Good investment advice reflects the big picture, taking into account an investor’s goals.
Eric and Wendy Nissan, co-founders of DIY.FUND, discuss with Douglas Goldstein, CFP®, why investors – and their advisors — need a holistic approach to managing money. Find out why practicing trading with investment simulation games won’t help you deal with the reality of working with the financial markets.
What is the hardest part of personal finance?
The hardest part of investing is not being able to predict the future. The easy part is the paperwork. Douglas Goldstein, CFP®, explains how technology is making financial paperwork easier to deal with.
Follow Eric and Wendy Nissan at: www.diy.fund and on Twitter @Diyfund
Read the Transcript
Interview with Wendy and Eric Nissan
Douglas Goldstein interviews Wendy and Eric Nissan of DIY.FUND share their thoughts on investing. What's the difference between playing stock market games and investing your real money? Also, how can investors be reassured about volatile markets?
Douglas Goldstein: I'm very excited to have on The Goldstein on Gelt Show Wendy and Eric Nissan, who run a company called the DIY.FUND. The company helps individuals manage their own money. Why is it so difficult for people to manage their own money?
Eric Nissan: There's lot of reasons. People who are getting started get advice from all over the place. I think inherently the advice that individuals get is biased towards the person who's giving it, and not necessarily in their best interest. Individuals wind up suffering, spending a lot of years trying to discover what it means to actually invest. In those early years, instead of actually earning a reasonable return, a lot of time gets wasted in trying a lot of different things. Cutting to the core of what investing is and how to get there quickly is to the benefit of the individual.
Wendy Nissan: I think what happens though is that individuals get sucked into the gamification of the stock market and investing. That isn't really investing but trading, and I think they lose sight of what the long-term goal should be; to actually maximize your return.
Are New Investors All About Trading Rather Than Investing?
Douglas Goldstein: You think that trading is the bane of the existence of a new investor?
Eric Nissan: It can be. It depends on your personality but I think a lot of people go into it thinking it's a sexy thing. You're hearing Wall Street and hedge funds and the first thing you do when you sign into your broker is get these charts and things are blinking at you. After the ride is the option trading button. Not to say that everyone goes down those avenues but it's out there, and you're being taught that those are proper investing tools for the individual. However, looking at your portfolio holistically, trying to manage your portfolio in that vein is really in the back order of things to do when you open up your account.
Wendy Nissan: But what professionals do is they look at your portfolio, see how well-balanced you are, get you properly allocated, and set time horizons. Most individuals don't go through that thought process.
Douglas Goldstein: I think the flashing lights is a very good metaphor. I think that companies make a lot more money when people are trading rather than when someone puts together a financial plan or an asset allocation model. It's very much that people are drawn towards the trees instead of the forest. Nowadays, there are plenty of distractions that keep people focused on the little things instead of big picture.
Eric Nissan: That goes to my first point of the advice you're getting or the screen you're getting, For whose benefit is that? Is it for your benefit or is it for the broker who's trying to get you to actively trade? Or is it for the benefit of the guy on TV trying to sell you something? What is your benefit and how do you take away that noise as a new investor and cut to the chase? That becomes a challenge, and the offer that you're given is geared towards those things. Everyone's so quick to gloat about how much money they are making and how easy it is. It's tempting to believe that it should be as easy for you too.
Wendy Nissan: Doug, you always hear about people's winners. How often do you hear about their big losers?
Douglas Goldstein: Sometimes I sit with clients and they say, “Doug, I want to buy this stock. My doctor owns the stock and he's doing great.” I apologize to all the doctors out there, but they are like the worst traders out there. They only invest in one sector of the market, which is pharmaceuticals, and as often as they are right or more often than they are right they are wrong.
The idea that you are bringing up is to focus on goals and goal-setting. But really, when you're 30 years old, who really wants to talk about planning for 30 years down the line?
Eric Nissan: Yes, and it's also, how do you organize your portfolio? The focus should be on, what do I want to invest in? What are the parameters around what I want to do? Then you can go and spend time finding that stock or those stocks, and how they all fit together.
I was at a hedge fund, and most of what they did to produce returns was to manage a portfolio like this, and there are interesting calculations and numbers. But we're not told that as individuals. The irony is when you get your account, you're told you can trade options and charts and do all that stuff. That's fine for individuals, but to manage a portfolio and to balance all of that's too hard. Let's send you to a professional to do it.
The irony of it is that the easier thing to do and the more worthwhile thing to do is manage your accounts more holistically.
Wendy Nissan: If you look at the S&P 500, it has returned on average close to 10% over the last 20 years. If I could lock in 10% today, I think a lot of people would probably do that. If you're looking at where you want to be 20, 30, 40 years down the line, being invested, and being invested properly, is the best way to go about getting that positive return.
Douglas Goldstein: You mentioned the S&P 500. It's truly a volatile investment and index. How do you reassure investors about volatile markets?
Reassuring Investors About Volatile Markets
Eric Nissan: First of all, you have to understand risk and the nature of risk and returns. I think that piece of the conversation also lacks for individuals. They think that the return can come without the essence of the risk attached to it. People need to understand what their risk levels are.
Douglas Goldstein: When you say “understand the risk”, what is risk? What is there to understand about risk? How do you tell a client, “Listen, Mr. Smith, you're putting in $100,000 into this, but it's risky”. They only hear the … Wendy said you make 10% on the S&P 500.
Eric Nissan: Yes, she did say that.
Douglas Goldstein: But past performance is no guarantee of future returns, right Wendy?
Wendy Nissan: Yes, for sure.
Douglas Goldstein: There you go. Okay, we just have to say that. But seriously, how do you tell someone that?
There's No Free Lunch!
Eric Nissan: The way I phrase it is there's no free ride in life. Everything you do, you have to give something to get something. If you want to earn 20% returns this year you're going to have to accept the fact that you could lose 20% in returns this year or more. Or if you're willing to say, “You know what; I don't want that type of risk. I only want to earn one or 2% this year.” Okay. The fee for that should be to risk 5% maximum.
Your return should be comparable to the risk you're taking. A lot of times we see investors who are taking too much risk and not getting that return out of it. That's where the true travesty of individual investing comes.
Douglas Goldstein: Travesty. I like that. I think one of the other things that I would focus on more is, I think investment professionals look at things differently, and when we talk about a percentage up or down it means one thing. But for an individual investor I'll often say, “Listen, you want to put $100,000 into the market. What would you do if next month your statement was worth $70,000?” I think people hear numbers. They go, “That's a car. That's a Nissan.”
Wendy Nissan: We really try to put things in their frame of reference because 100 to 70 is a very different prospect than down “x” percent.
Douglas Goldstein: You need to have those numbers. Let's say someone's listening to the show and he or she says, “This is a good idea, I should be investing.” Or let's say, “I just got an inheritance and I need to get started with it.” What's the first thing that they should do?
Eric Nissan: You're talking about someone who's never invested before?
Douglas Goldstein: Right.
Tips For The First-Time Investor
Eric Nissan: First of all, I'm not against getting a professional in that situation if you feel like you need someone to help you get started. But on your own as well, you can dip your toes in. You can put actual money to work and see what happens in the market. That is a learning experience in itself. You don't necessarily have to go all in, but just going that first footstep in a great way to understand the market.
Douglas Goldstein: Do you mean with real money by the way? Or one of these games where you get paper money?
Wendy Nissan: By learning it means executing a trade, hitting “buy,” and seeing what happens to your account. You need to get over the fear. I think there's a big fear that the investment professionals know something that no one else knows. When you actually start making those steps to place a trade and see what happens to your portfolio, you realize that that big hurdle is released once you've actually done a little bit yourself.
The Difference Between Playing Stock Market Games and Real Investing
Douglas Goldstein: That's actually an interesting model. When people play these stock market games, it has nothing to do with their own reality and there is no tolerance for risk because you're not really losing money. It's just on paper and therefore a lot of people may take much bigger risks and actually may make a lot of money on paper. Then they think they're really smart. The moment they go in with real money, that changes everything.
Wendy Nissan: My kid's school were playing a stock market game and it frustrated me. I said, “This is the last thing they should be doing. This is the worst lesson you could be teaching fifth grade kids.” They're going all in. The person that won threw darts and raced all the way to the moon. That's not real life.
Eric Nissan: The other problem with the game is that you could put the money down and you're not checking it every day, whether you've won or lost. There is a big difference between real money and playing a game. They are two different concepts.
Douglas Goldstein: You've got to put your money where your mouth is. In the last few seconds tell me, how can people follow you and follow your work?
Eric Nissan: Our website is www.diy.fund, without a “com” at the end. We have a blog at blog.diy.fund with the link there, and our Twitter handle is @Diyfund. Plenty of resources, you can sign up for our application and learn how our investing process works. It's free and we encourage comments and all sorts of ways for individuals to grow as investors.
Douglas Goldstein: Wendy, Eric, thanks so much for taking the time.