Ep752: Carolyn McClanahan – You’ll Never Be Smart Enough to Beat the Market

Andrew Stotz 00:01
Hello fellow risk takers and welcome to my worst investment ever stories of loss to keep you winning in our community. We know that to win in investing, you must take risks but to win big, you've got to reduce it. Ladies and gentlemen, I'm on a mission to help 1 million people reduce risk in their lives. And I want to thank you for joining that mission today. Fellow risk takers this is your worst podcast hosts Andrew Stotz, from mi Stotz Academy, and I'm here with featured guests. Carolyn McClanahan. Carolyn, are you ready to join the mission?

Carolyn McClanahan 00:36
I am so ready.

Andrew Stotz 00:39
Well, let me introduce you to the audience. Carolyn is a physician term financial planner. In addition to working in her financial planning practice, she speaks regularly on the interplay between health and financial issues, particularly regarding aging, chronic illness and of life long term care, healthcare reform and health care costs. She is an investor pedia. Top 100 advisors serves on the CNBC financial advisory council, and writes for various publications she's quoted regularly in the Washington Post, New York Times and CNBC Carolyn, take a minute and tell us about the unique value that you are bringing to this wonderful world.

Carolyn McClanahan 01:17
Well, I started out as a physician, and I practice emergency medicine and family medicine. And the thing that I became a financial planner, long story behind that, but it's because we couldn't find one that really did financial planning, they just mostly did investments. And once I got into this profession, because I went back to school for fun, I saw all these intersections of health and finance, and how if people understood all those intersections better, not just the public, but financial planners, that we could help people live a much more thoughtful life around money and health and all those things in between. And so that's what I aim to do is educate the world on those two things.

Andrew Stotz 01:59
And what is the typical person? You know, I mean, obviously, we everybody wants young people to be planning ahead. But you know, the reality is, is that they don't, but or, you know, some do, but not many do. What Who's your ideal client who's the typical client that comes to you? And then maybe you could just, you know, help understand, like, what's kind of a noticeable thing for them that it's like, oh, wow, I'm glad I found you.

Carolyn McClanahan 02:26
So, first off, I basically have to two different worlds in my life. One is my financial planning practice, and one is my education practice. And in my financial planning practice, our typical client is The Millionaire Next Door, do it yourselfer who has become too complicated to do it themselves well anymore. And they know that there are a lot of traps that they're missing specially around tax planning, and estate planning. And so they know they need help. And the thing that they don't like is the typical advisor charges based on assets under management, or they sell products. And we charge a flat fee based on complexity. So people who have more than one to 2 million, we're a bargain compared to the typical financial advisor. And we also do the holistic comprehensive planning, which includes aging planning, chronic illness planning. And so as people get older, or as they start to develop health care issues, where that's like my other world is we know how to help people deal with those issues, especially things right around dementia, cognitive decline, and help put plans in place to help protect people as they aged. So that's that job. And then the other job is educating all the other advisors in the world on what we do, so they can do it too.

Andrew Stotz 03:50
You know, I had mentioned before we turn on the audio that my number one fan who's going to listen to this and listen carefully is my mother, and she's 85. She's lived with me now for seven years in Thailand. It's remarkable that we've had this time together, my father passed away seven years ago. So she came here with me, and it's been a great time, but I can tell you that my parents didn't know much about investing and planning. But somehow along the way, they did a good job. Now they found a good advisor in North Carolina where they were and they stuck with that advisor and that advisor did give them very good advice. Now they did charge a fee on their assets. It wasn't just a fixed fee, but they really helped my mom and dad protect their their, you know, they weren't super rich, but they helped them. And then when my mom came to Thailand, you know, of course, she has, you know, health care, but in Thailand, you can't really use it. So it's cash. So we have to think okay, cash mainly. And then, you know, she's got her money that she's that they've saved and invested over time. And so she She's she's got that. And that's helped, you know, to support her. And then she's got, of course, me. But what I see is for the typical person these days to get to that point, unless you're like, rich, it's very hard. Like my dad worked for DuPont all of his life. He got DuPont stock at a discount price. And he just loaded up on that. And he got a pension fam plan from DuPont, and he got financial help from DuPont. And it seems like you know, there's just not that much help in the companies anymore. And so I'm just curious, like, Are people really prepared for their, you know, end of life or let's say retirement plus end of life?

Carolyn McClanahan 05:38
Well, you bring up a really good point in that in the 1980s, is when we started to see pensions go away. And people were forced into 401 K plans, and especially early on, they were forced into buying company stock in a 401 K plan and only being company stock. And Enron did that, look what happened to everybody that worked for Enron, they all lost their whole entire life savings. So thank goodness, things have changed. And companies are being forced to be more of a fiduciary for their employees as far as the 401 K plans. But the big problem still is people weren't taught how to save how much money they need for their life, lifespan and how to take care of that money. And it's easy to save money, but to figure out how to spend down that money is a huge challenge, especially, you know, tax planning is the most important thing that people can do in retirement to reduce expenditures. So yeah, it's you're exactly right. It's a challenge, I think, that people day do with what they have, basically. And, you know, especially in the United States, there are so many people that are just on the edge of disaster and our healthcare systems disastrous system right now. And, you know, I there, some people are going to be okay, and some people are going to struggle. Yeah,

Andrew Stotz 07:03
it's such a challenge. And it takes a lot more than you think my parents lived, they retired and had a retirement for 22 years. Before my mom came here for, you know, the last seven years. So, you know, there's a long time that you got to be investing in taking care of your money. And yeah, the healthcare system is awful in America. And it's awful in many ways, you know, that I've seen, but here in Thailand, you know, there's, there's, there's a free market, in health care, there's also government hospitals. And the free market, basically, you know, means that they're not all tied up with government, and not all tied up with insurance. And so the healthcare is pretty, pretty damn good. And at a reasonable price that you can literally pay out of pocket for so many things that would cause so much in America. And so, I, it's my dream that one day, America will become a free market capitalism, free enterprise country. But I think that's probably just a dream. And

Carolyn McClanahan 08:06
for me, that is a nightmare. I mean, we need a mix of we need competition, right? You need competition between government and private industry, that is the best health care system. So we can go on all day about that. But private markets do not work when you have people who are in poverty. And so unless you're gonna do something about that, then I don't agree with you. But that's all right, let's move on.

Andrew Stotz 08:30
Well, I think that, you know, we have a mix. And I think you gotta have a mix of private and public, you know, because that provides, you know, that competitive landscape. And the problem is that sometimes government will try to capture private sector, and then all of a sudden, it just gets messy. So I just hope that

Carolyn McClanahan 08:48
it's oftentimes private sector. And that's what's going on in the United States right now with Medicare, private sector is trying to capture government. And so that's where I mean, if you want to look at a great healthcare system, look at Australia. Okay,

Andrew Stotz 09:01
and what is it that you think is good about Australia, just just curious, they

Carolyn McClanahan 09:05
have a private option, and they have a public option, and they compete. And at first, the private option was doing better, but then they kept, they got greedy, and the public option started doing better. So people started moving to the public option. So they keep each other honest. And that is the type of competition we need not private to private, because private or private can collude to easily.

Andrew Stotz 09:30
Well, let me just ask you one last thing, because I know for my audiences, let's say 50% are in the US and 50% are outside the US. And, you know, you've got, you know, your teaching aspect that you're doing and I think for some, some of my listeners, they may be interested in that. And then other ones may say, I don't really have the resources or I'm not, you know, necessarily in that ready for that. But if you were to give one or two pieces of advice to somebody, that's the Thinking about, Gosh, I really even haven't even thought about all these issues that you're an expert on, what would be your like starting point or one or two things that you would do to get them thinking without overwhelming them?

Carolyn McClanahan 10:14
Well, the most important part is that most people don't ever think about losing capacity. So they think that they're going to get old, and then they're gonna die. And then there's this period where they aren't doing well. And they, and they're in denial about that. So the first thing you can do to prepare is simplify. Too many people have too much stuff floating out there. And the more simple you keep it, the easier it is to do a good job for yourself. And then the second thing is to get help early. So even if you, most people want to maintain control of everything they're doing, which is natural, and it gives you a sense of purpose. But as you get older, make sure you have somebody else looking in behind you. So whether it's gonna be a young child, or a friend, or you know, just whoever to make sure that you're not messing up. Because if you start to face cognitive decline, you think you're doing fine, and you're not. And before you know it, you're being taken advantage of or you're making stupid mistakes, either with your investments or just your planning in general. And so, so don't be cavalier when you're getting old, make sure you simplify and get help early. It's

Andrew Stotz 11:26
just advice that, you know, nobody wants to hear it. Because I don't want to think about myself going into cognitive decline. But it's worse. Yeah, well, they're worse about a lot of things. But what I would say is that in my mom, and my mom is facing cognitive decline right now. And she says to me, sometimes, like, I get so confused, and I can't figure things out. One of the things that my parents did was they got that financial advisor, they work with them and kept in touch. Every time that I went back to Charlotte, they set up an appointment, and I went in, and I met the financial advisor with my dad, and we went in and talked to everything. So when things started to get difficult, whether that was just health or cognitive decline, the handover was really easy. So it was simple. There was just one place, those advisors have been through all of this stuff before they knew how to set things up. And that really, so I that really helped my sister and I plus the, you know, the healthcare directives to understand what does my mom and dad want when it comes to that end of life period. And my sister and I understood it really clearly. And so I think that that that's a gift you can give to your to your kids really,

Carolyn McClanahan 12:42
right? Totally, totally agree. Yeah.

Andrew Stotz 12:46
Well, now it's time to share your worst investment ever. And since no one goes into their worst investment, thinking it will tell us a bit about the circumstances leading up to it, then tell us your story. Well, so

Carolyn McClanahan 12:56
you're gonna laugh so hard at this, because you're not and you're not gonna like it. So I started out in the mid 90s, my, was a resident and started my own IRA look, trying to learn about investments. You know, the problem with doctors is, we think we know we're smart. I mean, we're you got to be smart to get in med school through med school. So we're smart. But we think we're smart at everything, right. So we think just because we're smart at medicine, that we can beat the market, we can pick the best investments that we can get rich. And so I started investing. And my husband inherited a little bit of money in the mid 90s. And from his parents, sadly, and we invested that we were in our 30s, then early 30s. And we did super well. But you know why we did super well. Because it was the mid 90s 95 to 2000. We did well, he was an engineer, he and engineers think they're smart to you just so you know. So they. So he said, I don't want to be an engineer anymore. I want to be a track coach and an end age photographer. And I'm like, Honey, I am not going to take care of you. And so you got to figure out what this money is enough for you to be okay. You know, we'd pick stocks. And we've done well, we thought were brilliant. Now I know, we're lucky, right? And we tried to find a financial planner. And they all they wanted to do is take over our money and charges this fee to put us in a bunch of mutual funds. And they didn't do real financial planning. So that's why we went back to school. Along the way. I did stuff like day trading, and it was kind of crazy. And then I and then after I went back to school to become a financial planner. That's where I learned more about mutual funds. And so I'm trying to pick I spent so much time picking these great, great mutual funds that were supposed to grow beyond everything else and yeah, I just see it that these people are gonna be smarter than me. And then so now I'm a financial planner. I also started investing, investigating alternative assets. And all the due diligence on those. It's like, Oh, my goodness, you know, how do you really know the inner workings of all this? And so my worst investment is every actively managed thing I ever did everything. And so 2008 2009 comes along, I have all these bear market funds, and stock market crashes. And those bear market funds sucked worse than anything else. They were Bear Bear they went through. And unlike, okay, this actively managed thing, I spent so many precious hours of my life doing this research and trying to figure out what's the best. And I realize it and then that's when I really dig dug deep. And that's also when I hired a CFA for my practice. And he was active that he worked for an actively managed fund, he actually managed a large cap value fund. And then he switched sides and said, this is this off thing. He went passive. And he said, I will come work for you if you go 100% passive in your portfolios. And so we did and so I did haven't looked back. So my worst investment ever was active management. And I know you as a CFA probably hate that my CFA loves it because they love me, it's the passive or the high, or the highlight because you just can't beat the market. It's better to use your Wi Fi wisely and enjoy life.

Andrew Stotz 16:40
So how would you describe? Yeah, the lessons, let's just list it out. Lesson 123.

Carolyn McClanahan 16:45
Lesson one, there are everybody is smart in a different way. And there's nobody out there that can be sistent consistently smart to beat the market. Okay, you might get lucky. And you might be right once or twice. I don't know if you noticed, but I actually predicted COVID back in 2013. I have a big tweet out there. Coronavirus is going to cause the next pandemic. And I knew that because there were these cases of Coronavirus in France and in the Middle East where people died. And it was horrible. But it's really hard to pass. I said it and so you had to like really get a lot of secretions, it wasn't passed through the year I sent just need to make one mutation. So it can be passed through aerosol. And we're gonna have a poop show on our hands. And I was right. But I was what, seven years off. Right? Right. And that's, that's like, like trying to predict the stock market, you can't predict what things are going to do. So the most said lesson number two. And this is where financial planning comes in, you have to know what your goals for your money are short term money, you need to invest conservatively, long term money you can be more aggressive with, but don't try to like, pick what's going to do best because you're not going to know it just pick the whole basket that invest in international ETFs in domestic ETFs and just have it

Andrew Stotz 18:15
maybe I'll share a couple of my takeaways. I mean, my I, I wrote a book called How to start building your wealth investing in the stock market. And I wrote that book for women. And in fact, I wrote that book for five women. And the five women are my five nieces. And when they graduated from high school, I went back to America and brought them each $3,000, which was the minimum to set up an account at Vanguard, and I said, Here's your gift, we're going to open up this account, and you're going to invest passively, because I knew they didn't have an interest in the stock market. And so my objective was at 18 to get them an account open and get them started. And so and and for them, I would say you know, passive is absolutely the best way. And then as I told him, I told him, here's a fund that owns every stock in the world. Never sell it. And the reason why I said that is because you know, it's got us it's got global, it's got different sectors and all that just build it up, particularly at a young age. Even if you you would say well, it's prudent to be 10% in bonds and 90% in stocks or something for them and 18 If your first five or 10 years you were 100% in stocks in a diversified global portfolio that would give you stock performance that would be fun, and then get that up to 500,000 US dollars and then say okay, now I'll do something else. But in the end, I failed, unfortunately because I didn't I didn't convince them strong enough to contribute every month.

Carolyn McClanahan 19:50
Ah, and money. Yeah, so one

Andrew Stotz 19:53
of them actually did pretty well because she just said I just follow what uncle Andrew told me to do. And so when she had babies Sitting money or other she contributed and so hers grew, but for the other ones, and then what happens is that, and then you get excited about the active, you know, thing that you've said active management. And next thing, you know, one of my niece's was telling me about some of her investments that she's making that she's not. And I just thought, Ah, I just feel like I failed on that. So I think the the lesson that I take away from what you do, what you said is, it's a reminder for everyone out there, and as a professional, I mean, I've done all the academic research and read all the academic research, and it's very clear that active management is very, very difficult to beat the market. And basically, you're talking about, you know, 5% of active funds probably beat the market over a long period of time, and your chances of picking those five, at, you know, at before they consistently beat the market is, you know, tiny, and therefore, for the majority of people just set up, you know, the passive and let it grow. Because what's more important, particularly for a young person is contributing. And so, you know, if you don't contribute, you know, it doesn't matter whether you're active or passive, you're not going to accumulate the money. So yeah, that's what I would say, to what you said, I'm not that disappointed with what you said, Oh,

Carolyn McClanahan 21:13
good. Well, I know a lot of CFA is the reason you became a CFA is because you want to learn more. So you could like, figure out how to beat that stock market? Well,

Andrew Stotz 21:23
and if you're a CFA charter holder, you also are, you know, supposed to be continually improving. And when you continually improve, you know, you if you miss the evidence on passive, I would say, you know, that's a real problem. Right? Yeah. If you go into a, and that's where you then come up to the issue of, you know, an advisor, and you mentioned it before, a little bit. An advisor, that's not really an advisor, they're just a salesperson selling you products, versus a fixed fee advisor, or an advisor that my mom and dad had, that we're getting paid out of the assets under management. But we're at their fiduciary duty was to the client, it wasn't to pump out sales of particular banks products, or things like that. So now, based on what you learned from this story, and what you continue to learn, what one action would you recommend our listeners take to avoid suffering the same fate? Yeah,

Carolyn McClanahan 22:18
so the main thing is, know the goals for your money, know your time horizon, and make sure you have an investment policy statement for yourself that you follow, and that you stick to through thick and thin and you're going to be okay.

Andrew Stotz 22:36
Great, great. recommendation, I think the other thing I would highlight that you've brought to all of us is the overconfidence, bias, be very careful, particularly if you're a professional because, you know, you can get into a situation where you've been very successful in your business or in your medical practice, or whatever. And you have confidence in what you're doing. But even in the medical profession, research shows that older, more experienced doctors have overconfidence, bias. So it's everywhere. But when you take your, you know, success and experience in a particular area, whether that's being an entrepreneur or whatever, and then you think you're going to bring it to the world of finance, it's very difficult because the market is an extremely complex force that's having forces act or space with having forces acting upon it all the way. So keep in mind complex adaptive system that See, there you go, complex adaptive system. Exactly. So let me ask you what I mean, I'm looking at your website right now. And I'm just curious, like, what's a resource of yours that you'd recommend? For the listeners? What can they do to either follow you or to engage with you?

Carolyn McClanahan 23:44
Well, so my speaking website is Carolyn mcclanahan.com. And my company's website is life planning. partners.com. And on Twitter is Carolyn MCC. I don't know how much longer we'll be on Twitter, but who knows how long it'll last. But that's, that's how you can reach me. Fantastic.

Andrew Stotz 24:04
Alright, last question. What's your number one goal for the next 12 months?

Carolyn McClanahan 24:07
Oh, gosh, my number one goal? Well, you know, I'm starting my succession plan. And so I'm hoping to hire three new advisors, and grow the practice a little more and get ready to launch myself out of there in the next five to 10 years.

Andrew Stotz 24:28
Well, that's a great plan. And I wish you luck. We look forward to seeing your success. All right, listeners. Okay. There you have it another story of laws to keep you winning. Remember, I'm on a mission to help 1 million people reduce risk in their lives and this discussion helped us get there. As we conclude, Carolyn, I want to thank you again for joining our mission and on behalf of AES dots Academy. I hereby award you alumni status for turning your worst investment ever into your best teaching moment. Do you have any parting words for the audience? You

Carolyn McClanahan 24:57
just live life fully every day cuz you don't know where do you get another one?

Andrew Stotz 25:04
And that's a wrap on another great story to help us create, grow and protect our wealth fellow risk takers let's celebrate that today we added one more person to our mission to help 1 million people reduce risk in their lives. This is your worst podcast host Andrew Stotz saying. I'll see you on the upside.