I am continually amazed at the lengths to which investors and advisors go to make investing complicated. Now, I don't expect anyone to necessarily agree with my particular way of investing, but it's like people have no idea of what matters and what doesn't when it comes to investing.
For example, I got into a Twitter spat recently. It was with a blogger who focuses on choosing dividend stocks. The spat was over how long it took to learn “how to invest.” He was convinced it was a “lifetime process” that would take “at least 5 years.” I pointed out that the only requirement to invest other people's money is a series 6 exam- for which a typical study regimen would be 3 hours a night for a couple of weeks. Even a “high-level” designation such as the CFP only requires about 200 hours of studying (approximately 2 1/2 weeks of residency) and 3 years of some kind of related experience (which can be 100% in sales of financial products.)
Investing Doesn't Have to Be Complicated!
Needless to say, I thought 5 years was excessive, not to mention a lifetime. Now, I do think a lifetime of “continuing financial education” actually IS required, but that is a relatively easy requirement to meet. Maintaining a good investment plan can be ridiculously easy. If you don't believe me, I suggest you spend a little time with Mike Piper who has a very sophisticated, one-fund portfolio.
Despite the ease with which one can manage their own portfolio, I am often asked for referrals to financial advisors. There are some people that simply do not have the relatively low level of interest required to learn enough to manage their own portfolios or lack the discipline to stick with a good plan. Those people, perhaps 80% of doctors, can be best served by putting them in touch with those who give good advice at a fair price. So I have a pre-vetted list of financial advisors who not only give good advice at a fair price but are sufficiently interested in obtaining new physician clients to advertise on the site.
Adding the Twist
What is incredibly interesting as I go through this vetting process with dozens of advisors over the course of a year is just how much variation there is in the way they do investment management. Almost every advisor I run into acknowledges the merits of a “know-nothing” fixed asset allocation of low-cost, broadly diversified index funds, but they all add on their little twist.
However, it is always a different twist. A few months ago I had three advisor applications to review in a single day.
- This first application actually had a very reasonable investment management strategy, but I had to turn him down as he hadn't advised a single physician in the last year. I thought it would be hard to justify that to my readers.
- The second used low-cost index funds, but added on an options strategy “to control risk,” but when I went to pin him down, he was buying options every month.
- The third used actively managed mutual funds “where it made sense to do so.” That was pretty vague, so while pinning him down, it turned out he believed indexing didn't work with certain asset classes, which of course the SPIVA report card does a pretty good job disputing. It would do an even better job disputing that if it went out 20 or 30 years instead of just 5. But if an advisor wants to use actively managed funds, I like to see them using low-cost ones, since the real story of indexing is about costs, and this advisor wasn't doing that. Another frequent one is some version of tactical asset allocation — where the overall portfolio asset allocation is changed in response to, well, something (it varies quite a bit.)
These twists are actually the usual story, and I always have to decide if the “twist” is enough to disqualify them from my recommendation. I figure if they're mostly doing things the “right” way, that I can live with that. (There are no perfect advisors anyway.) If they're not, then I disqualify them. But why do all these advisors have to try to implement their “edge” anyway?
So, Why Make It Complicated?
Four Reasons Advisors Want “The Edge”
#1 Possibility of Increased Return
The first reason advisors try to always have some little edge is they really think it makes a significant difference. Maybe it does, but I'm confident nowhere near all of the “edges” I've seen do that. Most of them probably just add expense and subtract from returns. Now many, many individual investors also try to add a little edge to their portfolios. Maybe it's an “extra” asset class. Maybe it's a unique way to rebalance. Maybe it's a little tactical asset allocation or market timing or use of individual securities. Advisors are hardly the only ones guilty of this.
#2 Distinguish From Competition
The second reason is that advisors need to find some way to distinguish themselves from the competition. The “edges” do a fine job of doing this. Now nobody can tell what the heck anyone is doing when it comes to portfolio management. This has been studied in medicine, and it turns out that all those little variations generally result in substandard health care. But advisors want to avoid being a commodity because when you become a commodity, it becomes a race to unprofitability as everyone competes on price alone.
#3 Justify Fees
The third reason advisors use these little edges is to justify their fees. If all they were doing is managing a static allocation of index funds, rebalancing it occasionally, and maybe doing a little tax-loss harvesting, then they could be replaced with a robot. Hmmm…come to think of it, this explains a lot about the rise of the roboadvisors. But it turns out that the value-add for a “real” advisor isn't in the “edge” with the investment management, it's in the financial planning and in the “high-touch” aspects of investment management- building around the random investments in some doc's 401(k) and keeping him from selling low with every Brexit and Trump election.
#4 To Appear Active
Finally, the edge satisfies the demand of advisors, clients, and individual investors to tinker with their portfolios. We all have this idea that we can add value to our portfolio somehow if we just learn enough and work hard enough. We WANT to be active, even when we know the right thing to do is to invest our time actively and our money passively. If you really want to add work and want to add value with it, look to invest in real estate, websites, and other small businesses.
Rappelling, Zion National Park
What Really Matters With Investing
It seems a good time to review what really matters when it comes to investing.
- Setting appropriate and important goals
- Earning more money
- Saving a higher percentage of earned money
- Taking an appropriate amount of risk (i.e. a reasonable asset allocation)
- Setting up a reasonable investment plan
- Sticking with the investment plan
- Minimizing taxes and fees
If this list ends at # 7, all of those “edges” start way down on the list of importance at # 20. That stuff just doesn't matter much in comparison. It certainly doesn't matter enough to pay much for. If you're interviewing a potential advisor, walk away if he spends the whole time trying to sell you on his idea of an edge instead of basic nuts and bolts financial planning and investment management. If you're functioning as your own advisor, focus your time and effort on what matters and quit looking for an edge yourself.
What do you think? How long do you think it takes to learn to invest? Why do we try to be unique and edgy? Why does every advisor have their own version of “the best way to invest?” What do you think matters most in investing? Comment below!
It’s simple, but it ain’t easy. The rules are simple but following them through thick and thin is the hard part. Everyone can play the millionaire genius role in an up market.
The two bear markets that I have lived and invested through have taught me lessons that are not learned in books, blogs, message boards or podcasts. You do not know how you will feel, in the pit of your stomach (where is that “pit” anyway–never learned about it in Gross Anatomy 😉 ), while your net worth, and dreams along with it, are crumbling. The despair when you find that your 401k is now a 201K. It is easy to say that you will be disciplined when the time comes, but much harder in practice.
I agree and that is why I recommend people err on the conservative side with their asset allocation until they pass through their first bear market.
I credited my dad for the ease with which I ignore market vagaries: In 1989 or somewhere thereabouts when that decade’s big crash occurred he called me up that night and said “I just lost $150K (30%) in my retirement fund.” As he explained that this didn’t really matter, that it would probably bounce back up over the next few years and certainly by the time he retired, it helped me more clearly comprehend financial ups and downs and probably by his calm insouciance helped me to not worry about such stuff throughout life.
I also think gains/losses realized versus current value is an important concept. I remind the husband when reviewing our assets that x% (stocks) might be less or more and we don’t really know the final return until all bets are in and settled. I even point out that while we can guess that our house might be worth 80% or 60% of what we paid for it, we haven’t lost money until we sell it. (And if it’s a better deal not to sell, then its value to us is more than we could sell it for?)
My investing is complicated because I’m OLD. I started investing so long ago that the trends/ products have evolved around us and so we have dozens of separate assets instead of just a few. I lucked out and never got in to loaded mutual funds or annuities (thank you Andrew Tobias!) but I am slowly cleaning up my complicated portfolio. Ditched the DRPs after 25 years (daughter finally sold the birth day Hershey stock we gave her) for MF or keeping stocks all in one account versus one for each stock. Abandoned my childhood credit union (one kid still has an account there, but will close it when all her CDs mature). Slowly selling most of the stocks in a brokerage account I had for doing options before that was oversubscribed. Converting slightly (or vastly) higher fee managed MF into index funds in years when our tax bracket is lower. Trying not to add another specific class index fund to the collection of small cap, high income, international, emerging market, etc ones I’ve added to the portfolio as that type of fund was invented. Dealing with Vanguard’s decision to ditch solo 401Ks and turning my self-employment company pension fund into an IRA (sealing me off from easy back door Roth IRA).
The recommended investments if I were starting from scratch just weren’t available to me for the first half or more of my life investing. And realizing and paying taxes on a lot of capital gains if I converted all our fortune into those now, is a dumb idea. So I tell my kid “Do as I say, not as I did,” re finances. And “I’ll try to have this mess down to a lot fewer accounts and investment classes before you inherit any of it.”
Complexity comes with age. The folk on this blog would be amazed that when I started investing in 1989 roths did not exist, etfs had not been invented and I did not have a computer. You had to go sit down in an office and fill out forms to open an account. Things are much simpler now and cheaper.
Also, just to clarify a couple things — the CFP designation is not to become an investment expert. It is to be a comprehensive financial planner. Investing is one part of the education/exam. There is also tax, insurance, estate planning, college planning, retirement plans, and case study. The Series 6/7/66/65 exams don’t make you much more of an informed investor; they do make you more aware of rules and regulations.
Can you tolerate a 50% loss in one year?
Yes, but only on money I don’t plan to use in the next few years, which, right now, is all of my retirement savings and the college savings for my seven year old. What I can’t tolerate is for that money to grow too slowly over the coming decades for me to reach my goals.
I have a new 401k that was just rolled over from a prior account, it has a sizable 6 figure amount. I plan on keeping this money there long term (don’t anticipate pulling any money out of there anytime soon). it doesn’t seem to make sense to buy stock mutual funds at this time given how the stock prices are historically high at this point. should I look into bonds for now, may be re-balance my portfolio at some point when/if the stock market corrects. I see some Vanguard bond funds that look decent & have annual returns averaging 4-7% since inception (like VLGSX, VBLTX, etc).
What does your written investing plan say you should invest in?
That question is rhetorical. The fact that you’re asking this question indicates you don’t have a plan. You’re basically jumping straight to the last step of an investing plan without concern for the steps before it. These posts may help:
https://www.whitecoatinvestor.com/how-to-be-a-do-it-yourself-investor/
https://www.whitecoatinvestor.com/how-to-write-an-investing-personal-statement/
Remember that stock prices are USUALLY at historical highs. You wouldn’t invest in stocks if they weren’t.
Kal,
If you want, you can pay me $400 an hour to help you, or you could utilize the help of Warren Buffett, who said the following in his recent annual letter. I am a financial advisor whose motto is you don’t really need an advisor. The technology is so good, you can have the Vanguard computer auto-invest the money for you over a year or so. Here is the Buffett quote: “That professional [Advisor], however, faces a problem. Can you imagine an investment consultant telling clients, year after year, to keep adding to an index fund replicating the S&P 500? That would be career suicide. Large fees flow to these hyper-helpers, however, if they recommend small managerial shifts every year or so. That advice is often delivered in esoteric gibberish that explains why fashionable investment “styles” or current economic trends make the shift appropriate.” Jim, I love the WCI Network concept. I would love for you to follow through with the idea of an investing conference with a one on one with a financial advisor for a portfolio review. I need an excuse to get to Utah and hit the slopes.
Where did the one on one portfolio review idea come from? Are you offering that to attendees?
The 21st century affords the investor the advantage of using academic evidence, quantitative science, and ETF products to build robust portfolios and gain an “edge” for use in optimal asset accumulation and spending stages.
DFA has been a pioneer in this respect, yet the next step has been the application of tactical allocation towards the risk premium factors combined into a strategy with very few transaction per decade ( average of 8 per over a 60 + year sample ). This can help simplify the steps and steep learning curve that an investor faces. Further use of “motifs” ( at services such as motifinvesting.com ) based on these strategies can further eliminate the portfolio management / transactional steps
https://tinyurl.com/znnqxdw
https://tinyurl.com/j269ug5
Well, there’s certainly plenty of complexity in that approach.
Always beware of the limitations of retrospective data. It’s only useful insomuch as the future resembles the past.
Except now that everyone has that same access, those edges dont exist anymore. Even DFAs results are more likely due to specific fund mandates and structure than tilts, and while they may have alpha it is insignificant, aka, just as likely to be random chance. AQR, and many academic papers have tried to show these things exist when they just dont.
Like small value, its never existed in reality. A series of one off exchange mergers, repricings, and ignoring of giant bid-ask spreads and illiquidity. Likewise for value and so on.
There has been lots of research but heres a quick recap from the Dual Momentum guy, with references if you’re further interested. Most people are fooling themselves and just satisfying their active desires through what is an acceptable method, aka, indexing. Factors are the teslas of the investing world, the socially approved yet still just as poor overall choice.
https://www.dualmomentum.net/2017/02/factor-zoo-or-unicorn-ranch.html
I’ve never been a full believer in factors, although I think the arguments are compelling. The way I’ve dealt with that disbelief is to tilt in domestic stocks but not international.
Theres lots of good reasons why domestic stocks have done better, and no funny factors to consider. Our markets have switched to high margin businesses over the years (tech, healthcare) while EM and others are more commodity/industrial based with low margin and forex issues.
We also have always enjoyed (hope it lasts) good rule of law and a pro business/investor attitudes. Politics have been stable and we have not yet had the stagnation of europe or certain policies that market negative. So overall it makes sense, though some of these things are definitely at risk.
The arguments are compelling, in the past when they did work. One of the interesting things in that article is one of the research papers showing how much money each factor can take on before its arbitraged away. Thats the issue, too many smart people and too much money.
I think a good book or two or reviewing a few good websites like yours is all it takes to learn how to invest – not a great deal of time at all. The problem is that many folks when they’re young (especially) just don’t take the time to learn. I know for many years we just invested in active mutual funds from the latest “Top 10 funds over the last 5 years”. After I finally took the time to do some reading, we now have the majority of our money in index funds. But since we’re all human, I still try to “beat the market” with a few individual stocks, however we only do it with less than 5% of our total investments. Besides taking the time to learn the basics, I think DGI makes a great point – having the discipline to stay the course through “thick and thin” is much easier said than done. Like many things in life the principles are relatively simple to understand, but not always easy to actually do (kind of like losing weight).
Great Article. blog post , I was fascinated by the specifics ! Does someone know if my company could access a template NH DHHS DFA Form 800MA document to fill in ?