Dan Solin August 4, 2016 Behavioural Finance Buy a Car to Become a Better Investor Recently, I went shopping for a new car. I now understand why a survey from Edmunds.com found that a significant percentage of Americans consider the process of new car buying so distasteful they would give up sex, Facebook and their smartphones to avoid it. This is not an article about how to purchase a new car without getting ripped off. Rather, it’s a discussion of the similarities between car salesmen and stockbrokers. Understanding what they have in common will make you a better investor. Wolves in sheep’s clothing? Car salesmen and stockbrokers are often hired because they tend to be engaging, likeable people. Those are appealing traits that can lull consumers into a false sense of security. They both express a desire to “help” you in achieving your goals, whether through selecting the right car or the best investments. But, as noted in this article in The Economist, taking advantage of people who trust you is big business. I’m not suggesting the majority of car salesmen or brokers are engaged in any type of misconduct. However, you need to be aware that they will use what you have in common to extract the best deal for them, which often is not in your best interest. One former car salesman summarized the process as follows: “Being friendly is a sales technique. Period. It lowers barriers and fosters acceptance. If you believe the salesman is your friend, you’re more likely to believe that he has your best interests at heart. Newsflash: he doesn’t.” Neither does your broker. Conflicts of interest Both car salesmen and stockbrokers have interests in direct conflict with yours. The car salesman is incentivized to sell you a car he has in stock at the highest possible price, in order to extract the largest profit for his dealership and the biggest commission for himself. You want to buy the right car for you, at the lowest possible price. Your commission-based stockbroker is incentivized to sell you the highest-commission investment product that will generate the most fees for his employer and the highest payout for him. You understand that fees and expenses reduce returns. You want to buy the lowest-fee investment product that will generate the highest expected returns. In order to intelligently buy a car or invest your money, it’s critical to understand the difference between your goals and the interests of your car salesman and stockbroker. Knowledge is power Before you buy a new car, you need to know the invoice price and holdback (how much the manufacturer built into the factory invoice price of a new car). For details about other information you need to know, and a formula for computing a fair profit for the dealer (and a good deal for you), check out this helpful article by Carlton Wolf at The Insider’s Guide To Car Buying. This information will permit you to calculate how much profit the dealer is making on the transaction and give you negotiating leverage. The same is true for investing. Start by computing the cost to invest in a globally diversified portfolio of stock and bond index funds from low-cost providers like Vanguard. Investing in these funds will give you the returns of the indexes they track, less low fees. Your stockbroker will commonly tell you he can “beat the market” through stock picking, market timing and fund manager selection. Ask him to compute all the costs associated with his strategy, including commissions and the expense ratio of the actively managed mutual funds he recommends. Compare those costs with the index-based strategy. Then ask him how likely it is that his higher-cost investments will yield higher returns than your lower-cost, index-based strategy. If he tells you anything other than the index strategy is likely to outperform, especially over the long term, show him a copy of the SPIVA U.S. Scorecard. The year-end 2015 report on active management found that, over the 10-year investment horizon measured, 82.14 percent of large-cap managers, 87.61 percent of mid-cap managers and 88.42 percent of small-cap managers failed to outperform their benchmarks on a relative basis. Then run for the door. Don’t let your guard down. The crafty car salesman can increase the cost of your purchase by thousands of dollars. The stockbroker can deprive you of the retirement you deserve. You need to do your homework and level the playing field when dealing with both of them. Buy a Car to Become a Better Investor blog was originally posted on The Huffington Post website. Dan Solin is a New York Times bestselling author of the Smartest series of books, including The Smartest Investment Book You’ll Ever Read, The Smartest Retirement Book You’ll Ever Read and his latest, The Smartest Sales Book You’ll Ever Read. He is a wealth advisor with Buckingham and Director of Investor Advocacy for The BAM ALLIANCE. The views of the author are his alone and may not represent the views of his affiliated firms. Any data, information and content on this blog is for information purposes only and should not be construed as an offer of advisory services. Share: Facebook Twitter LinkedIn Email CIRO Advisor Report
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