“I am new to investing. How can I learn the basics?”
Great sites for basic and unbiased investing help are FINRA Key Investing Concepts and Bogleheads.org’s Getting Started.
“What is the hardest part about investing?”
You might be surprised. First, find a small mirror and hold it up to your face….now you know. We are our own worst enemies. When it comes to our own money, and saving for our future, we are prone to fear and greed, and this can cause you to commit behavioral errors, like trying to time the stock market. Investor behavior is the #1 reason investors do not earn a market return. There are strategies that can help, but you need to learn the basics (see above) if you are just starting out (or could use a refresher). Investing is simple (and some will say even fun) but it is not easy. There is always the tendency to fiddle and stray from the investment plan you set out to follow.
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. (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 financial services industry is built around the idea that you cannot do it yourself. The big lie is that investing is complex and you need professional help to succeed with your investments. The latest flavor is “robo-advisor” services. Investing does not have to be complicated. The best part is that doing a few simple tasks right, and committing to a simple approach to investing, is enough to beat the performance of most active managers after expenses, including robo-advisors. You do not need an MBA or any special training.
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!) That is what makes this site special, particularly in the arena of personal finance. See the “About” page for more info about me.
“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.”
All of those things are generally true about the fees and features for robo-advisor services, and there is nothing wrong with the idea, per se…if you are seeking active management. My hope is to convince you active management is not in your financial interest. I give some credit to Schwab, who advertises its Intelligent Advisor Services by saying you will “Pay no advisory fees, no commissions, and no account service fees. Period.” Even Schwab has to make money, and they allocate a portion of your portfolio to cash on which they earn a return. Other robo-advisors charge you fees based on AUM, and you are charged the fee the same whether you make or lose money.
Not only are Robo AUM fees a big cost, but many also implement their asset allocations using Exchange Traded Funds (ETFs). While the expense ratios for them can be low, some are not, 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. At other times, they can trade at a discount. This can be a problem if you pay the premium price when you buy, and get the discounted price when you sell. You just lost money twice! Add those losses to the amounts you lost on the spread. Contrast that approach (Robo, or otherwise) with the act of 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 closing price 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 any 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?”
John C. Bogle, who was a pioneer of index investing and founder of the Vanguard Investment Group, has spent most of his life espousing low cost investing and a simplified approach. This approach has the added benefit of being the most effective and efficient way to invest. The Bogleheads are a group of somewhat like-minded individuals in that they try to adhere to these 10 principles:
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Develop a workable plan
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Invest early and often
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Never bear too much or too little risk
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Diversify
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Never try to time the market
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Use index funds when possible
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Keep costs low
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Minimize taxes
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Invest with simplicity
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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?”
There is a lot of information out there on this question. I strongly suggest reading all viewpoints.
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 more portfolio turnover compared with simple index 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 drift from the style they set, so you have to keep track. For example, that fund you thought was US large cap now includes small and international. There are some active funds that employ low turnover and low expense strategies. Stick to those if you want to try to beat the indexes. Tread carefully. 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 outperform cannot be predicted in advance. Those funds that do beat the index attract huge inflows of money. This surge of inflows has to be invested; so, as investment choices and flexibility decrease, so does the performance. Try getting the same returns on a $200M fund that has grown into a $2B monster.
“Which brokerage should I use?”
I think Vanguard, Schwab, and Fidelity are all great choices. All three have low expense index investment products. Vanguard is known as the industry leader in the quality of their investment products, and they are a true mutual company, meaning they are owned by the shareholders of the funds they offer. Both Schwab and Fidelity are rich in website content and customer services, including banking. Schwab is publicly traded, while Fidelity is privately owned. Other good discount brokers are Scottrade and eTrade.
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