hilary Hendershott: That’s stock market growth. Okay? That’s what the stock market is. I want you to understand the purpose and power of investing so that you can build lasting wealth.

Hilary Hendershott: And I want to be blunt here and just know that I walk a fine line when I talk about investing publicly. Because of my professional role, I am not allowed to say certain things in the public to people for whom I don’t work. If you and I don’t have a contract signed, I don’t know your individual situation, so this statement is tempered.

Hilary Hendershott: If you don’t invest your hard earned dollars so that your money grows and compounds for you in the background while you’re living life, you’re not likely to achieve financial freedom unless you inherit or win millions of dollars. Right? You can’t leave your money in cash.

Hilary Hendershott: You know that loses purchasing power most of the days. Okay, so this idea of investing, I know everybody has got some story. Either you’ve been burned by it, or someone you know has been burned by it. And I promise you, there are ways that they have packaged the ability to invest so that it’s very easy. And then it’s the behavioral piece we need to master, and you are off to the races, okay?

Hilary Hendershott: Here we go.

Hilary Hendershott: Let’s talk about the longevity problem, right? Now for some of you, when I just mentioned the number of decades it takes for your money to double and compound, your brain went, “Oh, my gosh! I do not have that long.” Okay, I promise you, time passes more quickly than you think.

Hilary Hendershott: And, it’s the only way, right? Like there isn’t another way to do it reliably. It’s not like the solutions I’m talking about are the turtle. And there’s another solution that is the hare. It’s really not like that, right? So at this point, it’s possible to earn X amount of returns in the background in a passive way, and beyond that, you’re just taking risk that is likely to have you lose money over time.

Hilary Hendershott: So, returning to the longevity problem. One of the most wonderful things about modern living is that you can likely expect to live a long and healthy life right, like, lifespans are getting longer. We’re living healthier. We know how to eat vegetables. We know we should be doing two and a half hours of exercise every week.

Hilary Hendershott: The medical profession is always producing new advancements that enhance and elongate our lives and the quality of our life.

Hilary Hendershott: And then, hand in hand with the joy of living longer lives comes the problem of how to pay for those lives.

Hilary Hendershott: Too many people just don’t have enough money to retire comfortably.

Hilary Hendershott: Only the lucky few have pensions to count on. Inflation is a certainty, and the future of social security always seems uncertain. There are no more true financial safety nets, right?

Hilary Hendershott: That just isn’t the way life is now. So we are foisted upon by this responsibility to pay for our own financial lives. And that’s what we’re all here together about. That’s why you tune into the show, right? Unless you have more money than you need, you’ll find that once you’ve paid for today’s expenses, you need the extra growth and compound returns that prudent investing offers.

Hilary Hendershott: Okay, so longevity is great. And it’s like a problem.

Hilary Hendershott: Enter the investing solution. Whether you’re saving for a new home, your child’s education, or comfortable retirement, investing wisely is critical to your future happiness. By the way, I would invest for a new home very differently than I would for your child’s education or for your comfortable retirement. Right? There’s a rule of thumb–and this is kind of a sidebar here–we say in my industry, money that has less than a five-year timeline does not belong in the stock market.

Hilary Hendershott: So yes, invest for your new home. But once you realize, yeah, that home purchase might be five or fewer years off, now we’re going to offload it from the stock market, we’re going to harvest the gains.

Hilary Hendershott: We’re gonna take our wins and put our money in safer, slower vehicles. That’s just an example. So don’t put your down payment in an S&P index fund after this conversation.

Hilary Hendershott: Okay, investing wisely, really is critical to really everything you want in your future. It’s also one of the only ways to earn a true passive income. I hear people talking about passive income all the time, and it’s really an eye-roll for me, because if you are working, or fixing, or maintaining or curating the things that produce that passive income, it’s not truly passive.

Hilary Hendershott: Let’s step back and do some math. I want you to start by calculating what I call your investing lifetime. A lot of people make the mental mistake of thinking that they’re done investing at retirement. They say to me, “Hilary, I’m in your office. I want to retire at age 60. I’m 53 today, I have 7 years left.”

Hilary Hendershott: But that is not at all the case. Your money has to outlive you, so we have to take the long view, right? Especially after you stop working, we must be able to generate income from your savings so that you can pay your bills in the way you were when you were earning money.

Hilary Hendershott: Just to get a sense of that. Let’s say you live to be 100 years old right? I’m just picking that number. It’s 100 years old.

Hilary Hendershott: If you’re 40 today, you have 60 years left to invest. It’s your lifespan minus today’s age. So you have 60 years left to be in the stock market, left to earn exponential compounding returns and use those profits to pay your bills.

Hilary Hendershott: Okay, it’s a long time, right? And people have a lot of feelings about the volatility of the stock market. Unfortunately, I’ve seen a lot of–in my opinion–bad education out there that women are less risky, fundamentally, in our personality. So of course, you’re gonna want to walk into your investment manager and say, I want something that’s less risky, and what people mean when they say I want something that’s less risky is, I want the upside and not the downside, right?

Hilary Hendershott: However, returns follow risk, and I am very bullish; optimistic; positive. I have a very positive relationship with the stock market–even during down years. I’m about to explain to you why.

Hilary Hendershott: If you look at the last 100 years or so, that’s the time period for which we have stock market transaction data in the United States. The stock market has absolutely gone both up and down during many major economic and geopolitical events. We’ve survived these events, and the stock market has–

Hilary Hendershott: And we’ll talk about the beauty of compound exponential returns after I list this series of economic historical events that you either lived through or remember. One, the Great Depression. Okay, nobody who’s listening lived through the Great Depression, but we’ve all heard of it. The stock market dropped, I think 80% in 1929. It took a full 12 years to recover. And recover fully, it did. The German occupation of Europe and a deadly World War. Fear of Communism and McCarthyism in the United States.

Hilary Hendershott: President Kennedy’s assassination. War and violence in the Middle East for decades. A cold war with Russia. Black Monday of 1987, when the stock market lost 30% in just one day in a major market sell off. A real estate boom and bust that started in–the bust started in ‘08. The S&P 500 lost 55% of its value in 2008.

Hilary Hendershott: That financial crisis where the liquidity markets dried up. Lehman Brothers went out of business. You could not get a mortgage to save your life.

Hilary Hendershott: And a global pandemic with multiple waves of impact. We have lived through a lot of trauma, a lot of negativity, a lot of scary times. But you know what the really amazing thing is?

Hilary Hendershott: If you had invested just $1 in the US total stock market back in 1927–again, this is the first year we have data for, and you always want to look at the longest time periods that we have data for. Never let anyone cherry pick a short time period for you. And if you had stayed invested through all of those negative world events, the stock market would have grown that $1 by more than 10,000x.

Hilary Hendershott: So now your $1 is worth more than $10,000, and that would have turned $100,000–if you invested $100,000 in the stock market in 1927–today you would have more than $1 billion dollars.

Hilary Hendershott: Again, all you had to do was buy an index fund containing US large companies and not sell it.

Hilary Hendershott: And now look, that’s 100 years of data. Not a single one of us–not the person speaking today and not the ones listening today–are going to be alive in 100 years probably. However, any of us would take half that, right?

Hilary Hendershott: I know you would, I know I would. And so that’s why I’m so optimistic, favorable–bullish is the investing term–about the stock market.

Hilary Hendershott: So you can take advantage of and harness that growth for yourself by adopting a market-based investment philosophy. You’re basically just doing what I said: You’re buying a basket of stocks or companies–stocks; equities; companies–synonymous.

Hilary Hendershott: Investing people like to use that term, “equities.” It’s like, what am I talking…? It’s really companies. You’re investing in companies. You’re giving your money to a CEO or Board of Directors, and saying, “Go, go with you, go. Be ambitious. Go be smart, go make money. And then I want my fair share of your profits because I invested in that.” And that’s what it is to be a stock market investor.

Hilary Hendershott: This is really important for women, because you know that good old wage gap? And how women earn 84% of the money that men make to do the same job? By the way, that’s up from 77% back in 2010. So we’re making strides. But guess what? Earning 16% less means we have that much more of a retirement income gap to overcome.

Hilary Hendershott: Of course it’s intuitive to you that women are still more likely to step away from the workforce to do family caregiving, raise kids. This compromises our ability to contribute to retirement savings during those pockets of time. So investing prudently means the money that you’ve already saved will keep growing, even if your contributions slow or stop for a period of time.

Hilary Hendershott: What do I mean by prudent investing? All right. Here’s what I don’t mean: trying to DIY your investments. Like, going in and picking your own companies and buying them and deciding when to sell them and what new ones to buy. That’s a bad idea. There is no evidence that you will beat a simple buy-and-hold of the type of index funds that I mentioned. Some people refer to that as “beating the market.”

Hilary Hendershott: I’m sure you know someone who lost money this way. Many of us know someone who lost money by paying an investment manager, or someone who called themselves a financial advisor, to do this. A lot of times I get investment statements from people who want to become my client, and I see that the person calling themselves their financial advisor is really just picking stocks for them. Don’t do this. The data does not back it up.

Hilary Hendershott: Do it yourself-ers can end up taking unnecessary risk. Really, if you’re not investing in dozens, if not hundreds of companies, any investment professional would consider that unnecessary–really, unjustified–risk.

Hilary Hendershott: You’re probably not diversifying enough. You’re probably paying too much in transaction costs and capital gains taxes if you’re investing in an after tax account. Which means you end up with high bills, too low returns, and too much risk.

Hilary Hendershott: Wall Street has been positioned to us–the narrative we hear, and therefore what most people believe Wall Street is–is like a casino where the odds aren’t with you, right? And some of this comes from Hollywood, and some of it comes from the national financial news media. But the language of investments can be intimidating, and it can lead to paralysis and bad choices.

Hilary Hendershott: My experience with–just stereotyping broadly–again, I’m caveatting this, but I have been doing this for a long time. For the most part, for whatever reason, and I’m not sure if boys or teenage males or men get some tutelage or mentorship that we don’t tend to get. But my experience is neither women nor men really understand the stock market, but for some reason men lean into it anyway, and women lean away from it. Like the number of times I’ve said to a female prospective client, “Can I please see your 401(k) statement?”

Hilary Hendershott: She hands it to me and all of her money’s in cash. It’s like three or four hands I could count it on, right? Happens all the time. And that doesn’t tend to be the case with the other gender. So I’m speaking to you. If this fear, lack of understanding or perceived understanding has led to paralysis. Shout out to an episode, five episodes ago, where I talked about the worst advice on the Internet, and we dug a little deeper into these patterns that I see based on how you grew up, kind of gender normative messages that you heard…Again, I’m trying to be really gentle here. No one fits every mold. You know that I know that.

Hilary Hendershott: But if you feel like gosh, I just don’t relate to the language I hear about money, investing. I feel you. That’s what I’m saying. I feel you. And it’s okay. There is a solution.

Hilary Hendershott: I’ve used that word, “prudent.” Let’s go back to that. When I say prudent investing, I’m talking about building investment portfolios that have certain characteristics. I want them to be evidence based, well diversified, and professionally constructed. I’m gonna dig into each of those. So evidence based means–and this is in contrast to looking out into a crystal ball and predicting the future. No, there is no financial or economic Nostradamus; there is no shortage of people making predictions on the Internet, however, they never, ever, ever, not one time circle back and say, “You know what, Hilary? In 2023, I made 15 market predictions. Here’s how many of them came true.” Because the answer is, inevitably, somewhere close to half. Because if you’re predicting, it’s either going up or it’s going down. It’s either going to go up, or it’s going to go down, so your prediction effectiveness should be about 50% assuming no magic skills. Again, nobody can predict the future, and that’s what it tends to be, right?

Hilary Hendershott: So we’re contrasting that with evidence based, which allows you to take advantage of wisdom from, literally, I’m not exaggerating, Nobel Prize winners, PhDs, chartered financial analysts, the world’s smartest computers and decades of data proving how to earn returns instead of guessing or gambling. Just like I invite you to give up the thought that someone can predict the stock market.

Hilary Hendershott: Every single day, people are asking me, “Hilary, what do you think of artificial intelligence stocks? What do you think is gonna happen with the Apple Car? What about…?” Right? I get these questions every single day. These are not evidence based questions. I don’t know anything about the Apple Car, and even the people who are making the Apple Car don’t know how it will do on the broad market. They just don’t, right?

Hilary Hendershott: There’s millions of examples of great products that, for whatever reason, failed to produce shareholder value. And that’s the way the stock market goes. It’s brutal. However, as an investor you have the opportunity, if you diversify well enough, to take advantage of growth with bumpers on it. That’s what I mean. It really is like bumper bowling. Okay, I said, evidence based, well diversified, and professionally constructed. Let’s talk about well diversified.

Hilary Hendershott: You never want to bank your savings on one company, one sector, one industry, one geo. Nothing like that. So one struggling company or sector suffering or going out of business won’t tank your entire portfolio or financial plan.

Hilary Hendershott: I don’t ever invest in fads, not with my money, not with my client’s money. I mean, you should know, at this point, I do the same thing with my money that I do with my client’s money, right?

Hilary Hendershott: So we don’t want to start predicting the future or leaning into the fads. You want to stay well diversified. You want to profit when industries and companies profit, and you’re gonna suffer a little when they suffer, but you’re gonna profit more. Also, your portfolio should be professionally constructed. It’s created to withstand the ups and downs of the human cycle of a market of emotions, right, and support you through the different stages and phases of life. Index funds are created to match an index. The indexes are created by–

Hilary Hendershott: I mean, I’m speaking simply, and there’s even controversy about this– but index funds are created by index makers. For example, the Standard and Poor’s organization creates the S&P 500 index. The index is hypothetical. It’s 500 companies. It’s just a list, that’s it. It’s a list. And then all the index funds that run or offer S&P 500 index funds have to match the list. It’s really like, I know I’m demystifying, I’m like taking the wizard out from behind the curtain. But so there’s lots of indexes and lots of index funds. You could say those are professionally constructed.

Hilary Hendershott: They’re not picked with predictions of the future in mind. Okay, so that’s the linchpin.

Hilary Hendershott: What you’re really investing in with the stock market may be a surprise to you. There are no shortage–as far as I can tell, there never will be–of media headlines about stock market crashes, bubbles, blah, blah, blah. Stories about people who lost everything.

Hilary Hendershott: Perpetuating fear, and the belief that investing in the stock market is scary, terrifying, risky, and requires that you predict the future. However, what they never say is that markets historically, to this point, up to the moment I’m recording this on September 9, 2024, have always bounced back.

Hilary Hendershott: The stock market goes up and down, it just goes up more than it goes down, right? That is the simple narrative of a century of stock market returns.

Hilary Hendershott: And yet the media is far more interested in selling advertising than they are in stewarding you to a profitable retirement. So remember all those historical events I mentioned about seven minutes ago? Each one was unprecedented in its own way. Right? We rarely suffer the same problem twice, except for wars, which are horrible, and we just can’t get out of that. I’m gonna leave my commentary about that one on the side.

Hilary Hendershott: But the liquidity crisis was, of course, unprecedented. We didn’t even know something like that could happen. It had never happened before.

Hilary Hendershott: In regards to the liquidity crisis, in my opinion, they’ve put girders in place systems, processes so that that will never happen again. So almost everything that’s going to affect us is going to be unprecedented. The things we need to worry about are the things we don’t know we need to worry about.

Hilary Hendershott: And that creates positive and negative consequences. In the case of, for example, the liquidity crisis, that created huge problems which gave humans the opportunity to create huge solutions. And those solutions are what you’re really investing in.

Hilary Hendershott: Bringing it down, making a little bit less dramatic. I mean, shoes, computers, cars, Ring camera systems, right? Like, I’m thinking about the things that I have access to–that my daughter has access to–that I didn’t.

Hilary Hendershott: Cell phones. Oh, my gosh! Do you remember, if you went to the mall to meet your friend, and you didn’t find your friend, you had to go home? I don’t know how many of you that are listening to this are my age, but I think about the things that my daughter will–the problems she will never suffer. I mean, she’s 8 years old. At this point, with self-driving cars, I think she probably won’t even have to have a driver’s license.

Hilary Hendershott: And those incredible advancements are all captured by a simple buy-and-hold of an index fund portfolio. It is magical.

Hilary Hendershott: So the portfolios my team and I build contain thousands and thousands of companies and shares within those companies. And yes, some of those companies will go out of business. I’m sure they do every day, because they didn’t effectively solve the problem that they set out to solve, or they, I mean, being in business is tough, right?

Hilary Hendershott: But you know what? Another business is going to show up, because another human being thought of a different way to tackle the problem. And that innovation, that ingenuity, that creativity…

Hilary Hendershott: It’s not going away, no matter what the media writes to get your attention and your clicks. So I invite you to think of–and you’ve probably heard me say this before–I invite you to think of the stock market as a scoreboard for human creativity and ingenuity. And that scoreboard suffers temporary mispricings–misscorings–when people get really emotional.

Hilary Hendershott: That’s really what the stock market is.

Hilary Hendershott: Okay, let’s talk about your opportunity to work with an advisor. Let me caveat this. Obviously, I have a horse in the race, okay? But I do have some things to say that I think you’re not going to read on the Internet.

Hilary Hendershott: So let’s talk about the difference between what I do, which is, I’m an independent fiduciary advisor, and then sort of contrast that with a retail or Wall Street advisor. So at large banks and investment houses, there are commissionable agents.

Hilary Hendershott: At large banks and investment houses–there are non commissioned people, but there are commissioned people, especially at the insurance company ones, that are compensated by their firm or by a third party for selling you financial products. They’re a broker. They’re a sales person. They meet with their sales manager in the morning. They know their monthly sales quota, and they meet with you in the afternoon to make sales pitches that are couched as recommendations.

Hilary Hendershott: So really ask yourself, when it comes to my money, do I want to wonder what this person’s intention really is? Are they recommending what’s good for me, or are they recommending what’s good for their own paycheck?

Hilary Hendershott: Contrast that with a fiduciary–which you do need, in terms of business structure, you do need to have some level of independence from a relationship with a bank brokerage or financial institution.

Hilary Hendershott: Fiduciaries promise to put their clients needs before their own. You should know, the title financial advisor isn’t regulated. Anyone, literally anyone, can call themselves a financial advisor. I’m sure you’ve seen a corollary on Facebook.

Hilary Hendershott: Half the people who add me as a friend are called a health coach, and then I inevitably hear from them in my DMs, asking me if–they want to help me solve all of my health and body problems with their powder or shake. Okay? That’s a health coach. Same thing happened with the term financial advisor. There are excellent people who coach people on their health.

Hilary Hendershott: They probably have dropped that title at this point. Financial advisor is still the term most googled by people. And so we keep this term, financial advisor. But again, so anyone can call themselves that, so you don’t know anything about their training or background, or how they get paid if you hear the term financial advisors.

Hilary Hendershott: Fiduciary financial advisors have the highest standards legally to meet. Fiduciaries are legally and ethically bound to act in the best interest of their clients. So what we’ve done is we’ve removed the conflicts of interest from the relationship.

Hilary Hendershott: This is a specific question you can ask when you meet with someone. My clients never pay commissions. They never pay front-end fees, which are sometimes called 12b-1s, and they never pay back-end fees. There’s no traps, there’s no gouging. Right? We earn a fee. I charge a fee based on the amount of money that I manage, and I don’t earn any other money ever, not anywhere, not from anyone.

Hilary Hendershott: I’ve been using the same family of mutual funds in my client accounts for 25 years. They do not write me a check. I am not a compensated salesperson for that company. If I thought there were a better solution, I would take my dollars and my client dollars to that new company, right? I do not have a permanent relationship with this company that I’ve been putting client dollars in for more than two decades.

Hilary Hendershott: I’m an independent, fee-only fiduciary financial advisor, which means I’m not compensated for sales by any financial institution. And I think if I were looking for a financial advisor and I weren’t one, that’s what I would want.

Hilary Hendershott: Let’s talk about what people say about how easy it is to be your own financial advisor on the Internet. I am not immune to Reddit and the like; the places where people talk about what financial advisors do. I think that the phrase, “Well, do I really need to pay a financial advisor? Like, I feel like I could learn this.” There’s a lot of dialogue out in the world about how you should be able to manage your own financial situation.

Hilary Hendershott: And I think that what people think we do comes down to picking a US index fund and an international index fund, and just like sticking it in our client accounts, and then, I don’t know, hanging out eating BonBons. I am not sure.

Hilary Hendershott: I can tell you, I work very hard. My team of six CERTIFIED FINANCIAL PLANNER® [professionals] works very hard. We are working year round, we have a client service calendar. We are doing account maintenance. We are doing Roth conversions. We’re doing tax loss harvesting. We’re building bond ladders.

Hilary Hendershott: We are helping advise clients during unprecedented times. We are helping people settle estates. We are ensuring account titling is correct, and their beneficiaries are accurately recorded, and that if you take the time to draft a revocable living trust, that it actually has teeth because you’ve titled accounts and assets to that trust. We’re keeping up with new regulatory environments, right?

Hilary Hendershott: For someone to become a lead advisor on my team, which is when you get to start leading meetings. So, meeting with a client without a more senior person who’s actually leading the meeting, that’s about a decade, right?

Hilary Hendershott: So when I read the threads–and I don’t read them often, but occasionally I come across them–about how easy it is to manage your own finances, I have to be honest with you. I kind of roll my eyes. And I say, “Yeah, just come work for me for a year. Just come work on my team for a year, and I promise you, you will have a healthy respect for what we do and accomplish, and protect people from when it comes to building wealth.”

Hilary Hendershott: So those are my 3 or 4 or 10 cents. Again, just admitting, of course, I have a dog in the race, but I’ve been as honest and straightforward with you as I know how to be. So, why do these distinctions about who financial advisors are and how they get paid–why does that matter for you?

Hilary Hendershott: Well, because independent advisors are free to select from the entire universe of investment products to get you the lowest cost, best performing over long time periods, most risk-managed solutions. There are risk-managed ways to take advantage of exponential growth without using smoke and mirrors to predict things that could happen, but won’t necessarily.

Hilary Hendershott: I mean, when it comes to your money you need to have an answer that works, right? Not guessing. The promise of a Wall Street advisor is that he or she can “beat the market” by selecting investments that go up faster than the market.

Hilary Hendershott: Point of information: When people say “the market”, they’re almost never– 99.9% of the time–referring to the entire stock market, which is 15,000 stocks. They’re almost always referring to either the S&P 500, which is just US large companies. It’s 500 of them. Or the Dow Jones. That’s US large companies. It’s thirty of them.

Hilary Hendershott: So it’s a very small–you could say, non-representative–subsection of the actual stock market. That’s just a point of information so that you know what people are talking about when they say, “the market.”

Hilary Hendershott: According to a 2017 CNBC article, more than 90% of professional mutual fund managers who are actively trading, whose fundamental value proposition is, “I will beat my risk-adjusted benchmark” did not achieve the returns of their various benchmarks.

Hilary Hendershott: The Standard and Poor’s organization does a comprehensive report each year. They call it SPIVA–Standard and Poor’s Indices Versus Active Funds Scorecard–SPIVA report every year. Looking at the SPIVA report from 2023, so it ends at the end of 2023 and goes backward from there.

Hilary Hendershott: So for the time period from 2013 till the end of 2023. That’s technically 11 years, 2013 through and including 2023. How many of the mutual fund managers who are trading to beat the index, or to beat the benchmark, how many of those do you think did their job? How many of those do you think outperformed the index?

Hilary Hendershott: Whatever number is in your mind… Go ahead. Come up with a number… The answer? 8.56%. So over 11 years, more than 91% of professionally compensated, fully employed, professional active mutual fund managers who are picking stocks and timing trades to build mutual funds did their job was less than 9%. If you’re talking about international actively traded mutual fund–actively picking mutual fund managers, it’s 12.2%.

Hilary Hendershott: So little more than 87% failure rate. In emerging markets, it’s down: 10.8% did their job.

Hilary Hendershott: And you know I’m really not exaggerating here. These folks literally have one job.

Hilary Hendershott: Because all you have to do to achieve the returns, simply said–I’m simplifying a little bit–all you have to do to achieve the returns of the S&P 500 Index is buy an S&P 500 index fund. You’re short a little bit where it cost–there’s like transaction costs and some stuff in there, but their one job is to beat the index.

Hilary Hendershott: And more than 90% of them fail. Right? So contrast that with globally diversified, low cost, market based–or evidence based–investment portfolios.

Hilary Hendershott: You get the returns of the benchmarks because you literally own the benchmarks. Okay, you have to subtract out transaction costs and what we call the reconstitution effect. I’m saying this for the lawyers. The principle is accurate, and the data I just read you from the SPIVA is accurate. You can look up the SPIVA yourself. It’s a very well known report.

Hilary Hendershott: And yes, admittedly, the stock market goes up and down over time, and when it goes down it can be terrifying. It really can. But if you don’t sell, the stock market, remember, turned $100,000 investment into more than 1 billion dollars over 100 years–it’s actually 97 years. And that’s the longest time period we have records for in the stock market.

Hilary Hendershott: Clearly the biggest struggle I’ve seen people–clients, friends, family members–face when it comes to investing is holding out through the scary periods, right?

Hilary Hendershott: Our natural emotional reaction is, don’t just stand there, do something. And the “do something” is inevitably sell and go to cash. Like, let me just get out of the stock market, I’m gonna sit on the sidelines and wait this thing out. The data says you are likely to lose money when you do that. The best thing to do is just hold on, assuming you have a diversified portfolio. And overcoming these struggles is really worth it, because ultimately, it is the way to get yourself on a path to knowingly build wealth. Look, building wealth is possible in other ways. It’s just that those other ways include more risk, more luck than skill, right? So I don’t want you to lose out on that luck game.

Hilary Hendershott: Okay, action steps from today’s episode.

Hilary Hendershott: Start investing. Start participating in your employer’s 401(k) plan. Every 401(k) plan in the United States has an index fund or more in it. You might just pick that.

Hilary Hendershott: Max out your contributions. Make sure you’re maxing out the most you can contribute on an annual basis. At least contribute enough to get the full company match if you’re just starting out, or if your overhead is high, but have that be your goal.

Hilary Hendershott: This annual deferral into your company 401(k) plan is, in many cases, one of the largest tax deductions Congress gives you. Take it.

Hilary Hendershott: If you own a business, get yourself a SEP or a Solo 401(k). If you have high profits, consider a defined benefit plan. Really getting started and building the habit is key and then verifying you’re properly investing is paramount.

Hilary Hendershott: Consider hiring a financial advisor. Be sure to interview and research whoever you’re thinking about and trusting with your money before you commit. Make sure you know how a financial professional is compensated. I talked about why that’s important. If they dance around the question, it’s really a red flag. Also, I hate saying this, but unfortunately the public has figured out this term fiduciary, and so now some people who are not fiduciaries are verbally saying that they’re fiduciaries.

Hilary Hendershott: Ask them. You need to ask for it in writing, and look for it on their–what’s called Form ADV disclosure forms. They have to send you some disclosure forms. If you’re evaluating them, ask to see their Form ADV and that will disclose how they’re being paid.

Hilary Hendershott: Be prudent. Ask questions, verify their qualifications. Your money, your future, and your well-being are too important to engage your people pleaser when it comes to this, or to leave to chance, or to leave in the wrong hands.

Hilary Hendershott: I have published an article called Fee-Only Financial Advisors: Do you Need Fee-Only, or Fee-Based? You’ll find a link to that article in the show notes for this episode.

Hilary Hendershott: All right. Are you tired of listening? My throat hurts a little bit. So I know I’ve talked a lot. In conclusion, you’ve made it to the end. We’ve been taught to relate to the stock market like it’s scary and unpredictable, but it’s actually very, very reliable if you know what to expect from it.

Hilary Hendershott: I always tell people, I love playing in the stock market. And I just use that verb, “play” right? I’m not really playing. I’m actually very serious about it. I love playing with the stock market, because I know exactly what to expect it to do and what not to expect it to do. And isn’t that the key in a relationship? Right?

Hilary Hendershott: Like, if you can really, like, surrender to exactly the way a person’s personality is, and not expect them to be any way that they’re not, you’re totally fulfilled in that friendship. Right? And I’m totally fulfilled in my friendship with the stock market. All the evidence we have says that pairing a mathematical and consistent savings plan with a professionally constructed, well diversified, low cost, market-based portfolio maximizes the chances that you will achieve the things that are important to you.

Hilary Hendershott: So here’s my final question for you today. What’s one thing you’re gonna do to put the Invest step into action? What’s one way you’re standing on the sidelines due to fear, or lack of time, or education, because after today you can take that step.

Hilary Hendershott: So whether you’re maxing out your contributions to the 401(k), or whether you’re deciding it’s time to work with a financial advisor or taking another empowered step on your path to wealth, I want to know.

Hilary Hendershott: Write to my team and me at hello@hendershottwealth.com. I really can’t wait. I mean this. I can’t wait to hear how you’re building wealth. Nothing makes me more excited in the world. Thanks for listening, and we’ll see you in the next one.

Disclosure: Okay, as we wrap up today’s conversation, I do need to review the legal stuff. I need to disclose, as a fiduciary financial advisor offering wealth management services through my company, Hendershott Wealth Management LLC, the opinions expressed on Love, your Money® are my own, and they can change. The content I provide for the show is for general education, and it’s not intended as specific investment advice, nor do I recommend any specific financial products. I can’t guarantee that my statements, opinions or forecasts are always 100% right. Of course, I wish I could peek into that proverbial crystal ball, but so far, I haven’t found it. As you know, past performance is not indicative of future results. I do talk a lot about indexes, and I want you to know that you can’t actually buy an index, because, of course, when you take a list of companies and create a product that allows people to invest in those companies, there are fees and expenses involved that reduce returns. Remember, all investing involves risk, which, as you know, means you could lose your money. And I have to tell you that there is no guarantee that any investment plan or strategy, including my own, will be successful. And, that should keep my lawyers happy.