Ah, yes, write some guy a check, and when you’re ready to put down payment on your dream house, retire, or finance your son’s world-changing rocket-science Ph.D. work, you’ll have all the money you need.
Beware the flashing teeth. These are two instances of a typical meeting with a financial advisor. The first, someone meet this financial advisor which advise him to invest in a XXX index fund, so he could invest it in a mix of individual stocks. The annual fee was 5% of the assets, plus trading costs.
In the second instance, an advisor told someone young and urged an aggressive investing agenda. “No risk no reward” may or may not have been his exact words. Comparatively, this guy was cheap – he charged a flat fee of about 3% of assets. But (you knew a “but” was coming, right?) he wanted 2% of all returns.
If someone took those baits, they’d better be good. The fee structure was such that Advisor No.1’s stock picks would have to outperform the S&P 500 by 10 percentage points – a feat that would rank him among the top rung of the best investors ever. Advisor No.2 had a lower outperformance threshold, but he’d skim 2% of the gains (no matter how large or small) off the top.
The odds that either of them would do better than the plain-vanilla (and cheap) S&P 500 index fund were not good. Considering about 75% of actively managed funds fail to beat their far cheaper benchmarks (e.g., S&P 500). So how likely is it that those financial advisors were going to earn their keep?
Fortunately, the two potential clients of the advisors said: “Thanks but no thanks” and decided to go it alone. That’s scary – investing isn’t their day job, after all. And like most folks, they’ve a job and a family and responsibilities.
I mean, who has the time to manage his or her investments?
That’s a question we see a lot and it is a reason contributing to the large majority of people trusting their hard-earned money to “advisors.” And although you may not have the time to be a stock market wheeler or dealer, you almost certainly have the time to sit down once a year, design an asset-allocation plan, and build a portfolio composed entirely of low-cost indexes. Why? Because no one will serve your interests like you will.
But where do you start? That’s another question we get a lot. And getting started is a lot easier than you think. You just have to sit down, take stock of what you have, and figure out your timeline and risk tolerance. If you’re already retired, for instance, you’ll probably want to stash the bulk of your savings in low-volatility vehicles such as REITS, TIPS (Treasury inflation-protection securities), bonds or the likes. If you have a longer time horizon, you might be better served to put your money in some index fund, but consider the cost.
Of course, there is more to investing than that – which I’m happy to discuss further – but the basics can be fairly simple.
And then you’re on your way. The same principles that apply to do-it-yourself home improvement apply to do-it-yourself investing. You could hire a professional and pay that person a lot of money to do a job that may or may not be up to your standards or what was initially promised. Or you could do it yourself, take your time, and know it will be done right.
And just as some home improvements require a trusty guide, I hope this article could do you some favor on this. While there’re many well-intentioned money-managers out there who genuinely care about their clients, they can be difficult to find. If you do it yourself, on the other hand, you know exactly what you’re getting.