Hide your cash! The money managers are coming. There’s a huge lusty hungry army of financial advisers marauding about looking to latch on to your early retirement war chest and clandestinely drain it’s lifeblood while telling you it’ll all be okay and you’re in good hands.
Of course the conquerors will try to pacify you with soothing words! Of course they will try to take away any worries of losing money. How else could they justify outsized fees? How else can they scare you away from low cost DIY investing?
The truth is that you can manage your own investments and do better than the professionals (after fees) as long as you keep the long game in mind. Investing isn’t full of secrets that only seasoned professionals know. There are plenty of different ways of investing on your own, but here’s the way I do it:
Invest in an adequately diversified portfolio of low cost passive investments and hold for the long term.
That’s it. No secrets. No fancy sales words, charts, or graphs to persuade you to fork over a few percent of your investments to me every year (unless you’re feeling generous!).
I have a fairly complicated asset allocation that includes ten different asset classes, but you can do well with just one fund (like the Vanguard Lifestrategy Growth Fund VASGX). Or if you want to feel like you’re a real investor, two or three funds like Vanguard Total Stock Market ETF (VTI) plus Vanguard Total International Stock ETF (VXUS), plus Vanguard Total Bond Market ETF (BND).
Appetite for risk
The biggest challenge in investing is determining your risk tolerance. To get more specific, how comfortable are you risking the loss of money in order to achieve higher returns long term? More appetite for risk equals a larger proportion of equities in your portfolio. Inversely, less appetite for risk equals a smaller serving of equities and a larger serving of less volatile fixed income investments like stocks or bonds.
My investment company of choice, Vanguard, can help you out. They have an online Investor Questionnaire that does a great job of making you spill all your secrets and share your fears of losing money in the market while also figuring out other important financial considerations that impact your risk tolerance and ideal asset allocation. All in eleven questions. Give it a shot. Or if you want a customized recommendation of funds based on your risk tolerance, check out their Fund Recommendations questionnaire.
I plugged in my current situation as an early retiree starting to pull from investments soon and received a suggestion to invest in 70% stocks and 30% bonds. I’ve decided to get way more aggressive and hold almost 100% stocks with the exception of one to two year’s expenses in cash. I do this knowing that holding more stocks increases my risk of volatility year to year. In the long term, I expect to make about a percent higher return each year by holding more stocks.
If you’re curious about how different mixes of stocks and bonds have performed historically, Vanguard has that info too. I can see that a mix of 70% stocks/30% bonds generated a 9.2% return on average versus a 10.2% return for 100% stocks. How often did these two portfolios lose money? The 70% stock portfolio lost money in 22 out of 88 years they studied compared to losses in 25 out of 88 years for a 100% stock portfolio. And losses were steeper with the all stock portfolio.
In exchange for more volatility, I’m banking on the 1% higher returns generating me a 17 fold increase in my portfolio over 30 years instead of “only” a 13 fold increase if I were to choose a 70% stock allocation. This is my personal appetite for risk, and if you aren’t one to take calculated risks, don’t get too aggressive.
You aren’t alone
Some folks take pride in how awesome their financial adviser is. They hold the adviser up like it’s some badge of honor, some tangible proof that they have arrived. That they are successful enough to need to employ a paid professional adviser (to manage all their thousands of dollars!).
It’s really not necessary since plenty of wealthy individuals with million dollar portfolios manage to make great returns without a paid adviser. You just don’t see them boasting around the water cooler about how awesome their financial adviser is because they already retired early. That’s what saving hundreds of thousands of dollars in fees over a lifetime can do for you, too.
There are tons of online groups that are fans of low cost investing. The Bogleheads (40,000+ members), the Early Retirement Forum (27,000+ members), and the Mr. Money Mustache Forum (14,000+ members) to name a few groups. There are tens of thousands of people just in those three forums, virtually none of whom have MBA’s or professional training as financial advisers. They did a little research and legwork and figured out they can reach financial independence a lot sooner if they take care of their own investments and keep for themselves the 1-2% fees most advisers take. To be fair, not all the members manage their own investments, but the great majority do.
Resources to help you invest on your own
The forums I mentioned are great tools. But if you want to get a solid foundation in investing and how the stock market works, I’ll suggest a few books that taught me a lot. The Boglehead’s Guide to Investing. A Random Walk Down Wall Street by Burton Malkiel. The Four Pillars of Investing by William Bernstein. The Bogleheads book is a perfect introduction to DIY investing, and the other books provide more depth to investing and how the stock market works.
Once you start investing on your own, you’ll want to track your investments. The best online tool I know of (that also happens to be free!) is Personal Capital (review here).
Even though a simple approach of just a few funds is perfectly adequate, you often end up with more funds than that if you have more than one investment account. By the time you add in a his and hers 401k and a set of IRAs plus possibly a health savings account, you might have more than a dozen funds and need some way to keep track of the resulting jumble. I personally use a spreadsheet that is fed by the aggregated investment tracking from Personal Capital.
If you really can’t invest on your own and have to have a financial adviser, make sure it’s a fee only adviser. The best place to find one is NAPFA, the National Association of Professional Financial Advisors. All members are fee only advisors and will put your interests before their own. They don’t work on commission, instead relying on a fee you pay them for their services. Vanguard also has financial advisers for a very reasonable fee (who also don’t work on commission).
Online money managers
There are online investment services that will manage your money for you for a low to moderate fee that is usually a fraction of a full service brokerage firm. Personal Capital will manage your money for under 1% (with minimum accounts of 100,000). Another option with even lower fees than Personal Capital is Betterment. For 0.15% to 0.35% (depending on how much you invest with them), they will automatically invest any amount of your funds (even as little as $100) into a globally diversified investment portfolio that would look pretty similar to my own portfolio. They use mostly Vanguard ETFs which means rock bottom fees for the investments themselves. At $150 in annual fees for a $100,000 portfolio, it isn’t a horrible deal if you don’t want to deal with learning about investing on your own or want to let someone else manage a portion of your funds.
But you’ll be best off if you learn to invest on your own. For a moderate investment in time, you’ll save on investment fees and have more personalized control over your investments. Even a 0.15% management fee adds $1,500 in investment expenses to a $1 million portfolio. That’s a lot of money to pay someone else.
Do you have a financial adviser or are you a DIY investor? I’m guessing most readers manage their own money!
photo courtesy of flickr / Ken Eden
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