Howard Marks has this passage in his book The Most Important Thing, which I find very interesting:
Brokerages want you to believe that everyone has the ability to invest - at the cost of paying $10 in commission for each transaction. Mutual fund companies, on the other hand, don’t want you to believe in your own investment abilities; they want you to believe that only they possess such capabilities. Consequently, you will invest your money in actively managed funds and pay the associated high fees.
I consider those who simplify investment for others as “persuaders”…
His definition of persuaders gave me some inspiration. If we understand the business models of different institutions and the perspectives of “persuaders”, we can make more objective and neutral financial decisions:
- Brokerage firms: Everyone has the ability to trade investments. Daily trading, options, forex, crypto, are all lucrative tools! — Inducing you to pay commissions for each transaction or charging interest through margin accounts.
- Mutual funds: The investment market is too risky, only we have professional investment capabilities! — Inducing you to invest money in managed funds and paying management fees for it.
- Insurance: Most people don’t understand investing or can’t save money, so they need mandatory constraints! — Inducing you to purchase low-liquidity insurance investment products and paying commissions and management fees for it.
- Banks: Everyone needs to consume and pursue an ideal life, buying houses, cars, bags. — Inducing you to borrow money, mortgages, car loans, credit cards.
The truth is:
- Brokerage firms: Pursuing excess returns (alpha) in the market is a zero-sum game, largely dominated by institutional investors. Individual traders can sustain very little profit and require a significant amount of effort.
- Mutual funds: Most actively managed funds can’t outperform the market.
- Insurance: Insurance investment products are essentially funds in a shell, and this shell incurs high costs.
- Banks: Various operations, such as showing funds to increase loan limits, credit card rebates, etc., are all aimed at stimulating you to increase borrowing.
In the book “Three-Body Problem”, there is a term called “dimensional reduction strike”. Here, once we understand the business models of different institutions and their dimensions in the market, we can stand at a higher dimension and look down:
- Improve your financial literacy and recognise the “persuaders”.
- Banks: Save money. If you have a high borrowing limit and find it difficult to save money, the first step is to budget and cultivate good spending habits. Cut off credit cards, reduce loan amount, ensure a surplus every month. When you have enough emergency funds in your bank account and can repay loans on time with a surplus each month, then consider so-called investment that makes money by money.
- Insurance: When purchasing insurance, don’t blindly judge whether it’s “worth it” by comparing protection-type and investment-type insurance products. Compare investment-type insurance products with other investment products like funds or ETFs to have a basis for comparison.
- Mutual Funds: Economic principles and historical data tell us that passive broad index funds are low-cost, low-maintenance investment targets that guarantee beta returns.
- Brokerages: As long as you don’t trade frequently or borrow, the investment cost on brokerage platforms is actually the lowest. Choose one or a few reliable brokerages, invest in passive index funds through regular investment, and diversify your stock and bond investments to guarantee beta returns at the lowest cost.
Only when you have established financial knowledge and accumulated sufficient wealth do I think it’s worth exploring:
- Let others help you manage your money: only when you have established basic financial knowledge and judgment is it worth entrusting your finances to financial advisors, private banks, etc.
- Challenge yourself for higher returns with higher risks: invest a small portion of your capital in high-risk investments
- Wealth inheritance: plan for significant wealth through insurance products and or estate planning tools.
Never putting the cart before the horse!