Wall Street thinks you’re dumb - The Rise of Wise Money
Smart Money
When you join a large Wall Street Bank or Asset Manager and you start working in markets you quickly need to learn the jargon
For me, given that I grew up in France, it was a triple challenge – master the jargon, professional English (since the French Education System is pretty bad at teaching languages) and my Boss’ Irish Accent
Oh… and my mentor was Scottish (not to mention we soon started working with India and got to adapt to their accents too)
Anyways, back to the topic of Financial Jargon
You’ve got to understand who you interact with, clients, data vendors etc. and quickly you realize there are many definitions of ‘money’ on Wall Street
The broad separation is between Smart Money (Institutional Investors) and Dumb Money (Retail Investors)
Let’s start with Smart and then get into Dumb where it gets really interesting
Some forms of Money may not be Real ...
Smart Money further divides into multiple streams with Smartest Money usually assumed to be the Hedge Funds of which some are called Fast Money because of their short term strategies. Real Money are the long term Investors (where the sophistication varies a lot) including pension funds, fund of fund managers or sovereign wealth funds
Investment Banks are there to serve all these Investors – help their clients raise money in the capital markets, provide various financial advisory services, and assist with mergers and acquisition activity
But while most of the Wall Street Bankers use these definitions broadly there is a lot of nuances behind it, surprisingly in Retail too…
Cycling toward Financial Independence
It took me my ‘Round the World’ Cycling trip and then researching this topic further when I stopped in Morocco due to COVID-19 (if you deal with institutional clients you have little time to look into the retail segment) to really discover the Boglehead and F.I.R.E (“Financial Independence Retire Early”) or F.I. (“Financial Independence) communities – and it’s been an interesting discovery
Here is only as small part of what I’ve learned
Dumb Money
Everyone knows dumb money (retail day-traders and casual stock pickers) – Wall Street ignores them because of lack of assets and the lack of sophistication / technical knowledge and while as a whole they are a powerful market force, individually they are meaningless (compared to an Institutional Client)
From time to time dumb money gets covered on the Bloomberg Businessweek Magazine and is an easy prey for option traders and hedge funds that buy retail activity data (ever wondered why trading became commission-free?)
Thus, I’m not going to spend much time on dumb money
My main concern is that a lot of media outlets bucket all retails investors together and are largely ignorant about Wise Money that has a lot to teach Main Street and Wall Street
Take Morningstar for example, that covers Retail Investors day and night (it focuses on investment research & services)
It took years for its Personal Finance lead analyst to fully recognize the merits of the FIRE Movement Investment Philosophy (and they finally did, in June 2020!)
The Rise of Wise Money
Introducing the ‘Wise Money’ concept
You may be smart but that doesn’t make you wise. I have observed numerous common characteristics of wise investors but the one aspect they all have in common is that – wise investors are not making Stock Market Predictions
Wise Money is Forecast-Free
Wise money knows its own limitations and as I’ve explained in my latest post about Alaskan and Hokkaido Grizzly Bears one needs to be prepared for most possible scenarios
Your portfolio needs to be anti-fragile to shocks as much as possible
Now, not of all of the wise investors have the technical knowledge and have studied the past to make their portfolios immune
But at least they have the humility to acknowledge that they don’t know what will happen which may come from other aspects of life where wise people know how to make the difference between things that are in your control and outside of your control
Wise Money is usually Patient
Bloomberg headline on March 9 during the COVID-19 Stock Market Crash
You may be working on Wall Street and be dumb
You may still be dumb with your own money despite all the technical knowledge you have
I have seen this over and over again
Despite rigorous compliance systems (it’s really not easy to buy Stocks when you work on Wall Street) people will go through all the pain to get approved and pick stocks or use other ways to ‘time the market’ (I’m talking about people in other Financial sectors that have no insights into Equity Market so that they can’t leverage their knowledge and experience)
It’s much easier to get your ETF investments approved by the compliance department because compliance knows that you have little or no edge (unless you are a macro portfolio manager or someone that has insights into future flows that could be useful for some illiquid markets)
But some bankers have the illusion of control and edge over the market
They also end up trading more frequently than needed and have no perspective on the big picture and why it pays to stay calm and have the best mix of assets (e.g. to buy Equities when they are cheap)
Wise Money is Young
... when it first hears about Financial Independence
To understand when FIRE Investors start out I conducted a survey on one of the European FIRE Forums
It didn’t surprise me that out of the 300+ respondents most made wise Investment decisions relatively early in their lives. Safe money. Invest in Index Funds. Diversify.
75% of FIRE Investors have figured out their Finances before hitting their 30s
Wise Money has an Angel
Doing God's Work
Short after the Great Financial Crisis the CEO of Goldman Sachs said that banks serve a social purpose and that Banks are doing “God’s work”
The truth is, no single Investment Banker ever made any major positive difference for Retail Investors
Saint Jack
I am ashamed that despite over a decade of work on Wall Street I never heard of Jack Bogle
On the other hand, neither did any of my colleagues (it’s not a good excuse, I know)
But Jack (he was not a Banker per se but the founder of the Asset Management Company Vanguard) made more for the average saver than anyone ever did in the Financial World
Here is how my favorite Financial Blogger Bob Carlson summarized his legacy. It’s no surprise that he’s called Saint Jack
Dumb Money's Leader is Wise
Dave Portnoy, the leader of the ‘retail traders’ army’ is probably a very wise man
He estimates his net worth at more than $100 million and said he’s put $5 million into his day-trading account so far
What does it tell you?
That quite likely, 95% of his net worth is in some form of long term Investments (his followers should know that)
The 5% trading is a good amount of play money and his Twitter activity creates a powerful marketing machine that more than offsets the trading risks
Wise Money has beginner's luck
The main Bogleheads Forum was created in May 2008 and Mr Money Moustache Blog was only launched in 2011
Various FIRE communities popped around the globe during the last decade
Below is my count as of September 2020
For comparison, the biggest Dumb Money forum (aka WallStreetBets) counts 1.5 million members as of today
Of course, there is a bias in these numbers since wise investors know that communities can bring valuable information and are more concentrated here while Dumb Money is usually distracted by media and all possible financial traps imaginable (and there is lots of them)
As you can see, there is further differentiation in the FIRE community between members that can afford the type of retirement they wish (Lean Fire is minimalist while Fat FIRE is luxurious)
FIRE and Bogleheads Forum member count and creation dates
Luck favors the prepared mind
It did help that most of these investors started investing during the last decade
Over the last ten years the NASDAQ returned on average 17.8% annually, the S&P 500 13.4% and even Bonds were still performing well
Wall Street will say that it may be tricky to replicate this going forward and Wise Money must also set proper expectations in a World with low returns
But, remember Wise Money thinks in decades not years
And given their International Diversification, aggressive Equity allocation based on their age Wise Money will inevitably end up riding the next wave
Assets ranked by performance (2010-2019)
Wise Money will be Millionaire
Ultimately, Wise Money will end up Millionaire – the math checks out
- With initial injection of 1,000
- Monthly injections of 750
- Assuming long term returns of 8%
You will end up Millionaire in 30 years
Optimistic assumptions also given that you need to de-risk before retirement, but injecting more cash is also not unreasonable
30 Year Investment Portfolio Value Projection
Key Takeaways
- For Yourself & Your Children: If you want your children to succeed, invest early on and leverage the power of interest compounding. Deposit the money when they are born and log on once a year to re-balance (and top-up if possible). Let them become financially independent and focus on things they love instead of chasing money
- For Our Leaders: Some FIRE Investors were lucky enough because they heard about the powerful passive income making machine that the Stock Market can be, as long as you follow the right principles. Financial Education should be taught very early on so that we obtain a better level playing field for everyone – especially in an era of rising inequality
- For Wall Street: Investing is more (or at least as much) about wisdom as it is about technical aspects. We, as an industry, should recognize the merits of wisdom and long term thinking. I have listened to a number of audiobooks this year while cycling the world (mainly autobiographies). Wealthy people tend to move into charity work as time goes by – if you strive to be one of the rare people in Finance to make a mark on the World be like Jack
- For Bogleheads & FIRE Movement: Keep Calm and carry on leading by example in the next major crisis
Good luck! (invest Early and if it’s too late for you give that benefit to your children)
What's your opinion on this topic?
Let me know in comments section below 👇
Popular Guides
My fundamental reviews of Equity ETFs and Asset Allocation include:
- Investor Checklist - Ready to Invest? Have a look at the checklist before buying ETFs
- How to build a Long Term Portfolio for Financial Independence - Guide to creating a Smart & Simple Long Term Portfolios with ETFs
- All you need to know about International ETFs - including Developed vs Emerging Markets, Small vs Mid/Large Caps and country allocations with List of Best ETFs
- The Simplest Equity Portfolio - Comparison of Best Total World Equity Index Trackers
- How to pick the perfect ETF? - Investing in Europe is not quite the same experience as in the US but this guide will solve all your issues. Spoiler - don't use TER! (applies to US Investors as well)
- Which Assets do I need in my Portfolio? - Clean up your portfolio from assets you don't need. High Performance and low maintenance Asset Allocation Strategies
- How do I benefit from a market crash? - In the long run no crash (including Japanese style) can derail you if you do it right
- How to Invest for Short Term goals? - Medium Term Investing is more risky than long term portfolio - pay attention to the right asset classes
My fundamental reviews include:
- Spectacular Market Crashes - how much can you lose? How long will it take to recover? How to take advantage of the next recession
- What if my Broker goes Bust? How to choose a Broker that is safe
- What is the best rebalancing method? How to increase returns and reduce risk by rebalancing your portfolio
- What about currency risk? Should I hedge my Portfolio? - Hedge or not to hedge? Guide to hedging currency risk in your Equity and Bond ETFs
- Should you buy Gold? - Is it necessary to have an asset that generates no yield? What really drives Gold price?
- International and European Bond ETFS - For Long Term International Investors Bonds are key to protect their Equity Portfolios
- US Bond ETF Guide - Comprehensive Review of Blend Bond Funds, Treasuries, Corporates, High Yield, Inflation Linked, Muni ETFs
- Top 3 Corporate Bond ETFs - If you want to increase income buy these ETFs to invest alongside the FED [for US Investors only]
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Stay safe & healthy,
Raph
Another top article! I really enjoy reading your work/thoughts, keep it up!
Thank you, AI 🙂
After all, It seems being wise in investment and FIRE target is not that difficult with the possibility of ending up millionaire if you follow some simple rules. As Warren Buffett once said “nobody wants to get rich slow”, but I believe this the only reliable and proven way for most of us.
I wish I had read valuable articles like this in my early 20s. Nevertheless, you know what they say “later is better than never” 🙂
Couldn’t agree more, Ferdi.
As I mentioned in the post about market crashes unless you have skills to invest actively (by that, I don’t mean in Stocks) this is a wise choice but requires patience which is rare in a World of instant gratification
I’m in the same camp. I wish I read this in my 20s as well – just doing my part now to spread the message
Another great article Raph. I have to say that I am more and more bafled as time goes on how so many people overlook the long term view. From companies to individual investors it seems that the most important thing has become the next quarter.
Build over time, rebalance as necessary. Let the investment grow.
Thanks, Matt – unfortunately there are significant hurdles for Institutional Investors. For individuals, it’s much easier – in theory 🙂
Great article Raph, I also discovered Bogle “too late”. I think that their philoshy is not well known and spread because is, like he said, boring. At the same time is simple and in our minds something simple can’t be that efective, a winning formula should be complex, otherwise any idiot could be doing that and become millionaire… yet, his philosopy is simple and efective. Like Bogle said: “I look at indexing as being simple and, sad to say, boring. Be bored by the process but elated by the outcome. In Vegas, it’s the opposite. You’re elated by the process,… Read more »
Indeed, David. As with many other aspects in life. Wisdom usually comes with age (and too late) But the next generation may benefit from it.
Top site. Wise words indeed. Keep on pedalling.
Thanks – currently on a break due to COVID. This website benefits from it 🙂
Love the piece of advice.
I also like to “not think” about the investment. When you say “rebalance the investment every year”, what do you mean?
Hi Quikko –
Please have a look here, where I explain it in details.
Raph