Professional investment advice (and why you should ignore it)

In January, I accompanied Kim to an appointment with Paul, her investment adviser from Edward Jones. Paul's brother was my best friend in grade school and junior high, and we have many mutual friends. I sat and listened while Kim and Paul talked about her investments and how she ought to invest for retirement. I didn't participate much, though, because this is Kim's money, and I didn't feel like it was right for me to take an active role.

I did ask some questions about index funds, though. Kim's money is entirely in individual stocks (like Apple) and expensive load-bearing funds such as VFCAX (Federated Clover Value Fund), which has an expense ratio of 1.19 percent and a sales load of 5.5 percent.

Paul argued against index funds, saying:

  • Mutual-fund managers earn back the sales load (and high expense ratio) in time so that, long term, actively managed mutual funds outperform index funds. (Note: Studies show that, in general, this is not true.)
  • Part of the reason people pay him to manage their investment accounts is because he protects them from making foolish emotional decisions about the market and he alerts them to possible opportunities.

Afterward, I asked Kim what she thought of the meeting. She got the gist of things, but found a lot of it confusing. No surprise. I know this stuff and still found some of the presentation confusing.

“What do you think I should do?” she asked.

“Well, I still think you should be in index funds,” I said, but I didn't push it. Again, we've been dating almost two years, but it's not like we're married. I didn't feel comfortable making this decision for her.

Over the next few weeks, I wrote the investment chapter for my ebook. And then I rewrote the chapter. And then I rewrote it again. (This ebook will finally see the light of day at the end of April, by the way.)

As I wrote, I realized that I truly believe index funds are the right way for most people to invest. And it's not just me. Warren Buffett believes this, as do many other well-known investors. The evidence is overwhelming. The smartest way for the average person to invest is to put all of their money in broad-based, low-cost index funds and never touch it. End of story.

Meet the New Adviser — Same as the Old Adviser

Between January and March, Kim switched jobs. Her new employer also contributes to retirement, but uses a different investment adviser. Last week, we met with the new guy, Evan. This time, I asked Kim how she viewed my role before the meeting. “I want you to speak up,” she said. “I want you to act like you're my husband.” Well then, OK.

The meeting with Evan started very much like the meeting with Paul. Evan talked about how much Kim needs to save to meet her retirement goals (answer: a lot!). He also talked about where she should put the money. He agreed with me that it's probably best not to shift around Kim's existing investments (although I can't help thinking we're falling victim to a sunk-cost fallacy by not moving to index funds). He recommended that all of her new money should go into shiny new mutual funds that his company sells — funds that carry loads of 5.75 percent.

Note: These mutual funds are from American Funds, and I'm very familiar with them. When I was married, Kris put a lot of her savings into the American Funds family.)

“How are you compensated?” I asked.

“Great question,” Evan said. “I'm paid out of the sales charge, out of the front-end load of the mutual funds. A part of that goes to me, a part of that goes to my company, and a part of that goes to the mutual fund company itself.”

After a few minutes of discussing these new funds, I decided to speak up.

“Look,” I said. “I write about money. I'm not an investment guru and I don't have any specific training, but I've read and written a lot about investing over the past few years. Everything I've read says that the only reliable indicator of future mutual fund performance comes from a fund's fees. The lower they are, the better the fund is likely to perform in the future.”

“That may be so,” Evan said, “but that's only part of the story. With proper management, a traditional fund can outperform an index fund. Besides, index funds only work if you're able to control your emotions. Studies show that most investors earn returns far below those of the market because they make poor choices under the influence of emotion.”

“Sure,” I said. “The Dalbar study shows that every year.” I cite this study over and over again in the articles and books I write. “But investor behavior is only one part of the problem. The other part is costs.”

Evan protested. I didn't blame him. His livelihood is tied up in this. Besides, I think he truly believes in his funds.

“If Kim were to buy index funds through Vanguard or Fidelity, how would you be compensated?” I asked.

“I'd take 1 percent,” Evan said.

“One percent up front?” I asked. “Or 1 percent per year?”

“One percent per year,” he said. With the roughly 0.25 percent expense ratio for a typical index fund, that would give her a cost of 1.25 percent annually. That beats the expense ratios from the funds Evan was proposing, especially when you factor in the 5.75 percent sales load.

Following My Own Advice

At the end of the meeting, Kim smiled and shook Evan's hand. “Thanks for your help,” she said. “We'll go home and figure this out.”

We walked next door to have a glass of wine while gazing out at the stormy Willamette River. “What do you think I should do?” she asked.

“Do you want to know what I would do if this were my money?” I asked.

“Yes,” she said.

“First, I'd contribute as much to retirement as needed to get the match from your boss. I'd have that put into an index fund, and I'd pay Evan his 1 percent per year. I don't like it, but that's your best option to get the match from work.”

“For everything else, though, I'd invest on my own. I wouldn't do it through Evan. I'd open an account at Vanguard or Fidelity and schedule monthly contributions. He says you need to be putting away $920 per month for the next 20 years in order to have the equivalent of $50,000 per year at retirement. Do that. To be honest, I'd rather you didn't pay me rent or utilities. I don't need that money. I'd rather see you put it directly into an investment account every month. It'll still feel like you're paying me rent, but it'll be going to your future instead. Does that make sense?”

Kim nodded. “It does,” she said, “but I still don't like it.” (We're still hammering out the financial side of our relationship. She wants to pay her half of things — which I appreciate — but I don't want to take her money. When she pays me for rent or utilities or anything else, I tuck the money into a “secret” savings account at Capital One 360. That makes both of us happy.)

Unconventional Success

After our meeting with Evan, I began to have bouts of self doubt. It's one thing to make decisions with my own money; it's another to make them for somebody else.

To boost my confidence, I turned to books. I re-read the rationale behind investing in index funds. In particular, I turned to David Swensen's Unconventional Success. During our meeting, Evan had pointed to the Yale University endowment as an example of investing success. Swensen is the mastermind behind that endowment. He's also a passionate supporter of passive investing.

Unconventional Success contains nearly 400 pages laying out the arguments for index funds as “a fundamental approach to personal investment.” It explores asset allocation, market timing, and security selection before ultimately concluding that “overwhelming evidence proves the failure of the for-profit mutual-fund industry.”

Note: You can read a much shorter version of Swensen's arguments in his 2011 New York Times editorial about the mutual fund merry-go-round.

Refreshing myself about the evidence in favor of index funds allowed me feel much better about our second meeting with Evan. On Monday night, we returned to his office to explain our decision. In short, we wanted to put all of Kim's future funds into the following asset allocation using Vanguard index funds:

  • 45% into VTSMX, the Vanguard Total Stock Market index fund
  • 25% into VGTSX, the Vanguard Total International Stock index fund
  • 20% into VBMFX, the Vanguard Total Bond Market index fund
  • 10% into VGSIX, the Vanguard REIT index fund (a REIT is like a mutual fund for real estate)

“That's great,” Evan told us. “We can do that. But there's just one problem. Our investment platform requires a $25,000 minimum in order to make this happen. Otherwise, it's not worth our time.”

At first, I thought this was a barrier. Kim doesn't have $25,000 in new money to invest. But then I hit upon a couple of solutions.

First, we could move our shared “dream fund” from the Capital One 360 savings account where it currently resides. Instead, we could place it in index funds. Sure, this would introduce greater risk, but I'm OK with that. By the time we're ready to tap this fund, the stock market should be higher than it is today — and it should outperform savings accounts in the meantime.

Second, we could liquidate Kim's existing mutual funds and move the money to Vanguard funds instead. That's probably the smartest move anyhow. We had planned to leave her existing accounts at Edwards Jones, but this makes more sense.

In the end, Kim came up with a fun plan. Here's what we're going to do:

  • We'll move all of her investment accounts from Edward Jones to the new company.
  • We'll sell half of her existing funds in order to meet the minimum requirements to begin putting money into a Vanguard retirement account. (And because index funds are the better choice.)
  • We'll keep half of her existing funds as they are and allow her new adviser to manage them as he sees fit. Let's see if he can actually beat a portfolio of index funds.
  • Meanwhile, she'll funnel $460 per month into her employer-sponsored retirement account.
  • Finally, she'll open a personal Roth IRA account at Vanguard. Into this, she'll contribute $460 per month. This will give her a chance to see what it's like to manage an investment account on her own.

This process illustrated some of the problems the typical investor faces. First, she receives self-serving advice from advisers (even when they don't intend to be self-serving). Second, even when she knows the right thing to do, it can be tough to stick to her guns in the face of trained expertise. Third, there can be barriers to making smart choices, barriers like high minimums and additional fees.

In the end, it's important to make your own informed investment decisions. Remember: Nobody cares more about your money than you do. If you don't take the time to educate yourself, you can't expect anyone else to make the right decisions for you.

More about...Investing, Planning

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Income Surfer
Income Surfer
6 years ago

Sounds like the best solution JD. It’s really hard for a passive investor to beat a basket of index funds. I have several Vanguard funds myself.

I had largely the same discussion with my mother’s “investment adviser” years ago. It was a little bit ugly, but in the end she was well served.
-Bryan

David L. Wright @ Dollar Bits
David L. Wright @ Dollar Bits
6 years ago
Reply to  Income Surfer

I couldn’t agree more. A small basket of index funds and periodic rebalancing is the way to go for most individual investors.

Ty
Ty
6 years ago
Reply to  Income Surfer

Great post, JD. Like Income Surfer, I too had an ugly conversation with my grandmother’s financial advisor. He was charging her 1.5% to manage a portfolio of CDs for her that were paying her less than 1%. Yes, you read that right. He was advising her to invest in something that was paying LESS than he was getting paid on her account. It’s sad that one of the areas that people need the most professional help is so infested with sharks. There are good, fee-only financial advisor firms out there – but they are hard to find. I’d say 95%… Read more »

Jon @ Money Smart Guides
Jon @ Money Smart Guides
6 years ago

Great read. I wish more investors would wake up to the fact that paying high fees isn’t necessary and that that higher fees have no relationship to higher returns. If you want to be successful when it comes to investing, you HAVE to pick low cost investments and stay in the market long-term. I recommend using an advisor for many investors since it is hard to control your emotions and stick out the tough times, but you need to find an advisor that is on your side. Find one that follows a passive investing strategy (invests in index funds) and… Read more »

Jennifer B
Jennifer B
6 years ago

This new guy “Evan” really should have been up front with the required minimums to have the accounts set up at Vanguard. I’d be pretty unhappy that this wasn’t brought up at the first meeting when you discussed index funds and he said “sure, we can do that”… Note – I have all of my post-tax investments at Vanguard + my SEP. My husband, after years of actively managing his investments has been moving his accounts over to Vanguard as well, and I think we have nearly everything there now. We always made money on his buying and selling, but… Read more »

Dave @ The New York Budget
Dave @ The New York Budget
6 years ago

Man, it is amazing to me how those investment advisor fees can add up. I’ve never used one so it is definitely interesting to see the types of fees they charge. For the Vanguard funds, wouldn’t it be worthwhile to invest directly with Vanguard (only a $3k minimum, avoid the advisor fee) – it sounds as though you both know what funds to invest in, so the advisor isn’t really providing much value.

J.D.
J.D.
6 years ago

Oops. In the “Following My Own Advice” section, I have a typo. I wrote: “For everything else, though, I’d invest on my own. I would do it through Evan.” That should actually be: “I wouldn’t do it through Evan.” I hope nobody was too confused. 🙁

Barbara
Barbara
6 years ago

For an even simpler approach, you can invest in a Vanguard Target Date Fund. Those accounts are made up of the Vanguard index funds you mentioned, sans the REIT. And – I’ve run the numbers on this – the expense cost associated with the Target Date Fund is less than the expense cost of having the funds separately until you get to the point where you qualify for Admiral Shares which have Vanguard’s lowest fees.

Stefanie @ The Broke and Beautiful Life
Stefanie @ The Broke and Beautiful Life
6 years ago

I was working at corporate event for a major wealth management firm last week and it seemed like every speaker was trying to justify to their own employees why actively managed funds are better than index funds. I think they’re freaked out by the studies and data that prove otherwise.

Natali Morris
Natali Morris
6 years ago

Out of curiosity, if you can choose the funds yourself, why leave them with a manager at all? Why not choose a bank like Fidelity that lets you buy the funds and manage your account yourself?

I appreciate this article very much! It was well thought out and explained. I read ETFs for Dummies and made similar moves for my family. Seems like I’m in good company!

Johanna
Johanna
6 years ago
Reply to  Natali Morris

It sounds like Evan manages Kim’s workplace retirement plan. So if she wants to participate in that (and get the associated employer match and tax benefits), she has no choice but to hand over Evan’s 1%.

J.D.
J.D.
6 years ago
Reply to  Johanna

Yes, this is correct, Johanna. It sucks to have to hand over the one percent, but it “buys” another percent or two (can’t remember the number) from her boss.

Johanna
Johanna
6 years ago
Reply to  J.D.

Keep in mind, though – and I’m sure you do – that those are “percents” of totally different things. Evan’s 1% is 1% of everything Kim has in the account. The “another percent or two” is presumably a percentage of Kim’s salary. If she doesn’t have much in the account right now, she’s probably getting more in dollar terms from the employer match than she’s paying in fees. But before too long, that will be the other way around.

Johanna
Johanna
6 years ago

People need to get angrier about this. What gives snakes like Evan the right to take 1% of everything you have, every year, for the privilege of giving you shoddy advice that’s in his best interest and not yours? I think he only gets away with it because so many people don’t realize that 1% of everything you have, every year, adds up to an awful lot of money.

RNR
RNR
6 years ago

Good thoughts, good advice, good plan! There is so much inertia in getting out of a dog fund, or even a so-so fund. It’s easier to do nothing. I agree: Vanguard and Fidelity Index funds rule. You do have to be willing to ride the rollercoaster, but with a long time horizon, that’s no big deal. I like your “catch the match” split with “regular” IRAs. Here’s something I would do: Compare how those Edward Jones things have done on a 1-3-5-10 year timeline compared to Vanguard. And set a window on when she/you will do another comparison. And set… Read more »

Jen From Boston
Jen From Boston
6 years ago

Ugh. I don’t use a financial advisor, but if I did I’d go to a fee only advisor. And I wouldn’t even have him or her manage my Vanguard funds – I’d do that on my own. And I do that now. I have a traditional and a Roth IRA from when I made much less and could still contribute to both an IRA and a 401(k). The bulk of my IRAs are in the target retirement fund. I have smaller amounts in the Vanguard REIT fund and Wellington. Because the Wellington pays dividends quarterly I have it set up… Read more »

William @ Drop Dead Money
William @ Drop Dead Money
6 years ago

That “$25K to start” thing is what shut me down for decades. It’s only when I got over myself and began with a simple savings account that my investing career (such as it is) took off.

Your basic advice of index funds is sound — fewer than 20% of all mutual fund managers beat the S&P, even BEFORE their fees. And it’s never the same 20%! So picking any mutual fund over an index fund is handing over your money without even a gun to your head. Not smart.

Great post.

Petra
Petra
6 years ago

I have tried to advise a good friend of ours what to do with his retirement investments (we’re in the Netherlands by the way, and directly or indirectly investing with Vanguard is no option for him unfortunately).

It IS definitely even harder to give investment advice to someone else, instead of just deciding on investments for yourself. I can stand losing my own money if I made an error, I might not be able to stand seeing my friend lose money! Still, I think I gave good advice, and I think you did too.

RNR
RNR
6 years ago

There was a key point in J.D.’s post when his girlfriend said “what would YOU do?”

When someone asks me for advice, that’s how I frame it: Here is what I have DONE, here is what I have LEARNED, and here is what I DO, and here is what I would DO if I were YOU.

Sorry for the caps.

I also always note: Your mileage may vary. 🙂

Kate
Kate
6 years ago

If selecting which basket of index funds is daunting or you have even less to start investing, I would recommend looking into a service like Betterment. The fees are extremely low and you can set up goal accounts etc. I have had an account there since last June and have been exceptionally happy with their services and the ease with which I am able to invest without worrying about trading fees etc.

Mrs PoP
Mrs PoP
6 years ago

So is this through a 401K? I’m really confused. Employers have a fiduciary duty to their employees if they are sponsoring a 401K. How that goes with high front-load fees or a high minimum balance is beyond me. Personally, I’d tell HR that I’m dissatisfied with the choices in my 401K and ask for low cost index funds. I did. As a result, we have Vanguard funds available in our plan, which have significantly lower MERs than the Fidelity Funds we had before. Until people start doing this and making their employers honor their fiduciary duty, sleazy advisers like this… Read more »

J.D.
J.D.
6 years ago
Reply to  Mrs PoP

Do employers really have a fiduciary responsibility to their employees? I mean an actual, legal fiduciary responsibility? I’d never heard that. And it doesn’t make sense. Employers aren’t qualified to bear that burden. I mean, Kim works for a small company. Her boss does his best, but I don’t expect him to have his Series 7 license. Similarly, at the box factory we provide a profit-sharing plan, but none of us has formal financial training.

JLH
JLH
6 years ago
Reply to  J.D.

I’m a Chartered Retirement Planning Counselor who has worked for quite a few brokerage firms, specifically with teams in the 401k business. The direction of the industry is for each 401(k) plan to have an investment policy statement set up, which names specific individuals as “fiduciaries” who take part in making plan-level decisions (investment choices, if they should employ an advisor and what kind of help the employees should get picking investments). Technically that means someone at the employing company is literally putting their name on the line and opening themselves up to legal ramifications if they do anything other… Read more »

Mrs PoP
Mrs PoP
6 years ago
Reply to  J.D.

Absolutely, and it’s not talked about enough.

From the Department of Labor:
http://www.dol.gov/ebsa/publications/fiduciaryresponsibility.html

There’s no set limit of what fees are maxed out, but by law they are to be “reasonable”. I’d argue that in this day and age of electronic brokerages, 5% front load isn’t reasonable.

Julie
Julie
6 years ago
Reply to  J.D.

I am surprised you write about finances and investing and aren’t aware of the fiduciary responsibility of employers that offer a 401(k) plan. I have been a member of our plan committee for years…and yes, I do have personal fiduciary liability related to the company 401(k) as well as our ESOP. Our committee consists of Directors/Officers, and thus we have obtained D&O insurance to help mitigate the risk. We used to rotate interested non-management employees on to the committee so that they could participate as well, but we could not purchase any insurance coverage for them so we removed them… Read more »

RNR
RNR
6 years ago
Reply to  Julie

Julie’s outfit has taken a real “belt and suspender” fiduciary approach, which is good, I suppose. Whole lot of hoop jumping, though! Her last point bears repeating: The government and the IRS have made all this so complicated, and each plan (IRA, 401, etc.) ever so slightly different. It’s too bad we can’t go to a very streamlined IRA approach that combines all the benefits of the various plans, such as higher contribution limits, direct deposit of employer matches, real-time vesting, etc. Instead, we have this buffet of choices that require, as she rightly notes, a tremendous amount of time,… Read more »

Babs
Babs
6 years ago
Reply to  J.D.

Thanks for the link to the Dalbar site. This addresses some of the issues our small business is dealing with.
http://www.dalbar.com/portals/dalbar/cache/news/InNews/WCW-DECEMBER-MensackArticle.pdf

mike
mike
6 years ago

I pretty much came to a similar solution years ago. My wife doesn’t want to be bother with financial stuff no matter how I engage her. We have numerous different accounts for various reasons. Over the years I have looked at hundreds of articles and prospectus’ for funds. I came to the conclusion after looking at all the loads and mgt. expense fees and studies that indicate the unreliability of performance over long term of an active management that we are much better off with funds like Vanguards. Most of their funds in the admiral class have fees less than… Read more »

nicoleandmaggie
nicoleandmaggie
6 years ago

My FIL had his investments with Edward Jones, and as an accountant he should have known better! After he read the Bogleheads book he told us that his Edward Jones managed funds would have had to make some ridiculous percent more than the market in order to match the market, just based on fees. There were front-loads and annual fees and all sorts of add-ons. There’s a reason that we see Edward Jones offices all over the place, even in the tiny town that my in-laws live in. It probably isn’t worth it for fee-only financial planners who don’t make… Read more »

Cindy @ GrowingHerWorth
Cindy @ GrowingHerWorth
6 years ago

I love this post for so many reasons. First off, I love reading more about Index Funds; It takes a lot of the fear out of investing, and solidifies that I’m making good choices (I’ve moved my investments within my 401k to low cost index funds, mainly Vanguard). Second is the relationship aspect. There’s a weird spot in so many relationships where you’ve been together for a while, are planning a future together, and maybe even living together, but you’re not yet married. That’s where I am in my relationship right now. Talking about each other’s money can be weird,… Read more »

J.D.
J.D.
6 years ago

Thanks, Cindy. The relationship stuff can be hard to write about sometimes — especially since we’re still finding our way!

Cindy @ GrowingHerWorth
Cindy @ GrowingHerWorth
6 years ago
Reply to  J.D.

I think relationships that start when you’re older, and actually have “things”, are soo much harder to navigate, especially if you’re on uneven footing. I’m dating someone 20 years older than me. Day to day, my financial situation is much better: he has more debts, and no savings. But he has a great pension, which as of this year, he’s able to claim at any time. And he makes more than twice what I do. If we do it correctly, we’ll end up in a great place. Better than either of us would have been alone. But, there’s always going… Read more »

James
James
6 years ago

I feel advice is massively important. It’s bigger than fund choice because if you make one wrong move due to lack of advice or education(i.e. sell in fall of 2008), who cares what fund you’re in. In addition, there are a hand full of actively managed firms that do beat the index long term (15-20 years) AFTER expenses. Lastly, I find it confusing why people harp on fees an adviser receives (I get it if these fees are very high 2-3%, which I’ve seen). People still pay 15% tip on crappy service at a restaurant…people pay insurance premiums and co-pays… Read more »

Cindy @ GrowingHerWorth
Cindy @ GrowingHerWorth
6 years ago
Reply to  James

The encouragement with index funds for the most part is “set it and forget it”, other than periodic rebalancing. You’re in it for the long run, until retirement, so there isn’t as much concern about selling when the market is down. If you’re following the guidelines, there isn’t a lot of time spent researching or making adjustments. You do have to be willing to leave your emotions at the door and stay the course. As far as the adviser fees go, it is a big deal. In the past, the fees were hidden, so most people didn’t know what they… Read more »

James
James
6 years ago

I would argue there IS concern when markets fluctuate, even if you initially bought into a set it and forget it philosophy. How many people sold out of equities in 08′ and 09′ and went into bonds? And how many of those people were “invest and forget” investors…a TON!

It’s like dieting, it’s 80% behavior!

Cindy @ GrowingHerWorth
Cindy @ GrowingHerWorth
6 years ago
Reply to  James

Yes, it is behavior. And you never truly know what you’re going to do until you’re there yourself. But, if you sell during a market turn, that proves you didn’t really believe the philosophy. Index funds are designed to follow the market. When the market rebounds, so will the fund. And if you stayed the course, and continued buying when it was low, overall you’d be fine. Actually, you’d be better off, since you continued buying low.

J.D.
J.D.
6 years ago
Reply to  James

You’re right that if you do the wrong thing, it doesn’t matter which fund you’ve invested in. You have to be able to buy low and sell high. If you’re going to panic and sell when the market drops, your mutual fund is irrelevant. But fees make a HUGE difference. All sorts of studies back this up. That’s why over the long term, index funds outperform 90% (or more) of managed funds. Plus, in order to determine which managed fund will beat the market, you have to guess. How to you make that guess? It’s all just gambling. In his… Read more »

BrentABQ
BrentABQ
6 years ago

I’m pretty sure an element of sunk cost was floating around in there. 5% is near insurmountable. On a down year you could be down 15% instead of 10% because of the fee. On an up year you could have 5% instead of 10%. Also if emotion is the hangup just stop looking at it, give the password to someone else and never look back until you need to.

Russell
Russell
6 years ago

I agree with Mrs. PoP, that this is really confusing. It also seems that this adviser is really shady in not disclosing that $25K minimum at the outset. If I read this right, you are taking money that is invested with Edward Jones in a variety of funds, and moving that over to the company sponsored investment account. You will leave some of it in the same funds and transfer them directly to be managed by the advisor, and sell some to make the minimum balance in the Vanguard Index funds, which will still be subject to his 1.25% commission.… Read more »

J.D.
J.D.
6 years ago
Reply to  Russell

The final allocation was Kim’s decision. She really is curious to see if her adviser can outperform index funds. All of this is new to her, and somewhat confusing. So, we’re going to let him manage some. Meanwhile, she’s going to invest as much as she’s allowed into a Vanguard Roth IRA. The rest, she wants to invest through her employer to get the match. I’m fine with that.

mary w
mary w
6 years ago

I love this post and it makes me miss J.D. even more. The main points of this post (how brokers sell managed funds, and why you should use index funds instead) is new news. However, the personal WAY J.D. explains it using his own life is priceless.

J.D.
J.D.
6 years ago
Reply to  mary w

Thanks, Mary. You’re very kind. And you do know that I’m writing at my personal site, right? I call it More Than Money. I haven’t been covering finance topics there, although I may start. As soon as I launch this damn ebook, I’ll have a lot more time to share stories there of all kinds! Come on over.

Alea
Alea
6 years ago

“Kim nodded. “It does,” she said, “but I still don’t like it.” (We’re still hammering out the financial side of our relationship. She wants to pay her half of things – which I appreciate – but I don’t want to take her money. When she pays me for rent or utilities or anything else, I tuck the money into a “secret” savings account at Capital One 360. That makes both of us happy.)” No J.D. Kim is right she should pay her share of rent, utilities, based on her income. You would do her no favors by excusing her because… Read more »

Cindy @ GrowingHerWorth
Cindy @ GrowingHerWorth
6 years ago
Reply to  Alea

When I was younger, I would have totally agreed with you on this point. Now, well, I think it’s a little more gray. It depends on what the two people involved think, and how the situation makes them feel. Maybe Kim needs to pay her own way to be comfortable. And that’s okay. But you have to weigh the future as well. There are tax advantages to her putting the money into a 401k that aren’t there for them if she pays it to J.D.. And, by ramping up her investments now, she’ll feel on more even footing when they… Read more »

J.D.
J.D.
6 years ago
Reply to  Alea

Alea, you do know that Kris and I kept separate finances for twenty-three years, right? I’m all for separate finances. That said, every relationship is different. Based on the relationship that Kim and I have, I want to shoulder more of the load right now. I can afford to. I want to. I respect her for being independent. If she weren’t, I’m not sure I’d be with her. That’s why we have this compromise: She pays me rent, utilities, etc. But I don’t keep the money. I put it into a separate savings account that she has access too. (I… Read more »

J.D.
J.D.
6 years ago
Reply to  J.D.

Oh, and another thing! This cracks me up: Kris’s boyfriend refuses to let her pay for things. So, she and I went from 23 years of splitting everything to relationships where I want to pay more, and her boyfriend wants to pay more. We both think this is pretty funny.

Alea
Alea
6 years ago
Reply to  J.D.

Yes, complicated. More understandable. Thanks.

GamingYourFinances
GamingYourFinances
6 years ago

We don’t currently have an advisor and I don’t think we ever will. As you say, no one will care for your money as much as you do. As a result I’ll be taking some CFA courses at the local college to make sure we’re making sound investment decisions. That’s how we’re taking control of our investments

Edward
Edward
6 years ago

On St. Patrick’s day an acquaintance asked me about saving and investing money because she knew I’ve been doing fairly well with it. I began telling her about low-cost index funds with proper equity/bond allocations and rebalancing. About 10 minutes into the conversation a friend barged in raving about gold and silver being the only safe places, the end of fiat currency, the collapse of the US dollar, and all that other crazy stuff. He just blew away any decent advice that she may have gotten with his monetary lunacy. Doesn’t matter what my net worth was compared to his,… Read more »

J.D.
J.D.
6 years ago
Reply to  Edward

Edward, I hear you. The goldbugs drive me nuts. And don’t get me started about bitcoin! I think the problem is that most folks don’t grasp the fundamental difference between speculating and investing. To them, it’s the same thing. Plus, to truly understand this stuff, you have to grok a lot of background. There’s a recent that even the basic books on investing re-hash market history. When I was trying to write my ebook, I had to re-write the investing chapter several times, largely because I kept including too much background stuff. But without it, I feel like my advice… Read more »

Tyler Karaszewski
Tyler Karaszewski
6 years ago

We’ll keep half of her existing funds as they are and allow her new adviser to manage them as he sees fit. Let’s see if he can actually beat a portfolio of index funds. Seems like the only reason you did this *at all* is to not make Evan feel bad. This is some guy you just met, didn’t hire, and frankly, I have no idea why you went to at all. Why do you need to see an investment advisor? Maybe my job is weird, but it works like this: They set me up a 401k plan through Fidelity.… Read more »

J.D.
J.D.
6 years ago

Valid concern, Tyler, and perhaps it’s true, but I don’t think so. Kim seems fairly aloof about the whole thing. The real issue is that (a) she wants the employer match and (b) she’s not completely sold on index funds. I’m sure we’ll revisit this topic at the end of the year…

Pal
Pal
6 years ago

I am planning to start investing in vanguard index funds towards our retirement (30 yrs from now) & kids education cost (18 yrs from now). Say for example, how many ways can i buy this “Vanguard Total Stock Market index fund” in a periodic fashion? I am doing my online research, but couldn’t nail down which way is the best for a given situation? There are ETFs, admiral shares etc..

My situation: Invest $500 – $800 monthly

Thanks and as usual a great, informative post!

RNR
RNR
6 years ago
Reply to  Pal

Pal,

Check out the Vanguard site. There are some minimums to get started ($3,000) and to get the dirt cheap Admiral, $10,000 balance, I think.
But some funds you can start much lower if you agree to auto deposits. You can do that, or you can make electronic transfers or you can write plain old checks.
The thing is … to get started!
Just get on a regular schedule and dollar cost averaging will take of the rest. If you to try and time it, you’ll get out of the “habit” and hurt yourself.

Krishanu
Krishanu
6 years ago
Reply to  Pal

Kind of similar background – if I go by my age, I’ll retire in 32 years, kid will go to college in 16. But I plan to retire in far fewer years. Vanguard Total Stock Market Index Fund Admiral Shares or VTSAX is the “Admiral” category, with ER of 0.05%. Minimum investment of $10k. Vanguard Total Stock Market Index Fund Investor Shares or VTSMX is the “Investor” category, with ER of 0.17%. Minimum investment of $3k. Vanguard will automatically convert you to an Admiral account if you start off with the Investor. There is another category of the exact same… Read more »

Brian
Brian
6 years ago

Great article–brought up a lot of issues that are in the personal finance zeitgeist of late. I think the PBS Series Frontline has a fascinating discussion of this exact situation on a recent episode: http://www.pbs.org/wgbh/pages/frontline/retirement-gamble/ From my understanding that 1% a year of the total balance will destroy Kim’s returns over a lifetime. If I were in a situation where I had to use a broker to get a match from my employer I’d: 1. Send the employer the link to the video. Employers do have a fiduciary responsibility to their employees. 2. Transfer all but the minimum balance out… Read more »

Beth
Beth
6 years ago

I don’t have much to say here but thank you! I’m trying to figure out how to make my money work harder. (Canada has high MERs.) Every bit of information helps.

imelda
imelda
6 years ago

This is a great article. My company also has a financial adviser and some firm that offers a limited set of funds, and none of them are index funds. I work for the private foundation of a Wall Street financier, so I do wonder whether they are somehow making money off of us. I am shocked to learn that employers have fiduciary responsibility. It’s a bit of a joke, isn’t it? Many plan managers have no idea what they’re doing, and you hear all kinds of horror stories of the bad plans being offered. Actually, in my first job out… Read more »

Julie
Julie
6 years ago
Reply to  imelda

We certainly do not consider our fiduciary liability a joke! We take it very seriously as it is our employee’s retirement on the line. I would venture to say most Investment Committee members feel the same way that we do as we are all participating in the same 401(k) plan as our employees. That being said, our risk would be greater than yours as we have 15 million of assets in our plan and we have a very high participation rate of employees, almost 90%. Like the evening news, I believe the horror stories that you hear are the worst… Read more »

Bart
Bart
6 years ago

I’m so jaded; wish I didn’t have the experience that brought it on. I read this in a different light. Its so true that we never think about becoming a statistic until we become one. The question I would pose, and make no assumptions regarding your case, would be this: If you find your girlfriend in bed with another man next week, would you wish that you had handled finances any differently? Not saying you would, but breakups like that occur everyday in our world now, sad to point out.

Sorry for the bizarre curiosity.

Vivek Gupta
Vivek Gupta
6 years ago

Very useful post!!!
One question – Are ETFs not better than Index funds? I have been investing in ETFs over Index fund. Is this not the right decision?

Krishanu
Krishanu
6 years ago
Reply to  Vivek Gupta

If the underlying base of stocks for the ETF and the index fund is same (as is the case with VTI and VTSMX) and the ER of the ETF is lower (again, as is the case with VTI and VTSMX), ETF is the way to go.

The only thing with ETF is that they they offer you the option of trading real time, compared to the once a day dealings with a fund.

Yenka coupon
Yenka coupon
6 years ago

Great Article. Your All Tips is Really Nice and Helpful. thank you very much for Sharing.

FinancialDave
FinancialDave
6 years ago

The employer plan sounds like a SIMPLE IRA, which are typically advisor based. There are however some great ways to avoid all the fees the advisor is levying and that is to invest in the American Funds Money Market Fund. After you have been in the plan for an initial time period which I think is 2 years, all your money can be transferred somewhere else such as Vanguard at no cost and all future new money that is going into the MMA and avoiding the load fees can be transferred right away to the other account.

Quinn
Quinn
6 years ago

Find a fee only financial planner. Someone that will charge a small amount of money upfront (like a CPA does) but will provide advise on your entire financial life – the company match would be considered, outside accounts (IRA and Roth IRA) would be considered, and index funds (with low fees) would be considered.

Joe Saul-Sehy
Joe Saul-Sehy
6 years ago

“I think he truly believes in his funds.”

Any advisor who has “his funds” probably isn’t the right advisor. I’d prefer one that had “his” clients.

M Martinez
M Martinez
6 years ago

Here are two great videos that support the index strategy and discussion of other options from the YouTube WealthTrack channel: – quick 6 minute video “06-25-10 | Charles Ellis” (he talks about being an investor for 50 years, and other than Warren Buffett everyone he knows would have been better off indexing) https://www.youtube.com/watch?v=KQL9UzqJILs – 26 minute video with Vanguard founder “John Bogle” (very informative and discussion of indexing is about halfway through – I love his comments about ads in financial magazines and the negative real return of savings/CD accounts) https://www.youtube.com/watch?v=YgonFBH-RuM The best book I’ve found to explain why index… Read more »

Roger @ The Chicago Financial Planner
Roger @ The Chicago Financial Planner
6 years ago

Very interesting post. A couple of comments. First as a financial advisor to several companies who offer 401(k) plans I find it odd that the financial advisor to Kim’s plan would have any role in Kim’s choice of investments or that she should have to pay this individual anything. Perhaps I am misunderstanding what was written and his role. Second as was mentioned in another comment the Fiduciary responsibility of 401(k) plan sponsors is very real and as an advisor I am typically a co-fiduciary. I also advise individual investors and am a fan of index mutual funds and ETFs.… Read more »

Jay
Jay
6 years ago

Sounds like Evan has the easiest job in the world..ok, maybe not world, but a very easy job.

Rake 1% for doing nothing? Must be nice. Kudos to Even for landing such a job.

JTS
JTS
6 years ago

Good post of the real life madness of investing.

I’m also a big fan of Swensen but you aren’t following his advice by advising VBMFX (Vanguard Total Bond Market Index Inv). That is, I agree with him (and others) that investors aren’t adequately compensated for the risk (and callability) of even AAA bonds when compared with US government bonds. Vanguard offers a couple of different low-cost index government bond funds (e.g. VBISX, VLGIX). Consider those.

Karen B.
Karen B.
6 years ago

I really appreciate the wisdom in this article. In 2009, I realized that the fees I was paying far out-striped the investing gains; constantly buying and selling ate up my profit. The advisor was costing me money and making bad choices for me. Suggesting wacky investments that I did not understand. Talk about emotional investing; I was emotionally affected by the advisor in negative ways that cost me money. Now my money just sits (and I mean sits… I made no withdrawals or changes last year except to add money) at Vanguard and Schwab, making dividends as well as gains.… Read more »

fiscally fit
fiscally fit
6 years ago

I was hesitant to post but thought i would now haha. It seems like the majority of the issues mentioned can all be solved with finding a qualified and reputable individual to work with. We can all agree that accountability is what makes an investment strategy work. Being able to “stay the course” is a key issue. Whether the accountability buddy is an advisor, a friend, a blog, a forum, etc. It just seems like every time the investment advice discussion comes up, we get caught up in the commission structure, conflict of interest, quality advice, expertise. The assumption should… Read more »

LMaS
LMaS
6 years ago

I wonder if you could find a financial adviser to agree to take as payment any extra in years he beats some index and nothing in years he does not beat it. Put his money where his mouth is… probably end up with some really bad consequences.

Sonja
Sonja
6 years ago

This is such a compelling story on the subject of retirement savings, particularly index v. mutual funds. http://www.pbs.org/wgbh/pages/frontline/retirement-gamble/ Highly recommend everyone watch this.

I got tired of paying the upfront loads/fees plus high fees for the life of the relationship, that we’ve gone with Vanguard. It isn’t perfect, but it should be good enough and eliminates the fees that steal from the growth potential. Doing it myself meant NO front load (relief!) and they have advisors who will make recommendations for $250. So far feels great.

Samirian @MoneyWisdoms
Samirian @MoneyWisdoms
6 years ago

I will print this and read it s-l-o-w-l-y. I see some holes and some lessons. While, I am a proponent of passive investing and index funds, doesn’t mean active funds are no good. I can appreciate you allowing Kim to take the lead.

Joel
Joel
6 years ago

Thank you for publishing this article. It’s an uphill battle against all the FUD out there. The fact that almost all financial sevices have an inherent conflict of interest with the customers they serve is something that really needs to be addressed at the federal level. I went through a similar conversation with my wife when she left the workforce and rolled her 401(k) into an IRA. Fortunately she let me put it in a vanguard index fund where it has sat quietly for three years and will sit quietly for another 15-20.

Humble Lion III
Humble Lion III
6 years ago

Well, as a licensed and practicing financial advisor, let me represent the “evil empire” and share a point of view from the other side. I will agree there is certainly a point to be made with being conscious of fees, however there is truly much more to be considered when it comes to successful investing and reaching your financial goals. This is where the value of a professional advisor comes into play. Now, this person should truly be a professional, and not just an insurance salesman masquerading as an advisor, so I do recommend doing some research before you work… Read more »

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