After reading Tony Robbins' books Unshakable and Money: Master the Game, I learned that Tony Robbins had become a board member and Chief of Investor Psychology of Creative Planning with over $30 billion in assets under management. I welcomed the opportunity to sit down with the President and Chief Investment officer of Creative Planning, Peter Mallouk. (You can watch the full version of my interview with Peter Mallouk on YouTube).
While Peter Mallouk shared many great investment insights with me, here are the five most important ones I pulled from our conversation.
1. Understand the Importance and Nuance of a Fiduciary Versus a Broker
When someone hires a financial advisor, the natural expectation is that they have your best interest in mind. While most people are ethically driven to do just that, there is an important legal distinction between a financial advisor who is an independent fiduciary versus a broker who is held at a different legal standard.
"Most people are confused about what a fiduciary is and that's not surprising," says Mallouk. "Brokers are covered by one set of rules and Fiduciaries are covered by another. A broker by law has to do things for their clients that are suitable, whereas a fiduciary must act in their client's best interest. A fiduciary is required to do for their client what they would do for themselves."
Mallouk illustrates this point further by asking, which standard of care would you prefer in other areas of your life? Do you want a restaurant or health care provider that is "suitable" or do you want the best restaurant and health care providers you can afford? A fiduciary is legally required to put your needs in front of their own, where a broker just needs to ensure that what they recommend is a suitable option - often leading to conflicts of interest as brokers and their firms can be and often are compensated by the third party mutual funds they are recommending.
"About 90% of financial advisors are brokers and 10% are fiduciaries," says Mallouk. "This is unique to the United States. In the UK and Australia, all financial advisors must be fiduciaries."
If you're unsure if your financial advisor is a broker, just ask her if she has her Series 7 license. If she does, then she is a broker. She might also be a fiduciary, but she is ALSO a broker which means she is not legally required to act as your fiduciary every time you speak with her. You can also go to FINRA and type in your financial advisor's name. If she is registered here, then she is a broker.
2. Once you Eliminate the Broker Conflict, Understand the Talent Available to You in the Firm
Creative Planning, was awarded Barron's #1 Independent Wealth Management Firm in 2017, Forbes #1 RIA Firm in 2016, and CNBC #1 Wealth Management Firm 2015 and 2014, along with many other awards and designations.
In addition to investments, Creative Planning has divisions of its company focused on Wealth, Trust Company, Legal, Tax, 401k, and Institutional Services. When you look at the big picture of investing, the legal and tax structures are just as important as the diversified portfolio of investments being managed on your behalf. You don't need tax efficient investments inside your tax advantaged IRA accounts where you're not paying taxes until your retirement, for example.
Having the right legal and tax team to support your holistic investment needs is the best way you can ensure you are not only getting great returns, but that you are also keeping and protecting that growth from your investments.
3. Never Attempt to Time the Market (Up or Down)
In his book, The 5 Mistakes Every Investor Makes and How to Avoid Them, Mallouk identifies one of the biggest mistakes investors make: attempting to time and/or beat the market. It is extremely rare that an investor gets in at the bottom of the market or successfully sells out at the top.
"Let's say that an unlucky investor took all of his money and invested at the very top of the market in 2008 right before the crash. This would be the worst day of the market in the last 8 years in which to get into the market. If he kept his money invested in the stock market, then he would have already doubled his money," says Mallouk. "It's very difficult to lose money in the stock market over the long run."
And that's where investors get hurt - by investing emotionally instead of intelligently. Presidential elections, fears of new international conflicts, and even losses in the market, all may trigger getting in and out of the market sporadically. This will hurt your chances of realizing the gains desired and will more likely ensure you lock in the very losses you're working so hard to avoid.
4. Don't Believe the Hype that the Market is Overvalued
"From 2008 to today, just about every quarter someone is saying that the market is overvalued, and yet it has continued to go up," says Mallouk. "The market isn't stupid. It's made up of a bunch of people who put their best thoughts in to price something. As capitalists, that's what we believe. The market is efficient."
Mallouk went on to explain that if you were shopping for a house in a market where every house on the block is going for $300,000, it's unrealistic to think you're going to buy one that essentially the same for $200,000. The market adjusts based on what people believe a stock is worth. There are always going to be ups and downs, but when you look at the long cycle of the market, it generally goes up over time and it is generally efficient when it comes to price because it factors in all the overarching concerns shared by individual investors.
5. Exploit the Down Markets When They Happen
Perhaps the hardest thing for an investor to do is invest heavily during a downturn. When everyone else is panicking and pulling their money out of the stock market, that is the best possible time to invest. Don't try to time the bottom. Investing anytime during the downturn of a significant correction of 10% or more is when investors get the best discounts. If you love a stock before a downturn, getting a discount on that stock for no other reason than "the market is down," is the best time to buy.
This is one of Warren Buffet's well-documented strategies. When everyone else is buying at a frenzied pace, he looks for opportunities to sell. When the market is panicking and selling off due to a major correction, he's actively buying the companies he loves at a discount.
Peter Mallouk provides some of the most straight forward and easily understandable investment insights out there. When the next market correction happens, don't get swept up by all of the hype. Build your plan today for how you can profit from investing now and especially during a significant downturn. For more great insights, you can watch the full version of my interview with Peter Mallouk on YouTube as well as read more from Tony Robbins' on How To Retire Rich.