I saw a couple of posts on the Bogleheads forum recently that demonstrated a common phenomenon—it's what I call a “partial engagement with the financial services industry.” I'll demonstrate by including the questions asked and my answers to them.
#1 Asking for Reassurance from Bogleheads
“Hi everyone! I’m 22 years old, I have three investing accounts, and I just want some words of affirmation that I’m on the right track. One that I do myself and another two that are assisted with trusted financial advisors; the firm is a fiduciary. My Roth IRA and a brokerage account is opened by them; I opened it last year. I also opened my own brokerage account last year. I have maxed my Roth IRA with the help of a gift from my grandma and have limited money in the brokerage account run by the firm. I have no school debts, credit card debts, etc. As I start to enter the working world, I’m wondering where I should continue to invest a majority of my money. I have managed to invest $13,000 in the brokerage account that I’m in charge of. I invest in VTSAX and VTI, and I have $100 in Starbucks. I’m wondering if this seems like I’m on the right track. I don’t think I want to invest in bonds yet, but is there a bond index fund or anything else I should look into? Mostly looking for feedback. I’ve read a couple investing books including the Bogleheads Guide to Investing, and I took a personal finance class last spring. But I’m still learning. Thanks.”
My answer:
If you're capable of managing one account by yourself, why aren't you capable of managing three or one big combined account? Either hire an advisor to manage it all or manage it all yourself. I can't figure out why people do this.
At any rate, the way you build an investment plan is:
- Set SMART goals.
- Choose the accounts to invest in for each goal.
- Set an asset allocation (mix of investments) for each goal.
- Choose investments (primarily low-cost, broadly diversified index funds) that match that allocation.
If you can't do all that yourself, go hire a good advisor. One good advisor. Who manages the whole portfolio. And quit managing any of it yourself. Alternatively, learn how to do this, fire the advisors, and move on.
#2 Met with a CFP Today
“Looking for a little insight. Met with the CFP today. Here's a little about his philosophy. He definitely likes to build portfolios with single stocks. I've never done that. I always use ETFs. He said, for sure, on bonds he would do that. He doesn't like funds; he likes to do individual bonds. He definitely likes to focus at my age 54. Don't want to go working past 59 on the income side of things vs. the stock-heavy approach that I have always done and has got me here. I realize at this stage in the game, I do need to get a little less risky; [I'm] just not sure how much growth potential I'm willing to give up. He says I have no idea what the growth is going to be—none of us do, which is true, but we can control the income side of things with investments, which is also true. I don't know. Does anybody have this kind of portfolio setup doing the individual stocks and bonds? I know this group is always going to lean more toward ETFs and stocks in general. He said I have been a great offensive coordinator, but he would be my defensive coordinator. Maybe I do need that at this stage. My total portfolio is just north of $2 million. Within the next seven years, I'm investing a total about $115,000 per [year]. I'd like it to get to 3.5.”
My answer:
If I were paying someone for advice, I wouldn't go check their advice with a random internet board. And if I were going to take the time to become knowledgeable enough to ask intelligent questions here and follow the advice, I wouldn't pay someone for advice. So, why do you and others go pay for advice and then come here to see if it's right?
And no, this is not the advisor you're looking for if you really do want one. If they don't understand why they shouldn't be picking stocks, that shows you how little they understand about investing.
Your goal seems intelligent and reachable. If you can write goals like that (not to mention save and invest well enough to be a multimillionaire in your 50s), there's a good chance you don't need a paid advisor at all. You only need a 3.8% rate of return to hit your goal.
=RATE(7,-115000,-2000000,3500000) = 3.8%
You could lock that in with an all-Treasury portfolio if you wanted, although I suspect that goal isn't adjusted for inflation, is it? If not, you'd need 3.8% + inflation, which will call for at least some stocks or real estate in the portfolio. If inflation is 3%, you'll really need:
=FV(3%,7,0,-3500000) = $4.3 million which will require a return of
=RATE(7,-115000,-2000000,4300000) = 7.38%
You're unlikely to get that just with bonds. A balanced portfolio heavy in stocks (60%-80% probably) seems appropriate to me.
More information here:
Picking Individual Stocks Is A Loser’s Game
Partial Engagement with the Financial Services Industry
This post isn't really about these two individuals or their personal situations. It's just me wondering what is going on with people who can't decide if they want an advisor or if they illogically want to manage just part of their portfolio. Why does this happen so darn frequently? I think there are a few reasons.
#1 Confidence Trails Knowledge by About a Year
As people become competent do-it-yourself (DIY) investors, their confidence often lags their knowledge by about a year. Maybe the folks asking these types of questions are just in that year and in the process of becoming DIYers. Neither knowledge acquisition nor confidence acquisition happens instantaneously, and people like me just need to be more patient with them as they acquire those two things.
#2 It's Really Hard for People Who Need an Advisor to Recognize Good Advice
People who know they don't know enough to be DIYers still want advice, but they have also learned that there is a lot of bad advice out there. They just don't know what it looks like. They are logically seeking advice but also are still trying to figure out if they're getting it from the right source. This is primarily an issue with the financial services industry and/or government, neither of which does a very good job policing those who are just pretending to be real financial advisors.
#3 The Financial Services Industry Is Selling Hard
Don't forget that financial advisors have to eat also, and they want to send their own kids to college, just like you do, no matter their competence level. So, they are actively trying to cause you to doubt your own ability to manage your own portfolio as a DIYer, whether in person or via their marketing. No wonder people doubt their ability.
#4 People Are (Probably Improperly) Comparing Returns with Their Advisor
Maybe people are saying, “I'll invest this account and the advisor will invest that account, and then after a while, I'll compare and see if the advisor really knows what they're doing.” That doesn't seem so illogical. Until you realize the role of an advisor isn't to beat the market and it's easy (and appropriate) for either of you to match the market using index funds. If you think your advisor's job is to beat the market and your job is to pick the advisor that is going to beat the market, I've got news for you: you're probably both going to fail in the long run. Your investment advisor's job is the same as yours: “Come up with a reasonable plan, fund it adequately, and stick with it for the long term.”
That's it. Nothing more. Nothing less. If you can do all that yourself, you don't need an advisor. If you can't, then use an advisor to help you do the parts you can't do yourself.
What Should You Do Instead of Partial Engagement?
If it is illogical to have an advisor manage part of your portfolio, what should you do instead? Here's what I suggest:
#1 Learn
Start learning personal finance and investing. It doesn't take all that much time or effort to learn information that will be worth literally millions of dollars to you over the course of your lifetime. You should do this whether you use an advisor or not.
#2 Figure Out Who You Are
There are three types of investors:
- DIYers: People who are capable, comfortable, and willing to do their own financial planning and investment management.
- Validators: People who will do the work themselves but want to check in with someone every 2-3 years to make sure their plan is on track and see if there are any tweaks they should make.
- Delegators: People who want a “money person” who will tell them what to do and who will do as much of it as possible for them.
If you can just figure out which category you fall into, the next step becomes pretty darn obvious.
#3 Take the Next Step
- DIYers: Write your own financial plan by using a paid resource like our Fire Your Financial Advisor courses, cheap resources like good investing books, and free resources like this blog and good online financial forums. Then, implement and follow the plan.
- Validators: Find an advisor who can competently serve you (not as easy as it appears, but we've found a few for our recommended advisor list.) They'll help you put together a plan, and then you will need to implement and maintain it.
- Delegators: Pick an advisor where you're paying a fair price for good advice. Not sure where to start? Start with our list. Then follow their instructions.
In case you're not aware, we are in the process of ramping up a firm called White Coat Planning. While we're not yet taking clients, you can get on the no-commitment interest list here.
More information here:
Physician's Quick-Start Guide to Personal Finance
Investing: That Thing Rich People Do
How to Build an Investment Portfolio for Long-Term Success
What Not to Do
- Don't divide your portfolio in pieces and manage some yourself and have advisors manage the rest. That's illogical.
- Don't hire a good advisor, pay them thousands of dollars a year, and then check every recommendation they make with your favorite online investing forum. You'll both be perpetually unhappy with each other. That is also illogical.
What do you think? Are you a DIYer, a validator, or a delegator? Why is there so much partial engagement with the financial services industry?