I am new to investing. How can I learn the basics?
What is the hardest part about investing?
If you have difficulty “staying the course” on your own, there is no shame in asking for help by hiring an investment planner or advisor. Be careful if you seek outside help. (1) Use only a Certified Financial Planner (CFP) or Certified Financial Advisor (CFA), one with no conflicts of interest, and one who adheres to a fiduciary standard. (2) Do a background check of the person you are considering by using the Broker Search tool at FINRA. (3) Do not agree to pay unless it is based on a flat fee, not a percentage of your portfolio’s value, aka “assets under management” (AUM). If you do just these three things, your financial interests are more likely to come before those of the planner or advisor.
What is so special about this site? There are probably hundreds out there just like it.
The goal here is for you to keep more of your investing dollars, and hand over less to the fee-and-expenses-driven financial services industry. Yes, it costs money to run a mutual fund, but today, expenses for index funds are the lowest in history. Whether it is robo-advisor or other advisory services, most people do not need them. Over the long term, their performance has to overcome their disadvantage of costs, which are a hit taken in every year of operation, regardless how the stock market performs.
I do not sell financial services or products. Ad revenues obtained from operating this site (hopefully) will cover its operation, but even if it falls short, I still don’t need your money (…but a kind word occasionally is always nice!) I think that makes this site rare and special, particularly in the arena of personal finance. See also the “About” page for more info about the No-Robo guy.
What is wrong with robo-advisor services? They provide an inexpensive way to obtain professional asset allocation and account management services. AUM (assets under management) fees are lower than traditional services. Robo-advisors have lower minimum account balance requirements, too.
Not only are AUM fees a big cost, but also many Robos implement their asset allocations using Exchange Traded Funds (ETFs). While the expense ratios for them can be low, some are high, and they all have important differences that can cost you more money. Costs that could be avoided simply by buying mutual fund shares yourself.
ETFs are closed end funds that trade during market hours like stocks. One problem with ETFs is that firms (even Schwab) that are market makers take your money by pocketing the spread between the bid and ask price on every trade. Robo-advisors automatically (translation: frequently) rebalance, in part because each time they do, they make money on each position traded. Another problem with ETFs is they can trade at a premium above the underlying market value of the securities contained in the fund, and at other times they can trade at a discount. This is a problem if you pay a premium when you buy, and then you receive the discounted price when you sell. You just lost money twice! Add to that to the amounts lost on the spread. Contrast that approach (Robo, or otherwise) with directly purchasing an index mutual fund. You receive shares based on the actual closing market price of the fund, and that is based on the actual value of the underlying securities, and it is the same whether you buy or sell shares. Period. No spread, no fees, no discounts, no premiums.
Managing your own investments is really quite simple. At least it can be. Unlike many other aspects of life, complexity in investing does not mean the returns will be better. In investing, cost matters a lot, and complexity tends to add to costs. The biggest driver of portfolio risk is the ratio of stocks to bonds. If you have more in stocks and less in bonds, you have more risk because stocks are far riskier. If you choose to add some complexity (without adding to cost) you could “slice and dice” to overweight to the small and value factors, or to REITs. I say overweight (also referred to as “tilting”) because small value stocks and REITs are already included within the total stock market index. Avoid “smart beta,” and other strategies like long-short. These are often employed by Robos, are usually inefficient, and add to your cost, whether you see it directly or not. Why pay any fee to a Robo or include higher cost funds, when you can do it yourself?
What are Bogleheads and what does that have to do with the No-Robo Investor?
- 1 Develop a workable plan
- 2 Invest early and often
- 3 Never bear too much or too little risk
- 4 Diversify
- 5 Never try to time the market
- 6 Use index funds when possible
- 7 Keep costs low
- 8 Minimize taxes
- 9 Invest with simplicity
- 10 Stay the course
The No-Robo guy is a Boglehead.
Is it better to use a passive indexing approach or active management to beat the indexes?
Here is the short version of the No-Robo guy’s point of view. It is not so much a question of active vs. passive, but rather it is about focusing on cost and simplicity. Many actively managed funds and robo-advisor services have higher costs. It costs money to actively manage a portfolio, and of course you also have to pay the salaries for the “talent.” Index management is very inexpensive to operate because it is simple and passively-managed. Active funds tend to have higher expenses and portfolio turnover compared with simple passive indexing using mutual funds. High turnover causes capital gains and tax events, not to mention higher trading costs. Index funds have very little turnover and minimal trading costs. Active funds can also drift from the style they set, so you have to keep track of that fund you thought was US large cap that now includes small and international. Some active funds employ low turnover and low expense strategies. Stick to those funds if you want to try to beat the indexes, but tread carefully. The No-Robo guy mostly sticks to index mutual funds. The No-Robo Investor List of Acceptable Mutual Funds details the lowest priced index funds in the industry. If you are considering other funds, please look at this list before you leap.
Expenses are even more critical with bond funds given their smaller returns. If fees are 0.50% on a fund earning 2%, you are handing over 25% of your return!
The bottom line is that over long periods of time, managers cannot consistently beat the stock or bond indexes. Those rare few who do cannot be predicted in advance. Then, those funds that do beat the index get huge inflows of money, inflows the manager has to invest in something, but there are no longer any choices left to continue at that level. Try getting the same returns on a $200M fund that has grown into a $2B monster.
Which brokerage should I use?