Being the Boss of Your Investments: A Primer

Greed sells, but fear sells better: For decades, that’s been lesson number one for aspiring copywriters in the investment advisory business.

It’s also a major reason why advisors and editors of publications rarely write their own advertising. We want to focus on the positive about what we’re doing—the benefits of taking our services.

Over 35 years of providing investment advice, I have written my own advertising copy, more frequently since I started my own business about a decade ago. And though I’ve relentlessly accentuated the positive, I have had my share of successes.

That includes writing the “insert” advertisement for the very first stock report that ever appeared under my byline: “Electric Gold,” highlighting the best buys in the US electric utility sector.

I’m proud of that. But it’s also a fact that the most effective promotions this industry has ever seen have almost universally focused on aggravating investors’ fears and insecurities.

Fear of missing out on a big profit, fear of getting caught up in a market crash, fear of falling behind friends and family: All are powerful motivators for action. And the best copywriters over the years have been those most effective at inspiring fear in readers.

Nowadays, advertisers have numerous other media to reach audiences, including video, audio/podcasts and social media platforms like Facebook and Instagram. But the primary objective is the same: Galvanizing the viewer/reader to open their wallet. And the surest way to do that is by elevating fears and insecurities and then proposing a solution—a membership to the service being advertised.

The undisputed champions of fear based investment marketing are no longer the advisory copywriters of old. They’re the giant corporations that I talked about in my initial post: State Street with $3.9 trillion of investor assets under its control, Vanguard with $7.5 trillion, Blackrock at $10.01 trillion, and the other marketing machines that dominate the ETF industry.

Successfully marketing an ETF first requires convincing investors they shouldn’t try to buy the stocks on their own. Second, that they shouldn’t pay fees to a professional advisor. And the key to winning both arguments is generating enough fear: Fear that if you try to pick stocks, you’ll make the wrong choices and lose big, fear that professional advisors will drown your returns in high fees and poor advice, and fear that someone you know will wind up with better returns.

So here’s a little bit of my own fear-based marketing, in this case directed back at the ETF industry. In my previous post, I pointed out the S&P 500 Index was underwater by more than 24 percent from the beginning of 2000 through the end of 2009. That was before the rise of ETFs. But there were then index funds set up to mirror the S&P 500’s performance—and when you add in the fees and tracking error, they did several percentage points worse.

Returns from today’s S&P 500 ETFs would likely track the index more closely, if for no other reason than they assess lower fees. And even if the next 10 years wind up looking like the lost decade of the ‘00s, they’ll still be around to give investors an opportunity to make up their losses.

But there’s no such guarantee for the vast majority of ETFs now in existence. 2021 was a record year for ETFs, with Wall Street launching 445 new issues and inflows rising 71 percent over 2020 levels. Many of the newcomers were “thematic ETFs” focused on specific sectors or set up to mirror certain strategies, such as ESG—environment, social, governance focused investing.

But even with the S&P 500 rising nearly 30 percent last year, sponsors still shut down 106 ETFs. That means they involuntarily cashed out investors, unloading holdings en masse at market prices.

The most common reason for ending ETFs was low volume and market capitalization due to lack of investor interest. And the typical reason for that was a period of underperformance. So investors were effectively cashed out after the prices of whatever was inside the ETF had dropped, often precipitously.

So much for buying low and selling high: In fact, investors who try to buy ETFs low are always going to be at increased risk of getting cashed out at worse prices. The smaller the ETF the greater the danger of getting cashed out. And if the market of the next few years does come to resemble that of the ‘00s, we won’t just be seeing a few hundred ETFs getting cashed out but potentially thousands.

That’s a stark contrast to buying individual stocks at low prices to bet on a rebound. Provided the underlying business stays solid, you can stay in as long as you want. And if there’s a dividend involved, you get paid to wait.

How can investors get educated enough to take charge of their money and stop relying on the ticking time bomb of ETFs?

Here’s one way. As an adult volunteer for Scouting BSA, I’m a counselor for the “Personal Management” Merit Badge. My favorite requirement is for the scouts to choose five stocks and track them over a period of time. We discuss what they chose and why, and what they learned from following prices.

Not surprisingly, most of them choose companies they’re already familiar with, like Apple Inc or Amazon.com. That makes sense, as nothing informs about a company like a customer experience. In fact, it’s a good place for anyone to start.

Just make your list, find a place for stock quotes and start tracking prices. A daily basis should be enough. But there are also numerous free services like Google Finance where you can literally follow individual stocks’ prices throughout the day.

If you’re an ETF investor, here’s an exercise for you: See if you can get a current look at what’s inside one you own. ETF sponsors’ websites like Vanguard’s will have information. But here’s a dirty little secret: Any numbers you find there are unlikely to be very current.

In fact, in the case of Vanguard Total Stock Market ETF, the posted portfolio data on the website is still as of December 31, 2021. That’s also true for the fund’s information that’s available from Bloomberg Intelligence, which my partners and I have access to and is easily the most extensive financial information system in existence.

That’s another reason to beware ETFs as an asset class: You really never know what you own at a given time. But checking under the hood so to speak can be a good way to identify individual stocks for further research, particularly if you’re buying an ETF that’s focused on a particular sector like renewable energy for example.

With around $5 billion in market capitalization, iShares Global Clean Energy is currently the biggest renewable energy ETF. Bloomberg Intelligence as of this post has portfolio data that’s current as of January 31.

There are some worthy companies among the 87 it contains. But many investors who own this ETF would likely be surprised to know that the fifth and sixth largest holdings have no real earnings. The third largest holding is an electric utility that actually buys most electricity it distributes from fossil fuel-related sources. And the biggest holding at nearly 9 percent of assets has lost more than 40 percent of its value in the last 12 months, with a dividend cut likely later this month.

How can you tell what stocks inside the ETF are worthy buys, and which you want to avoid? That depends first on what kind of investor you are. If you want to generate income from your investments, the iShares Global Clean Energy ETF isn’t likely to be very attractive with its token dividend of about 0.13 percent. But some of the ETF’s largest holdings actually pay dividends as high as 5 percent.

Once you’ve identified a decent sized yield, the question becomes sustainability—and very importantly, whether the dividend will be increased faster than the rate of inflation over time. Ascertaining that will require learning what the company does and getting a handle on a few key numbers, such as the percent of profits paid out in dividends. And finally, you’ll want to look at how the stock price compares to the value of the company’s underlying business.

This may sound like a complicated task. But believe me, with a bit of confidence in yourself and knowing where to look for information and advice, you can pick your own stocks with success and take control of your investing.

I’ll have more in my next post.