INVESTING WITH CLARITY® BLOG
What Mutual Funds & Rental Cars Have in Common
April 3, 2019 12:18:45 PM
Anyone who has rented a car before has to admit that the care taken for that vehicle is nowhere near that of their own as there is little incentive to mechanically maintain a rental car, this includes keeping it clean. This is because the renter sees no future benefit from washing it because once they return it, they most likely will never see it again. On the contrary, a person who actually owns a vehicle has a strong incentive to take care of it as they see the future increase in value that routine maintenance affords its caregiver over the long-term.
In the investing world, this rental car mind set is also present in the collective ownership structure of mutual funds and ETFs. Due to the blended nature of these investment vehicles, investors feel less affinity or ownership to the underlying holdings. It’s as if investors feel they are renting investments. This idea is supported by the dramatic change in the average time period that today’s investor hold on to stock compared to 50 years ago; eight months versus eight years, respectively. The old saying of; “Drive it like it’s a Rental” is the antithesis of proper investment ownership. If investors see themselves as temporary renters of a collective set of funds, which are purported to represent the so-called market, they do not view themselves as long-term individual owners of a prized asset. As a result, they do have a long-term perspective on the value of that asset and fall victim to thinking that the assets can be easily turned in and exchanged for a new one.
The car rental example is worthy of comparison in that the care and affection taken in renting a car for a day or two is not remotely close to that of owning an automobile we diligently saved tens of thousands of dollars to purchase and tend to keep for many years. Instead of viewing their investment portfolios like a business owner, today’s investors act like short-term renters of collective funds that are tossed “to and fro.” Today’s investor is void of conviction as to the components of their “rented” portfolios. When market corrections or natural fluctuations occur, they create a tidal wave of fear, causing them to capitulate and make emotional decisions on important investments they perceive as “rented.”
Investors do not possess the rudder of clarity connecting their investing goals with their life goals. Certainly there are times in life when renting anything from living quarters to a car to equipment is appropriate and some instances a must. Our hope in writing this blog wasn’t to besmirch the positive aspects of renting or those that decide to do so. Even in the investing world, using funds on a temporary basis in the early throws of wealth accumulation is, without a doubt, appropriate. What we do find fault in is when sophisticated investors of means fall prey to the short-term mentality fostered by the investment industry that leads to a renting of companies versus owning of companies philosophy. In closing, our firm belief is the
foundational concept of business ownership as it relates to investing is paramount in the beginning of one’s journey on the Road to Clarity®.
Want to learn more about the benefits of viewing your investments form an ownership perspective? Go to www.InvestWithClarity.com to download your Free copy of “3 Easy Ways to Stop Making Mistakes and Start Investing Like a Business Owner”.
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