A few months ago, I got my co-worker to sign up for the 403b plan (401k for public sector workers). He has been getting interested in investing and spoke to his friend who referred him to a financial adviser. I gently implied to my co-worker that the adviser may not necessarily have his best interests in mind as he works on commission and may steer him towards investments that earn the adviser more money. My co-worker responded by saying that he does not begrudge another person trying to earn money. You pay an attorney for legal advice, a doctor for medical advice, so why not a financial professional for financial advice? When I suggested index funds, he said that they might be good for a beginner, but if you have a professional managing your portfolio, why not beat the market instead?
All good questions. Being cheap and being lazy are two negative terms. This is for a good reason. It is because these traits are bad. It is counter-intuitive to think that you can often get the best return by spending less. But remember higher price does not mean better quality. It is counter-intuitive to think the less you work at something, the better the results. Investing is a unique creature. A lot of common sense thoughts on it do not apply.
Index funds outperform actively managed funds. So why pay more for poorer performance. Also, one of the reasons index funds outperform actively managed funds is because they keep their costs low. Costs matter. They matter a lot. Check out this tool on Vanguard’s website which shows you how much higher costs eats into your returns.
There are no affiliate links in this article. I am not paid by Vanguard. I am just a big fan of the company
As for a financial adviser, those can be costly. If you have a large amount of assets, then you might need to speak to a professional. But even in that situation, I’d advise you to use a fee only adviser who gets paid for answering your questions and helping you create a investment plan. I would not go to a commission-based adviser who may steer you to expensive funds that pay him a referral feel. For most of us, you can do some research online or use this tool at the Vanguard website to decide what type of fund is good for you.
Or you can use a lazy portfolio. (more on that later)
We’ve been taught that working hard will bring you success, so why is investing any different. If we want to be successful, shouldn’t we research companies’ financial statements and attend stockholder meetings. Well number one, I highly doubt most of us have the time to do this. And number two, since many professional fund managers are not able to beat the market when it is their job to do so, it is highly unlikely that you can.
“If you spend more than 13 minutes analyzing economic and market forecasts, you’ve wasted 10 minutes.”
– Legendary Investor Peter Lynch
It is counter-intuitive, but you should set up your asset allocation and then ignore all the noise about what the stock market is doing. It can drop 170 points because of tension in the Middle East or go up 300 points because Ben Bernanke sneezed, it doesn’t matter if you are satisfied with your investment plan.
According to the Bogleheads wiki page, lazy portfolios are designed to perform well in most market conditions. They contain a small number of low-cost funds that are easy to rebalance and the “lazy” investor can maintain the same asset allocation for an extended period of time.
Here is an example of a lazy portfolio:
33% Vanguard Bond Market Index Fund or Inflation-Protected Securities Fund.
34% Vanguard Total Stock Market Index Fund
33% Vanguard Total International Stock Index Fund.
You can invest in all-in-one funds such as the Vanguard Life Strategy Funds which maintain a preset growth- or income-oriented asset mix (Income, Conservative, Moderate Growth and Aggressive Growth) or a Target Retirement Fund which becomes more conservative as you get closer to your retirement date. (You can also use a different institution if you prefer, just make sure the expense ratio is low).
Investing doesn’t have to be complicated. It can be very simple, so stop making excuses as to why you need to wait. Start investing now. For those who can’t hear enough about the stock market, turn off CNBC and find something better to do with your time. I just saved you tons of money and time. I feel like the Gekko from Geico.
Index Fund Returns Get Better With Age by Rick Ferri
How to Beat 80% of Investors with 1% of the Effort by Matt at Mom and Dad Money.
(Actually there is one affiliate link in this article and it is this book that I read and re-read)