Do you pay someone to manage your financial accounts? Are you someone who thinks they need a financial adviser? Yes, I think financial advisers have their place in today’s financial world but only if they are a fee-only fiduciary adviser. Recently I have discovered podcasts to listen to while I work and I have found some to be very interesting. I also am reading a great book by Vanguard founder John Bogel titled Common Sense on Mutual Funds. Both have reinforced my beliefs on how people should invest these days.
First I will address the information I got from a podcast and accompanying book that outlines three ways in which to invest in today’s markets. And after listening to several of the podcasts and reading the entertaining yet informative book, I must agree with the assessment put forth. The first method of investing is to look at a fund of funds in which is a target dated fund. These funds are aimed at changing your investment’s asset allocation from an aggressive approach to a more conservative one as you approach your retirement year. These funds are becoming extremely popular with target dates that are spread out on either five or ten-year intervals. If you are in your early 20’s, you may want a target date fund that ends in 2060. Now, these are mutual funds that invest in other mutual funds to achieve the asset allocation mixture. Many will have a total stock index, a total bond index, a total international index and a total international bond index. When you are younger, the asset mix may be 90% equities split between the US and international funds and the remaining 10% is a mixture of bond funds. The key in selecting a target date fund is first to consider the asset allocation to ensure it is one that is consistent with your investment style and wishes. Then just as important are the fees the fund charges as it is a fund of funds it will cost you more than a typical mutual fund. Here it is extremely wise to go with a low-cost fund family such as Fidelity or Vanguard.
The second option laid out in from the podcast and book is to examine one of the many robo-advisers that are now available. Some of the more well-known robo-advisers are Betterment and Wealthfront for larger investors who seek IRA or traditional brokerage accounts. Then there are the micro robo-advisers such as Acorns and Stash which allow traditional brokerage accounts with as little as $5.00. All of these robo-advisers use exchange traded funds to compile their portfolios. And to determine what kind of asset allocation your portfolio will have you just have to spend a few minutes to answer some basic questions about your goals, time horizons and risk tolerance. Then the programs take over and come up with your optimal asset allocation, and your funds will be divided into a series of exchange traded funds. While almost all of these robo-advisers charge the same in fees, you do need to be aware of the fees charged by the individual exchange-traded funds that make up your portfolio. Just as with a target dated fund you want to pay the least in fees that you can so your funds will have the best chance to compound over the long haul.
And finally, the third method mentioned in the book and on the podcast is the method that may be the one best suited for a fee-only adviser. And that is to select a fund family and invest in three or four funds from that company to create your own asset allocation, model. Again, Fidelity and Vanguard are excellent choices to accomplish this as they excel in low-cost funds that specialize in indexed funds. The reason I suggest a fee-only planner is they can assist you in selecting the percentages that you want to invest in each asset category and can help you rebalance on an annual basis to keep your portfolio in check over the years. Also, fee-only advisers can assist you in keeping emotions out of your investing decisions which are what causes most people to do the exact opposite of what they should do. Many people when they panic will sell when the price has declined and buy again after it has risen, which is not the way to invest. And it is not wise to try and time the markets as if you missed the twenty best days over the past four decades you will have missed the majority of the gains in the markets. Here you want low-cost funds and to use the method of investing called dollar cost averaging. That means you invest at a regular interval allowing you to buy more when prices are low and less when they are high but the average is one that will generally benefit you in the long run.
As for the John Bogel book, I am about half way through it, and it is a real eye opener. I am going to go out on a limb and go ahead and recommend it to everyone who is interested in investing. In fact, I will be adding it to the recommended reading tab here on the site if you want to purchase the book. Similar to the third method mentioned above Mr. Bogel recommends investing in the market mainly through an index fund that specializes in the S&P 500 which will encompass the majority of the markets in the US. And since these are the largest 500 companies in the US you will have automatic exposure to the international markets as about 25% of the profits of the S&P 500 come from outside the US. Mr. Bogel also only recommends having a single US bond indexed fund to capture the bond portion of your asset mixture. But the main thing that Mr. Bogel preaches is that costs matter more than people think so it is best to go after the indexed fund with the lowest fees that are passed on to you as the investor. After I finish the book, I will again talk about it in more detail and give a more detailed review on why I think it is a must read for anyone who wants to invest.
Investing does not and should not be difficult. In fact, the simpler the plan, the better it will be for you the investor. People have tried to beat the markets ever since their inception, and it has proven to be a wild goose chase. Instead of beating the markets we all would be wise to accept the market’s return which has been about 10% since 1926. Not bad for a set it and forget it investment strategy that we should all follow. If you want to invest in actively managed mutual funds or individual stocks I would recommend not putting more than 10% in these assets or if you are younger and can take the additional risk maybe up to 20% of your assets. The rest needs to be invested in indexed mutual funds that have the lowest fees available.
If you need more information or have a comment, please feel free to contact me directly or leave a comment.
