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Transcription of interview with Connell Fullenkamp on October 28, 2013.
Douglas Goldstein, CFPÆ, Financial Planner & Investment Advisor
Connel Fullenkamp is a professor at Duke University in the Department of Economics and one of
the fabulous teachers from the Great Courses.
Douglas Goldstein, financial planner & investment advisor, interviewed Fullenkamp on Arutz Sheva
Radio.
Douglas Goldstein: One of the problems, when I deal with clients, is helping them to take
what seems like a very complicated world of investing and talk about it in human terms.
What would you tell someone who is just starting out in the world of investing?
Connel Fullenkamp: It really can be intimidating to get started with investing. I like to look
at it from the standpoint that the complexity really means that there are tons of choices.
The way to think about it in my mind is to say thereís something out there for everyone,
no matter what time of life youíre in, what you have to invest, or what your preferences
are. If you put some effort into asking some questions and learning a little bit, youíll
definitely find something thatís right for you.
Itís really a matter of being persistent and asking few questions until you find the
thing that is right for you. Iím sure that there are many investments, once you figure
some things out about yourself and what your goals are that will be really appropriate
for you and youíll be happy with.
Douglas Goldstein: A lot of times, people come to my office and wonder, until I explain
to them, ìWhy are they asking me about my family and my kids, where I live and my house?
Just tell me what to do with my money.î But everyoneís situation is different. How would
you suggest to someone begin to formulate his own goals?
Connel Fullenkamp: I think the obvious goals are the big life goals - saving for retirement
or thinking if you want to start your own business someday, sending your kids to school,
college or what have you. Those are the types of things youíve got to sit down and think
about first. What do you want to do? What are the big life goals that are going to take
some money to achieve? Once you do that, I think you really need to ask yourself a couple
of questions. One is how much time do you really want to put into managing your investments?
Itís possible to do very well and not put in a ton of time, but itís going to affect
the investments that are right for you. There are some people who want to get into it and
really love it and are willing to put in a few hours a week to just looking at different
types of investments and managing what they do, and thatís all well and good. Both types
of people can do really well.
The second question is really seriously asking yourself what kind of risks you can really
tolerate. You need to think, ìIf I buy an investment and the next day the price drops
10%, how am I going to react? Am I going to take it well or is it just going to bother
me and I canít let it go?î I think getting to understand your own personal risk tolerance
is really important here, and those are the types of things that I like to talk about
when I talk to people about investing.
As a type of investor who is more like Buffet, I tend to invest the money and then try my
best to just forget about it and let it work for me. I can certainly understand how some
people can get really caught up in the day-to-day market movements and it causes them all kinds
of headache, and thatís definitely not what you want to get into it as an investor.
Douglas Goldstein: How would you help someone to differentiate between short-term issues
and long-term fundamental changes, whether itís the government shutting down, the real
estate implosion, or the high-tech bubble? For long-term investors, guys like you and
me, when we tell people be a long-term investor, it seems to have always worked out well. But
is it about time, or is there something that you want to tell people to look out for, that
really itís a paradigm that we have to change?
Connel Fullenkamp: I think that there are big changes in the economy happening all the
time, and weíre in this huge shift towards even beyond the knowledge-based economy and
the social networking economy. These are really big shifts, but I think whatís surprising
to me and surprising to a lot of people is how the fundamentals of investing still donít
change. Youíre still looking for good long-term performing companies that are making products
and services that people want, if youíre playing the stock market or youíre looking
for a solid opportunity. From my perspective, the things that are really driving the long-term
progress of the economy and on which all of our financial investments are based really
arenít changing that dramatically. Iím a really long-term optimistic, and I think that
as long as you can write out a lot of the short-term day-to-day fluctuations it will
do really well as an investor.
Douglas Goldstein: What do you advise investors - normal people, not the institutions, how
to manage financial risk?
Connel Fullenkamp: Iím actually teaching a course this semester at Duke on risk management,
and itís a lot of fun. But when it comes down to personal investing, the first step
is to identify which risks are the big risks that you need to worry about, and to my mind,
they are really too risky for an individual investor. One of the risks is what we call
market risk, which is the risk that the prices of your investment will fall rather than going
up. Market risk management is a matter of time for the individual investor. You can
manage your market risk through choosing investments carefully according to your risk tolerance,
but also by giving enough time to your investments to work themselves out. Time is a really great
ally, and when markets go down, they usually come back up again. In fact, they come back
up again sometimes surprisingly soon. Thatís one great strategy for that type of risk.
The second type of risk, which I think is more dangerous and is often underestimated,
is inflation risk. To me, that is by far the biggest worry for the individual investor.
Itís different from market risk, because itís not the risk that your investments donít
do well but that the prices of everything that youíre saving for go up. Thatís something
that we really canít deal with all that well. The best defense I can think of is to use
specific financial instruments that are designed to deal with inflation, and the one that comes
to mind are inflation index bonds. These are bonds where either the interest rate or the
prices of the bond go up automatically with inflation. Itís still an imperfect way to
deal with inflation risk, but it seems to be the best that we can do.
Thereís a big distinction between what individuals can and should do about managing risks and
what professionals do. Itís not that the professional tools are necessarily dangerous
or too complicated. Itís that they are just expensive. They are too expensive for an individual
investor
to use.
You have to think about it as being like buying insurance. When we buy car insurance or health
insurance, that insurance is expensive, and you have to think about that in terms of risk
management in your portfolio. If youíre looking for the cheapest ways to manage risks, one
of the cheapest possible things you can do is diversify your portfolio, and diversification
is basically free.
Douglas Goldstein: When the market crashed in 2007-2008, everything went down.
Connel Fullenkamp: There are certainly times when that will happen, and then you have to
fall back on this idea of using time as your ally. Not every investor has time on their
side, but if you can possibly swing it, you need to get time on your side to give your
investments the time that they need to come back if they should fall in value.
Douglas Goldstein: One of the ways that I usually describe it is when people talk about
risk, I tell them you have to differentiate between risk and volatility. To me, the risk
that Iím the most worried about for my clients is the risk of running out of money during
their lifetime. I canít have some old lady coming to me and saying, ìYou did this financial
plan 25 years ago and now Iím broke.î Thatís the risk. Volatility is the ups and downs
in the market, which you have to educate clients about, but if you canít stand the heat, get
out of the oven.
Connel Fullenkamp: I think a lot of us have to get over that hump and realize that volatility
is just a normal part of the game. Part of the reason why the financial markets are developed
is because there are opportunities for people to take both sides of trades and to have that,
you need some volatility. Itís a necessary ingredient of having good financial markets,
but it does put a lot of people off.
Douglas Goldstein: What is the number one thing you think people need to know about
now, in order to get on the road to financial success?
Connel Fullenkamp: I think the number one thing is something I always tell people when
they get into investing, which is to do your homework. This means asking lots of questions
and not settling for answers that you donít understand. Investing is fundamentally an
easy thing to do, but you have to get out there and ask questions and be satisfied that
you know what youíre getting yourself into. If you can raise your comfort level with investing
and understand the things that youíre getting into, then you can be a very successful investor,
no matter how much or how little you put in and how much or how little time you put into
it. Thatís my best investing advice.
Douglas Goldstein: How can people follow you and follow your work?
Connel Fullenkamp: You can find me through the Great Courses. I have the Understanding
Investments Course and I actually have a new one on Financial Literacy coming out.
Douglas Goldstein, CFPÆ, is the director of Profile Investment Services and the host
of the Goldstein on Gelt radio show (Monday nights at 7:00 PM on www.israelnationalradio.com.
He is a licensed financial professional both in the U.S. and Israel. Securities offered
through Portfolio Resources Group, Inc., Member FINRA, SIPC, MSRB, NFA, SIFMA. Accounts carried
by National Financial Services LLC. Member NYSE/SIPC, a Fidelity Investments company.
His book Building Wealth in Israel is available in bookstores, on the web, or can be ordered
at: www.profile-financial.com (02) 624-2788 or (03) 524-0942.
Disclaimer: This document is a transcription and/or an educational article. While it is
believed to be current and accurate, divergence from the original is to be expected. The original
podcast can be heard at https://sites.google.com/site/goldsteinradioshows/. All information on this website is purely
information and should not be used as the sole basis for making financial decisions.
The opinions rendered herein are those of the guests, and not necessarily those of Douglas
Goldstein, Profile Investment Services, Ltd., or Israel National News. Readers should consult
with a professional financial advisor before making any financial decisions. Please see
the complete disclaimer at https://sites.google.com/site/goldsteinradioshows/.