It's so tempting. You see the ads with the guy sitting next to you on the beach as you stare off into the ocean outside your dream home. He tells you that you can retire more comfortably than you ever thought possible. Then the voiceover comes: "Trust [insert investment bank name here] with your money."
Ah, yes, write some guy a check and when you're ready to put a down payment on your dream house, retire, or finance your son's world-changing rocket-science Ph.D. work, you'll have all the money you need.
Beware the flashing teeth
A few years ago, I met with two financial advisors. The first told me to pull my money out of the Vanguard 500 Index Fund
The second advisor told me that I was young, and urged an aggressive investing agenda. "No risk, no reward" may or may not have been his exact words. (Though I can't remember full sentences, I do recall his gold pinky ring.) Comparatively, this guy was cheap -- he charged a flat fee of about 3% of our assets. But (you knew a "but" was coming, right?) he wanted 2% of all returns.
They better be good
The fee structure was such that Advisor No. 1's stock picks would have to outperform the S&P 500 by 10 percentage points per year -- a feat that would rank him among the best investors ever.
Advisor No. 2 had a lower outperformance threshold, but he'd skim 2% of the gains (no matter how large or small) off the top.
The odds that either of them would do better than the plain-vanilla (and cheap) S&P 500 index fund weren't good. Just look at the index fund's largest holdings:
|
Company |
10-Year |
% of |
|---|---|---|
|
IBM |
10.6% |
1.04 |
|
Intel |
2.8% |
0.99 |
|
Verizon Communications |
5.2% |
0.89 |
|
PepsiCo |
10.4% |
0.89 |
|
Merck |
4.2% |
0.76 |
|
Coca-Cola |
0.9% |
0.76 |
|
S&P 500 |
8.3% |
N/A |
And if those returns look low to you, consider that approximately 75% of actively managed funds fail to beat their far cheaper benchmarks. So how likely is it that those financial advisors were going to earn their keep? Not very.
Your own best interests
So I said "thanks but no thanks" and decided to go it alone. That's scary -- investing isn't my day job, after all. And like most Americans, I have a job and a family and responsibilities.
I mean, who has the time to manage their investments?
That's a question we see a lot at our Motley Fool Green Light service. And although you may not have the time to be a stock market wheeler and dealer, you almost certainly have the time to sit down once a year, design an asset allocation plan, and build a portfolio composed entirely of low-cost indexes. Why? Because no one will serve your interests like you will.
But where do I start? That's another question we get a lot. And getting started is a lot easier than you think. You just have to sit down, take stock of what you have, and figure out your timeline and risk tolerance. If you're already retired, for instance, you'll probably want to stash the bulk of your savings in low-volatility vehicles such as Treasury Inflation-Protected Securities (TIPS). If you have a longer time horizon, you might be better served to put your money in the Vanguard 500 Index Fund. Indeed, my husband and I continue to keep money there today.
Of course, there is more to investing than that -- which we're happy to teach you -- but the basics can be fairly simple.
And then you're on your way
The same principles that apply to do-it-yourself home improvement apply to do-it-yourself investing. You could hire a professional and pay them a lot of money to do a job that may or may not be up to your standards. Or you could do it yourself, take your time, and know it will be done right.
And just as some home improvements require a trusty guide, our low-cost Motley Fool Green Light service is here to help you learn to start investing. If you're not quite ready to plunge into the market, Green Light can help you learn to effectively pay down your debt, save money each month, and make sure your bank account is working for you.
The Foolish bottom line
While there are many well-intentioned money managers out there who genuinely care about their clients, they can be difficult to find. If you do it yourself, on the other hand, you know exactly what you're getting.
Ready to take control of your financial future? Click here to try out Motley Fool Green Light free for 30 days.
This article was originally published on Sept. 5, 2006. It has been updated.
Kate Ward owns shares of the Vanguard 500 Index Fund. Coca-Cola and Intel are Inside Value recommendations. The Fool has a disclosure policy.
