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Be the Expert: What would you tell this novice investor?

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If there is one thing that drives me crazy, it’s “experts” who make a quick buck off of ignorant people by recommending products that are NOT in their best interest.

One of my readers, Matt, recently emailed me for advice about applying the suggestions in my book. He was considering switching his mutual funds to index funds and asked what his financial adviser thought.

Here was her response:

Hi Matt – All mutual funds have expense ratios (fees) to cover transaction costs, statements, research, prospectus, etc.  While index funds typically have lower expenses than a managed fund, you are in effect only buying an index.  You have no one selecting the holdings for the fund, nor is there anyone who makes the decision to sell a stock that is dropping.

For example, in 2008, as banks stocks were dropping rapidly, if they were a part of an index like the S & P 500, they were still held by the fund,  while a  manager of a fund could lower the funds exposure to this sector, thus attempting to limit the downside risk to the portfolio.  Additionally, a fund manager researches and finds companies that could represent an excellent value or a stock that has strong potential growth prospects and add it to the portfolio.  An index fund does not do this.  They add a stock when the stock is added to the index itself.

Please let me know if you would like to discuss further.

What do you think? What would you recommend Matt do?

Note: Let’s be constructive. It would be easy to rip this adviser a new one. But what should Matt do?

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89 Comments on "Be the Expert: What would you tell this novice investor?"

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Jim
Jim
4 years 1 month ago
Ripping the adviser is irresponsible, we don’t have enough context. We need his original e-mail to his adviser to know why she would respond in that way. Did he ask “Why would I choose a manged fund over an index fund?” Her response could be valid based on the questions she was responding to. Or did he ask “What is the best type of fund available?” We also need to know his goals. Is he looking for higher risk and reward than an index fund can offer? I would suggest that he define his goals. From there you can research… Read more »
Paul E
Paul E
4 years 1 month ago
My first thought is to check the accuracy of what the adviser is saying. What mutual funds was she advising in 2008-2009? Go to google finance and compare the selected funds to one of the low cost index funds championed by Ramit. Maybe she is truly a rockstar and recommends funds that consistently outperform the indexes. More likely, the situation she describes did not occur, and the managed fund did just as bad or worse than simply holding an index fund due to the additional management fees. Either way, take a look at the data so you can make an… Read more »
Paul E
Paul E
4 years 1 month ago
So I just went ahead and did a quick comparison and the results surprised me. I looked at a balanced mutual fund with an expense ratio of 1.42%, American Funds American Balanced C (BALCX). I compared this to a lower cost index fund by vanguard in the same morningstar style category (large blend). Vanguard Target Retirement 2045 Inv (VTIVX). This fund carries and expense ratio of just 0.19%. This fund is an example of the type of fund that Ramit recommends, and is one of my personal holdings. Looking at a comparison of both of the funds I was surprised… Read more »
Tyler F
Tyler F
4 years 1 month ago
Rob G.
Rob G.
4 years 1 month ago

Paul E: lots of managed funds beat indexes in 1 or 3 or 5 years. Once you get over 10 is where the indexes tend to start winning, and over 20 almost no managed funds beat the indexes. At least part of the reason is the higher fees compound over larger periods of time negate any short-term wins.

Aliotsy
4 years 1 month ago
I would make the switch to index funds, and a strategy that does not attempt to outsmart the market or predict the future (I use an ETF version of Harry Browne’s Permanent Portfolio strategy, but there are several good strategies out there). Past results are not a guarantee of future performance, but he could ask her which funds she recommends, and ask what his balance would be vs. an S&P 500 index fund, both historically and specifically during the 2008 crisis. I don’t get the sense that actively-managed funds did much better than the index; most probably did worse. By… Read more »
Brolin
Brolin
4 years 1 month ago
If what his financial adviser recommends interests him, I’d suggest he should invest in a mutual fund with the guidance of his adviser. Together they can select a fund manager(s) that he feels will provide returns that will match his appetite for risk. However, Matt should be buying something like, SPY, where his expense ratio is far lower than a mutual fund. He can replicate the gains (losses) of the index, thus earning (losing) what the market is earning (losing). Over the long run, his average yearly compounded gains will be between 5 and 10 percent, or historically 8%. Matt… Read more »
Chris
Chris
4 years 1 month ago
Don’t buy managed funds. The “experts” are *rarely* able to beat the index funds anyway. Get a lifecycle fund with the correct target retirement date for you. It will be automatically reallocated to become more conservative as you near that date. Plus, it maintains a certain percentage of each type of asset no matter what: if one chunk of the pie becomes too big, the fund will sell part it off and buy something of the types that are lacking. Net effect is that you get index-average returns, don’t have to micromanage your portfolio, and don’t have to pay someone… Read more »
JK
JK
4 years 1 month ago
From her response alone, I assume he either asked specifically about ETFs or that she works for a particular fund company w a vested interest. Where does she stand on managed index mutual funds? Is she pointing to a specific time period because she wants to sell him on the idea of managed funds or because he’s looking into investments for the short-term (vs. say in a retire accnt)? At any rate, who says you have to buy just one index fund. Her justification of “in effect only buying an index” assumes Matt will only be selecting a single fund.… Read more »
Jorge
Jorge
4 years 1 month ago
This is really a debate between passive vs. active investing. Taking a buy and hold approach with index funds and/or traditional mutual funds is how I would define passive investing, and by doing a little research you create an allocation yourself and don’t really need the services of a financial advisor. You can take the same approach with mutual funds that are managed by a portfolio manager, which in most cases is also taking a buy and hold approach within the mutual fund. Again, you can simply do a little research and buy and hold a portfolio of mutual funds.… Read more »
Shannon
Shannon
4 years 1 month ago
I would ask for an example of a mutual fund that beat the SPY index during 2008. I’m guessing she doesn’t know of one, it was just an example she was making. Always ask for data. And, if you have an index like the S&P 500, a stock that’s tanking falls out of it when it’s no longer in the 500. Matt, you essentially asked someone selling SUV’s if they think a Prius is a good idea. Of course she’s going to be against them. She doesn’t make money off of a Prius, she makes it off of an SUV.… Read more »
Jared
4 years 1 month ago

Why not use both? Index funds and actively managed funds both have a place in a portfolio.

Kirk
Kirk
4 years 1 month ago
I have been a financial adviser for 6 years. Here is my industry’s dirty little secret: Over 80% of actively managed mutual funds under-perform their benchmark after adjusting for fees/commissions and we all know it! Financial advisers put clients’ money in them because they pay us and mutual fund wholesalers provide us extra money/support to grow our businesses. But guess who performs much worse than these mutual fund managers? The average investor! Emotions tend to make the average person buy high and sell low. Financial advisers can add value buy helping individuals control the fear/greed emotions that lead to bad… Read more »
SB
SB
4 years 1 month ago

If you really need a financial adviser, use a fee-only adviser who has a fiduciary duty to look out for his clients best interests. These advisers almost always use low cost index funds and charge the client a percentage of invested money or a flat yearly fee.
Another option is The Garrett Financial Planning Network. This is good for those with low account balances.
My favorite and lowest cost method is to use the collective wisdom of The Bogleheads (http://www.bogleheads.org/)

Ornella
4 years 1 month ago

I agree with what Kirk said. However, it is difficult to say what the purpose of the money is from the investor to switch to index funds. I am proponent for index funds. Financial advisors do make a percentage off the assets they gather assuming they are licensed accordingly.

And the average investor does make their decisions based on emotions which is a losing stratedgy. They don’t realize it but they are timing the market.

Kevin M
Kevin M
4 years 1 month ago

My next question would probably be – do the fund managers of the actively managed funds she is recommending have a track record of beating their index for the past 20 years?

The only reason to pay more for something is to get more value.

Ayman Al-Abdullah
4 years 1 month ago
“Stock-market investing is often described as a roller coaster. Sometimes it’s a really steep drop, and it’s scary. But no one gets hurt on a roller coaster unless they jump off. You must be willing to ride the roller coaster down as well as up.” Yes, a mutual fund could have pulled out of banks to reduce risks, or you could have just ignored the market — taken a long term approach and continued to invest in your index fund. By using dollar cost averaging (per Ramit’s book), you would be buying these funds on the “Clearance Rack.” Your “adviser”… Read more »
Justin Steele
Justin Steele
4 years 1 month ago
Step back. Are you trying to game the market to make short term gains or are you investing in the future, long term? That’s what I thought… Index funds also protect you from the mistakes and misses a manager might make while keeping your fees low. We only hear about the outcomes where a fund manager had great positive results (beat the market for a short period) or avoided a painful loss (for a short period). How many times do fund managers “cost” you money by missing good picks or not avoiding disasters? You never hear about those do you?… Read more »
Chris
Chris
4 years 1 month ago
The problem here is that there’s never a black and white answer to what invest solutions/strategies will work best for everyone. Index funds vs. Mutual Funds is on going discussion that will never have a clear winner or loser. There will be situations and persons where one will be a better choice than the other, but it is situational and dependent on what the investor is looking for. There is nothing wrong with paying a professional to manage your money to try and out perform the markets. For those of you that think this cannot be done on a consistent… Read more »
Danielle
4 years 1 month ago
Another CFP here. Just want to distinguish that there’s a BIG difference between fee-based (they collect commissions PLUS charge you a fee) vs. fee-only advisors. Fee-only are beholden to no one and you’re probably not going to see recommendations for active management funds very often. The value is not only in picking out some set of hot funds but looking at your total financial picture, projecting where your savings and spending habits will get you, drilling into your tax return, checking out your insurance (I’ve yet to recommend whole life!) and sorting out all the crappy investments you’ve probably already… Read more »
Boris
Boris
4 years 1 month ago

Chris,

With all do respect a Management Expense Ratio (MER) of 3.61% is outrageous. A big part of that goes to distribution fees to banks and advisors like yourself which is fine if there was real outperformance.

You do not show an adequate analysis of its performance, you compare a midcap growth fund (which invests highly concentrated in 4 sectors) to the biggest 500 companies in the US.

The problem is that it takes highly specialized knowledge to properly judge investment performance which is often not present or not used for obvious reasons.

Regards,

Boris

Tim Rosanelli
4 years 1 month ago
I am sure this adviser is well meaning, but investment advisers and fund managers are emotional beings and make decisions good or bad based on this feelings. Her example of the banks is exactly the mistake most people make of selling low for the sake of “lower the downside risk.” We all know that banks will always be there. He would be better off buying the banks when they are low. Index Funds by their nature buy low and sell high because they are constantly rebalancing their portfolio. Plus, those management fees can eat away at most of your gains.… Read more »
Elliot
Elliot
4 years 1 month ago

Your asset allocation is much more important and influential on your portfolio than which funds you select. [re-read this 3 times and then continue] Once you have your asset allocation selected than you can fiddle with fund selection.

If you have your asset allocation set and you’re still worried about expenses the go ahead and switch to index funds.

Don Davidson
4 years 1 month ago

Matt should ask the advisor how they determine if outperformance by an actively fund is generated by luck or skill.

Jim Mortensen
Jim Mortensen
4 years 1 month ago

The action to take is easy:

Say he has $10k to invest. Put $5k in an index fund, give $5k to the adviser to manage.

After 6 months, evaluate which has more money. If the index fund has more money. ask the adviser why. If the adviser says anything other than “I didn’t do as well as I thought I could. I’m still learning.”… dump em.

Jim Mortensen
Jim Mortensen
4 years 1 month ago

Alternately, ask to see the adviser’s own assets. If their portfolio hasn’t beaten an index fund, dump em. If they refuse to let you see their assets, dump em.

Jim Mortensen
Jim Mortensen
4 years 1 month ago

@Ramit

True. It’s a test of the adviser’s integrity more than their actual performance.

Tage
Tage
4 years 1 month ago

I’ve been an indexer for several years, and I have often heard that active funds under perform the benchmark index after fees– that’s why I’m an indexer. What’s harder to find is actual data that supports this (or maybe I’ve been looking in the wrong places).

I would greatly appreciate it if someone could point me to an academic article/ analysis that compares index and active funds.

Matt
Matt
4 years 1 month ago

S&P keeps track of this: http://www.standardandpoors.com/indices/spiva/en/us. The main takeaways are:
1. Over multiple different trailing time periods, index funds as a whole outperform actively managed funds.
2. Actively managed funds that actually do outperform index funds over some time period are highly likely to subsequently underperform over the next time period. That is, there are essentially no actively managed funds that consistently outperform. I’ve actually seen statistics from David Swensen that the % of active funds that outperform is less than what you would expect based on random chance. And people get paid to do this?

Tage
Tage
4 years 1 month ago

Matt, Thanks!!
This is just what I was looking for.

Ramit, I’ve read you’re book and I guess it’s been too long for me to remember that. I lent it to a friend, so I’ll have to get it back and check what you wrote. Thank you both.

Joseph @ Canadian Stocks
4 years 1 month ago

Another thing to keep in mind when looking at Mutual Fund vs Index performance is survivorship bias. Mutual funds merge, close, and are renamed all the time therefore their “true” performance can be difficult to know.

“Survivorship bias is the logical error of concentrating on the people or things that “survived” some process and inadvertently overlooking those that didn’t because of their lack of visibility. This can lead to false conclusions in several different ways.”
http://en.wikipedia.org/wiki/Survivorship_bias

Byron
Byron
4 years 1 month ago

I am a single family income. An extra $2001 would be right on time.

Patrick
Patrick
4 years 1 month ago
It depends on the specific fund, but in most cases the rules a fund manager operates under (due to the prospectus) and the size of the fund dramatically limit most funds flexibility to such an extent that even if the manager knew the market was tanking, they couldn’t effectively address the situation. What this means is that if you are considering investing in a large, traditional mutual fund, you are probably better off just using an index fund- the fees will probably not be worth it. The situation would be different if you had the opportunity to invest in a… Read more »
Kevin
Kevin
4 years 1 month ago
I’ve been a financial planner for over 6 years and put all of my clients in low-cost index funds. The facts show that timing the market is a loser’s game. Matt needs to do some more research and then decide if he truly believes a passive portfolio is best for him. If he doesn’t buy into or understand how index funds provide superior after-tax and after-cost returns, he’ll likely be swayed by someone with a slick sales pitch or hot stock tip. When he’s decided on his investment philosophy, he should look for an adviser that shares that same philosophy.… Read more »
Mike McCaffrey
Mike McCaffrey
4 years 1 month ago
Technically, everything the “advisor” said is true — index funds are “unmanaged.” However, please note the advisor’s use of the word “attempt,” which is very telling. I would refer Matt to the books, “A Random Walk Down Wall Street,” by Burton Malkiel or “The Investment Answer,” by Daniel Goldie & Gordon Murrey, and also the Standard & Poor’s SPIVA report, which they publish semi-annually, available here: http://www.standardandpoors.com/indices/spiva/en/us Bottom line — the vast majority of active fund managers fail to beat simple, unmanaged indices. Sidenote — Is this “advisor” a stock broker? If so, fire them. Stock brokers are not advisors.… Read more »
Barry
Barry
4 years 1 month ago
There are a lot of good comments in response to this question . Mine is a combination of some things that have already been mentioned and some of my thoughts . There are many sources that show that in the long run (key concept) index funds outperform actively managed funds. While no one knows what is going to happen tomorrow the major economies of the world are not in great shape right now Matt the potential for volatility in your investment portfolio is high whether your in active or passively managed funds.Think about your stomach for accepting this volatility and… Read more »
Nick
4 years 1 month ago
I’ve been investing in mutual funds since I was in college in the 90s. At first in managed growth funds that rode the internet bubble and later shifted them to Vanguard target retirement index fund. However over a 15 year span my IRA investments are basically flat, with about an overall 0-10% gain depending on what the stock market is doing. A few thousand I put into a managed China fund is doing better than the index funds and even the rare company stock I own due to a contribution match has done better over a 10 year span. I… Read more »
Alex
Alex
4 years 1 month ago
The thing that the adviser argues is a strength of managed funds over index funds, the human component, is actually their biggest weakness because humans fall prey to some crazy psychological traps when it comes to taking risks. Loss Aversion is a behavior that humans have developed as we evolved. Basically, we instinctively feel the pain of a loss much more than we would feel the joy of a gain of equal value. It is a fantastic survival instinct, but makes people bad at investing in the stock market. For example, if you find $20 on the street, it is… Read more »
Strom
Strom
4 years 1 month ago
Most of you are playing the wrong game. Sure, you can save a few dollars by buying index funds over managed funds. Sure, the managed funds may have the occasional year of outperformance. The problem is that if you are simply trusting asset allocation to take care of you, you have surrendered the most important component of portfolio management – risk management. Ask some Japanese investors how effective those rebalancing trades have been over the last 20 years. Ask an Icelandic investor. The stock markets of every single developed economy on the planet have suffered drawdowns in excess of 80%… Read more »
Financial Advice for Young Professionals

A lot of people get caught up in what to invest in, what allocation to have, but almost everyone is not saving enough. 401k’s are extremely under-funded. People need to think long term and make some sacrifices now in order to max out their retirement accounts. Once you’ve accomplished this, worry about what funds to invest in. 1% doesn’t make much of a difference on a $100,000 401k. 1% makes a big difference on a $1,000,000 401k..

Frank T.
Frank T.
4 years 1 month ago
I would advise him on something else entirely. I would ask him: Hey Matt, look, your financial advisor has her own ideas, so we should just take a look at what strategy we should take here. Let us argue, during the crisis, you would have taken one of those funds. Would it have lost 50%? It would. And as you can see, it would have just come back up. Now, your financial advisor is advising you to take a fund that SELLS like crazy in those turbulent times and from a perspective of being human and being compensated, i can… Read more »
Sally
Sally
4 years 1 month ago

If you’re putting money into shares without knowing what you are doing you may as well spend a night at the casino because investing without knowing what you are doing is just gambling in disguise. Don’t rely on advice from people making money from your ignorance (i.e. Financial Advisors). The most successful investor in the world is a man named Warren Buffett – look him up (and start doing your own research).

yvette owo
4 years 1 month ago
The adviser’s note is misleading. Academic studies have documented that actively managed funds under-perform index funds over the long-term. Rather than tossing his adviser just because of one item, Matt should go through the steps below to determine what benefits the adviser provides and if he should toss him/her. As an added benefit, if Matt decides to get a new advisor, the steps below will prepare him to know what he’s looking for in an adviser. 1: Decide what benefits the adviser provides outside of stock picking – If the adviser is doing a good job providing other benefits, keep… Read more »
san jose21
san jose21
4 years 1 month ago

since Matt is already paying a mgt fee on his account he most likely knows what it is… it would be nice to have numbers in the advisor’s illustration… if Matt asked about the difference the advisor can easily give him a comparison of the costs between the 2 and saying somthing like: so you are paying $xx more in a mutual fund to have people look at it everyday versus relying on an index classification to rotate stocks in-and-out of the portfolio…

J. B. Rainsberger
4 years 1 month ago

According to “The Ten Biggest Investment Mistakes Canadians Make” (http://link.jbrains.ca/LJslSn), you need to watch a Fund Manager for 35 years to have 90% confidence that his performance comes from his skill, rather than from random luck. Said differently, you CANNOT know whether a Fund Manager is good or lucky. If you invest to gamble, and it’s OK if you do, then go for a managed fund, but don’t pretend that managed funds are any less gambling than picking throwing darts at a dartboard of stock symbols.

Peter
Peter
4 years 1 month ago

I would think that for a true novice, an index fund is probably safer. The market always increases in value (even if only by inflation) over the long term, while mutual funds fail all the time.

Zac Bissonnette
Zac Bissonnette
4 years 1 month ago

All kinds of problems but the big one that is just factually wrong and indefensible is this:

“All mutual funds have expense ratios (fees) to cover transaction costs, statements, research, prospectus, etc.”

NOOOOOOOO!!!! The transaction costs are an expense IN ADDITION TO the expense ratio–and of course, funds that trade a lot will have higher transaction costs that drag down their returns.

See, for instance, this:

http://online.wsj.com/article/SB10001424052748703382904575059690954870722.html

Clif Bridegum
4 years 1 month ago
I can agree that index funds are the way to go. In agree-ance with many of you that posted before me, Ramit’s book is a must read. I use to have my large portofio at E.J. and when I wanted to pull all my money out and switch I got a similar kind of message. Using index funds and getting the market return minus the extremely small expense ratio is fine with me. I much prefer this over an advisor making guesses or bets as they will most likely be wrong some percentage of the time. As Ramit’s book proves… Read more »
Nathan
Nathan
4 years 1 month ago
I don’t trust most advisers. Most advisers were wrong about the crash in 2008. They were wrong about crashes before. They were and are wrong about so much. It’s ridiculous. And their defense is “Well everyone was wrong.” But I feel if I pay you to manage my money, I pay you to be right even when others are wrong. (If you care to find out how wrong people are about their financial predictions just read anything by Nassim Taleb. It’s a scary wake up call. Or “What I Learned Losing A Million Dollars” by Jim Paul. It’s all about… Read more »
Geoffrey Barrows
4 years 1 month ago
If I am correct, William Sharpe won the Nobel Prize in economics from his observation that 90% (or so) of capital gains come from asset class, 8% from choosing the right stock (or whatever) in that asset class, and the remaining 2% from timing. Thus choosing the right asset classes are most important. When you couple that with the fact that most actively managed mutual funds underperform the market, index funds seem the way to go. Personally I’m a fan of the David Swensen model portfolio- he manages the Yale endowment fund and has “beat the market” over long periods… Read more »
Ian
Ian
4 years 1 month ago

Unless a person is extremely good at choosing the fund manager who will correctly decide what to invest in and when to invest in it, a person will be better off putting their money with an index fund.

If you want to speculate with fund managers or individual stocks, do that with a small portion of your assets and understand it as going for home runs with money that you will most likely strike out with.

Rachel
Rachel
4 years 1 month ago

I thought you said he read your book? Why does he still have a financial advisor? If he trusted her advice I assume he wouldn’t need ours.

There is no mention of the cost of switching between the funds, but if he has read your book then he would probably choose an index fund or lifecycle fund. Unless he really wants to pay someone he doesn’t know to manage his money by choosing stocks.

Everything his financial advisor said would make a sane person pick the index fund.

Hem Singh
4 years 1 month ago

see the current fiscal situation of the country and when ur heart allow to do then once introspect putting his eyes of and having the name of God do with courageous. Her example of the banks is exactly the mistake most people make of selling low for the sake of “lower the downside risk.” We all know that banks will always be there. He would be better off buying the banks when they are low.

christie
christie
4 years 1 month ago

To be able to answer…….. what are his goals ? Does he have some cash stashed for a rainy day ? Credit cards paid off ? …. then i would go with the index funds. But, he could do some of each…
~ Christie

Sal
Sal
4 years 1 month ago

I’d tell him to read David Swenson’s Unconventional Success: A Fundamental Approach to Personal Investment

mark
mark
4 years 1 month ago
I know nothing about investing so I shouldn’t say anything. But as long as he keeps the majority of his money in cash and away from the stock market he’s good. Most people including me don’t know squat about investing. Just do what I do. Keep your money in cash, work a job and work a small business. Only use money you can afford to lose in a business. But start a business you like, understand and will make extra money for you. Sorry Ramit, but I don’t trust any mutual funds,stocks or hedge funds. It’s all nonsense and pure… Read more »
Moo
Moo
4 years 1 month ago
I think this guy is in an exciting place. He has infinite options, and there is no “right” way to go about it. If he wants to do a lot of research on individual companies, he could become a value investor and buy what will lead to long term wealth instead of what some salesperson recommends. But most people won’t put in that kind of effort. If he wants to do things the really easy way, he can buy a few broad market index funds that charge low fees and more than pay for them through dividends, which he can… Read more »
Ben Dang
Ben Dang
4 years 1 month ago
I’m assuming he doesn’t want to spend any time managing his money. With that I would tell him that while active managed funds would save him time but the fees you pay them aren’t worth it. The reason why is that there are stats that say that “99.9%” of financial managers cannot beat the index. On the same token, I wouldn’t suggest he just ignore the advisor’s advise. There is some merit to having his money being managed, just not with her, because there is another way to grow his money. I would suggest he look into an age based… Read more »
Trevor
Trevor
4 years 1 month ago

Why limit to mutual and index funds? He needs to check out ETF’s.

Boris
Boris
4 years 1 month ago
Simple answer from a Finance professional from Holland: The Advisor implies 2 things: Fund Managers have stock picking skills and Fund Managers can time the market. (wrong!) Finance Literature* says: – 80% of fundmanagers do underperform their benchmark – you cannot predict which managers (20%?) will outperform in the future (yes morningstar is mostly useless except for avoiding the really bad ones) -If you want to outperform the market with market timing you need to be right 70% of the time* -out of those 20% many do not really deliver alpha (skill) after accounting for risk factors. (google: carhart four… Read more »
joeyg
joeyg
4 years 1 month ago
Problem #1 – asking the financial adviser for input. The adviser is going to advise the client to invest in managed funds as they provide a commission to the adviser. The adviser is going to say the managed fund is better. And it may be. Just like Las Vegas, some people do win. However, the numbers tell a different story. Selecting a broad index fund, like say, the Vanguard 500 Index, would have yielded better returns for 1,3, 5 and 10 years than 70% of its managed competitors. Unfortunately, it’s hard to know which of the 30% of managed funds… Read more »
Chuck
4 years 1 month ago
For a novice investor, I think it’s best to take advice from poker. “If you can’t see the sucker in the room, it’s you” You should be happy to get average performance, so I’d suggest trying to get index performance with minimal fees, rather than trying to be “smart” and try to hedge against risks you don’t understand. Also, if you start to pick active funds, there’s an impulse to DO SOMETHING as opposed to go with the flow. Should I sell? Should I pick another fund? Choosing your own funds creates new options and takes up willpower you should… Read more »
Kathleen
Kathleen
4 years 1 month ago

Fire the advisor. Do the reasearch and or join an investment club. Stop paying someone else.

Chris @FinancialEvoGrp
4 years 1 month ago
For the most part the adviser is accurate in her comments. However, there is a more important issue to address and that is net performance. It is far to simplistic to say you should only use ETF’s or you should only use mutual funds. The way to ensure the best possible overall performance for your portfolio is to select the best investment option from the universe of available options within an asset category. Of course, all investments will be considered net of fees. You should always begin with assessing your risk tolerance and time horizon. From there you develop your… Read more »
Rick Francis
4 years 1 month ago
Matt, It’s true an index fund only represents the index that is the point! You are guaranteed to get market returns minus the funds fees. There is no ONLY about getting market returns, especially over the decades that you will invest for your retirement. People want to believe that “experts” are able to predict the future and pick superior stocks but the evidence does NOT back that up. If you do some research, such as reading Ramit’s book, you will find most actively managed funds don’t beat their benchmark indexes in the short term and almost none beat their indexes… Read more »
Sanjiv
Sanjiv
4 years 1 month ago
Read Ramit’s book again, in detail. When the stock market goes down, it’s an opportunity to buy more of the index fund. Regular investing with funds that one can invest for the long time horizon is the key to investing success. Concentrate more on asset allocation and automate the process so that you have enough funds to meet the emergencies of life. The active funds guarantee the expenses that they charge but can never guarantee returns! Also, because there is very little overlap in the holdings (stocks) that index funds have, asset allocation is a breeze. Active funds have a… Read more »
Jon
4 years 1 month ago
I don’t know why people are playing around with mutual/index funds. Why not dab into futures/forex? Much more leverage and lower starting balances to get started. Is this the part where you respond “it’s risky”? Sure, when you trade the money yourself you may win or lose. At least it is a result of your direct decisions; and you have an opportunity to improve your choices. When you hand your money over to someone else; what incentive do they have to make money for you? Especially if they “get paid” anyway and they do not offer any type of guarantee… Read more »
Susan
Susan
4 years 1 month ago

Need more information. Age of investor? How is financial adviser compensated? Seems that risk profile needs addressing. Is this $$$ held in a taxable account? Ratio of account to total assets?

Stefan
Stefan
4 years 1 month ago
Okay, the advise given in the post is not the best argument for active funds but I would still like to question the common theme that index funds are always better. Its not a everlasting rule that passive funds always are better since they have lower fees. Given the fact that there is enough active investors out there the competition is hard (you could say the market is more efficient) you dont get enough value to justify the active managers fees just as historical data suggest. If a majority of the investors only had index fund it would change the… Read more »
Elizabeth
4 years 1 month ago

I am a poor single mother of two,but i have the believe that i will not remain poor,my biggest win will help me establish,i just share it with my friend on face book.

Jonathan@Friends and Money
4 years 1 month ago

Let’s be honest, there is no such thing as in independent financial advisor even if they advertise as such. Someone will always have a bias towards a particular type of financial advice or organisation.

l
l
4 years 1 month ago

Neither.

Until you invest locally in peoples and businesses that you know, you are just a piece of the machine. You will have no financial security. However, if you invest locally, you will have relationship, financial, and community security.

A
A
4 years 1 month ago

My guess is ‘I’ means to build a relationship with those who have a direct connection to you. Any of the three ways I can interpret Ramit’s example of ‘Uncle Jo’s trailer farm’ would work:
1. raised bed farming environment = access to and investment in food supply
2. tractor trailer supplies for farms = investment in food supply
3. residential area usually known as a trailer park = investment in land, income from leasing land, and opportunity for community/social development.
These all look like positive options to provide meaningful work and employment.

Richardo Putra
Richardo Putra
4 years 1 month ago
First, I’ll make sure that you only invest the money that YOU AFFORD to lose, not the money that you highly dependent on. Than, the only question that I would ask first would be: “What is your time horizon of investing?” Is it short term or long term gain? If it short term, I recommend you to avoid stock market. But if you choose a long term, both option (index and mutual funds) is a good option. Because in short term, market moves volatile and you’ll battling your own greed and fear (which many of peoples failed). While in long… Read more »
tom anderson
tom anderson
4 years 1 month ago
Is the “advisor” fee based or commission based? I bet, based on her comments, that she is commission based. These types are disasterous. 1) they are a major reason that most people lost big in 2008. Due to the way that they get paid, they encouraged their investors to stay in and ride out the crash. 2) they are salespeople and by training don’t know anything about their product, only how to sell it. A) dump the “advisor” and NEVER use commissioned based help again. B) Read up on funds. Index is the way to go if you don’t want… Read more »
tom anderson
tom anderson
4 years 1 month ago

RAMIT
I don’t know about Uncle Joe but
Pappa Carls trailer farm is a money machine!
He bought it in 1970.
It is free and clear.
it is worth about $2,000,000.
It grosses $450,000 a year and nets after all expenses $270,000.

I am about to buy another similarly sized “Pappa Carl” place that nets $50,000+ with no money down.

If you need a broker – send me a note.

Tie the Money Knot
4 years 1 month ago
I would tell him that the adviser is neglecting to mention that there is data that clearly supports the notion that on average, actively managed funds underperform broad-index benchmark performance. This is the case whether we’re talking large-cap all the way to small-cap. Along those lines, I’d also tell him that one should always keep in mind who he or she is taking advice from, and what the other person’s motivations are. This applies in many aspects of life, not just with respect to personal finance. Just because somebody is a “professional”, it doesn’t mean they are A) working purely… Read more »
srinivas
srinivas
4 years 1 month ago

I suggest, read ramit`s I will teach you to be reach, page 58.

He covers this in depth

Matt
Matt
4 years 1 month ago
Over the long term almost zero actively managed funds will outperform the market. Over the short term an actively managed fund may outperform the market. This is usually followed by investors flocking to that fund and often times the managers have trouble managing the additional assets. The additional assets will mean the manager will either need more stocks as good as the stocks that led to the market outperformance or pour more money into the stocks that have already had a good runup. Warren Buffett has said in the past that he could return something like 30% per year if… Read more »
Varaneka Laxmi
4 years 1 month ago

I suggest reading Robert & Kim Kiyosaki’s Rich Dad/Rich Woman series, which also has titles by other financial professionals.

Raul Felix
4 years 1 month ago

Varaneka, I would disagree with recommending Robert Kiyosaki. While he has some general knowledge on finance, its nothings that hasn’t been taught elsewhere nor is he really deep enough to warrant much attention. He is more of a creature of MLM than anything else.
Check out this report by John T Reed showing what a hack he is:

http://www.johntreed.com/Kiyosaki.html

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