GVUL Experiment August 2024 Update (Part 4)

I blinked, so July is over. I’m proud to say that after writing last month’s update to this little GVUL investing experiment, I didn’t check my investment accounts again until just now. We get some surprises and interesting takeaways. I’m also going to talk about some of the things I did other than checking my account balance last month. (You can skip that part if you want.)

First, the numbers:

Hello Volatility!

Last month, our fancy BlackRock fund had increased more than $49 in value. This month, that value decreased by $28.84, making our overall holdings in that fund worth less than they were last month. Ouch.

That BlackRock fund comes with the highest expense ratio in our experiment: a staggering 0.63%. The idea is that the big brains at that swanky investment firm earn that extra cut of our earnings by choosing so well between winners and losers that they can beat the overall market.

If you’re here, then you probably have enough financial education to realize that this isn’t realistic. Most actively-managed funds under-perform the overall market in the long run. This month’s results illustrate that perfectly.

Despite leading the pack last month with a 4.93% return, this month our BlackRock fund’s overall ROI now lags both of our low-fee index funds by 33%!

I’m also thoroughly unimpressed by our actively-managed “S&P 500” fund that doesn’t actually try to match the S&P itself. It’s up less than half as much as its passively-managed, low-fee competitors.

Now, if we judged any of these funds based on a mere two months’ performance, we’d be fools. This is a long-term experiment because investing in the market only works over the long term.

This type of volatility is what a lot of investors mistake for major risk. Let’s touch a little more on that idea.

Risk vs. Volatility

Uneducated investors see the fact that the market can swing wildly up or down in a short amount of time and think that’s a big risk. If you’re investing properly, for the long term, these short-term changes are meaningless.

Sure, if you retired yesterday and need your money right now, then today’s market performance matters some. However, if you plan ahead enough, you can plan your withdrawals ahead of time and avoid issues. Over the very long run, the average return of the overall stock market is 10.5%. If you can embrace the idea of “fire and forget” with your investments, you’re likely to approach that return over time.

The people who get worked up about volatility are mostly day-traders who need to avoid big downturns right after they buy. You can play that game if you want to, but I think it’s a waste of time for most pilots. Go fly something cool instead.

For me, bigger risks are things like an entire company losing their way. (See: Boeing, Twitter, and many others lately.) The value of those companies decreases because they make bad decisions. We diversify our investments to avoid this type of risk. That leads to a quick discussion of diversification.

Diversification is About Risk, Not Return!

Just about any financial advisor will urge you to diversify your investments. Uneducated investors somehow get the idea that this is about getting better investment returns. That’s dead wrong!

An investor would always get the best possible returns by picking the one single company that is going to perform the best over their time horizon, and put all their money into it.

I recently listened to a fantastic episode of Paula Pant’s Afford Anything podcast with Michael Kitces as her guest. (If you haven’t already, listen to it!)

Their discussion suggested that the best possible investment in the recent past probably would have been to buy stock in Nvidia. This stock has performed wonderfully because their GPUs are key components for both AI and cryptocurrency.

However, what if Intel, or Google, or AMD, or someone else suddenly announced a much better GPU, at a lower price along with the ability to manufacture them twice as fast as Nvidia? That high-flying stock would crash overnight, and AMD would be the new hotness.

If we diversify by buying both Nvidia and AMD (and Intel and Google) we get the gains from whichever one wins, while also absorbing all the losses. That sounds bad, but in the long run this is exactly what gives us that 10.5% average return for the whole stock market.

We diversify because we’d rather only get a 10% return than suffer the massive losses of picking a winner that suddenly becomes a loser (or worse, picking a loser than looked like it would become a winner when we bought it.)

Why do I talk about this over and over again? I feel like a lot of Certified Financial Advisors convince us to pay them extra to help us diversify our investments because (they convince us) it’ll increase our overall returns. That’s wrong in every possible way. If a financial advisor starts trying to sell you on this, please politely shut them down.

Paying a CFP to diversity your holdings won’t increase your returns, and you don’t need someone to pick stocks to help you diversify. There are plenty of passive, low-fee index funds available for this. Those index funds help protect you against volatility or the risk of any given company suddenly failing. You don’t need to pay someone else to help you mitigate those risks either.

Tangent – Actual Investing Potential

That same episode of the Afford Anything podcast includes its own excellent discussion of why pilots like us should not bother trying to pick stocks ourselves. Basically, Kitces asserts that since most pros who spend all day every day trying to pick stocks usually fail, it’s nearly impossible for a lay investor to do better. However, unlike a hedge fund cubicle dweller, a pilot like you or me does have the ability to pick up an extra trip, frequently for premium pay, and make a bunch of extra cash for very little time or effort invested.

For a major airline Captain in my position, a day of flying for premium pay is worth a minimum of nearly $4,500. That day might cost me 24 hours away from home, including 2-14 hours of actual work. Overall: not too shabby.

I could, instead, spend 2-14 hours researching stock picks while sitting at home. What is the chance that I could end up learning enough in those 2-14 hours to make a meaningful investment decision capable of generating $4,500 in one day? I’d say that chance has a value approaching zero. The chance that I could do this more than once, without accidentally picking a bunch of losers in between two wins is even lower.

I do think some alternative investments offer different benefits, risks, and tax advantages that make them worth researching. They are not stock picks, and we’ll discuss them another day.

At the very least, picking up an extra day of flying likely has a much higher ROI than almost any stock pick. I sincerely hope that most of us have other important things to do as well. I’ve had a busy July that didn’t involve much work flying. However, it was both fun and rewarding. I want to chronicle some of it here as an example of a better way to spend time than trying to pick stocks.

If you don’t want to read about personal, non-financial details, you can skip the rest of this post. Thanks for reading, and I’ll see you next month.

Better Ways to Spend Your Time

I do a lot of GA flying out of a great little grass strip officially known as the Historic Wimauma Auxiliary Airfield, FD77. It’s a truly fantastic place with good people and cool aircraft. We’re big on mentoring future generations, and two of our favorite young people are Lorenzo and Christian. A friend recently sponsored the cost of Lorenzo’s Private Pilot ASEL rating. I figured that since my Pipistrel is a glider, I could do the same for Lorenzo’s Private Glider add-on, and Christian’s initial Private Pilot Glider.

I got to enjoy several days of flying with two great young people who actually study before showing up, pay attention to what I say, and even offer to help wash the plane when we’re done. I had Lorenzo soloed on Day 2, and he passed his checkride with flying colors later that month. Christian is doing well and should solo soon.

Next, I flew with a paying customer who traveled all the way from Europe to get his initial Private Pilot Glider rating. He’s a sharp business owner who also did well on his checkride the same day as Lorenzo.

I enjoy flying and teaching any time, and will take just about any excuse to do either. The fact that this particular student generated enough revenue to at least cover the costs of hangar and insurance for the month was icing on the cake.

I didn’t spend all my time flying this month. My wife and I got to spend a weekend away from the kids. We didn’t go too far, but I cashed in the Marriott points to score a $700/night room at the Ritz Carlton Sarasota for very little out of pocket cost. My wife was thoroughly impressed. If you haven’t been, Sarasota has some fantastic food downtown.

We also had a scary incident this month. One of our pups, Subzero, suddenly started having a hard time breathing. I spent essentially a whole day waiting to get him to an emergency vet. He spent the night there, and we spent the day after he got home watching him closely.

Thankfully, the vet’s treatment was successful. SZ is happy as ever and fully back to normal! He recovered from that visit much more quickly than our wallets will.

Although I complain about the costs of that vet care, I feel blessed to have a great job at a great airline. Since my wife and I have had the good sense to fill up a Treasure Bath, covering this bill didn’t break us. Also, as an airline pilot I get to spend enough time at home that I was actually able to be at home with my family for this emergency.

If I was at a lesser company, or worse, in the military, I might have had to ditch my wife and say, “Sorry the dog’s sick; take care of it yourself.”

Having great jobs and a Treasure Bath has also paid off for us another way. We’ve talked for years about building a dream house with things just the way we want them. After a couple years of shopping we found a great opportunity to do just that.

We’ve since spent many hours choosing options and finishes, and planning the other enhancements we’ll do ourselves after our builder is finished. (Among other things, we’re hiring our own contractor to do a massive solar array and electric car charger. Since we live in Florida, we’ll truly get to drive that vehicle on nothing but sunshine and sell any excess power to the neighbors.)

Our new house will be closer to our kids’ school, my wife’s job, and is no further from Wimauma AAF. It’ll have almost everything we’ve spent these years dreaming and saving for. We were able to move quickly with the deal in part because we had plenty of Treasure available to scoop from our bathtub to cover our down payment.

Last, but Not Least: Oshkosh!

If you’ve never been before, you must find a way to attend the EAA AirVenture at Oshkosh sometime. I’ve been there a few times, and this year I got to fly my Pipistrel to the show for the second time.

My trip was not without hickups. I stopped for fuel in Cross City, FL, to find my nosewheel covered in oil. Some tight clearance between my filter and my fancy Akropovic exhaust doesn’t leave enough room for a conventional filter wrench. I’d crimped the casing of my filter using the least terrible wrench in my toolbox, and it failed on me.

Thankfully, I was close enough to home to get new parts and do a replacement on the ramp. I enjoyed the rest of my trip to KOSH, and finally found the correct filter wrench at the Lockwood booth at the show.

AirVenture had some great acts and some exciting new aircraft on display. I had the honor of giving a presentation about getting higher quality flying for less cost at the National Association of Flight Instructors display on Wednesday. I received positive feedback, and hope to continue spreading that message.

One of the best parts of the show this year was that a few friends from Wimauma also flew up. Three of them were there for their first time, and I enjoyed seeing the magic of Oshkosh reflected in their eyes. They had their own challenges getting to and from the show, so we didn’t get to park together. I ended up at the far end of the South 40, with some interesting neighbors.

This didn’t prevent us from enjoying the afternoon shows from their prime location in the North 40.

Somewhere amidst all of this I managed to do some airline flying and even record an episode of the Engage podcast with my MEC Chairman in Atlanta. It was a busy month, but all time well spent.

I could have used some of those days researching stock picks, but I think it would have resulted in an overall loss. My investments in FXAIX and VTI are up 3% in two months, which is outstanding. Why not fire-and-forget my Treasure into great investments like that and spend the rest of my time flying, teaching, hanging out with friends and family, and taking care of my sick doggie?

I’d love to hear your thoughts on this. Do you spend lots of free time researching investments? If not, what other valuable ways do you spend your time? How much money does it take to convince you to pick up an extra day of work?