Financial Advice

I see all the time people crowing about DIY finances.  Just buy low cost index funds they cry!  Financial advice?  What a rip off!,  Why I can buy VTSAX for 4  bp…  And that is true.  It is cheap, but is it wise?  Why studies have shown you can’t beat the market…  But those studies are generally compared against actively traded funds a worst case comparison.  What about passive factor based funds?  Why those AUM guys just want to pump and dump for 1% of your money…  It’s hard to find a 1% AUM Financial Adviser most are 0.5% and under.  The ones that use 1%, use 1% to weed out clients with small assets.  Crowdfunding, by gosh I believe in crowdfunding gonna make a mint… Plenty of articles out there decrying crowdfund risk.  Taxes ya I know all about taxes… Do you really?  

I read article after article saying the “average retail investor” under performs the S&P by greater than 4%.   Another one I read says 3% performance for the DIY crowd over the last decade is average.  So if you can get a FA to help you get an additional 500bp return is it worth paying him 10% of that?  

In my investing life there have been dramatic changes.  I started trading commodities in 1975, the same year Vanguard was invented.  Vanguard was loathed, hated and ridiculed in investing land.  Back then you bought actively  managed funds with front end loads typically 5.5%.  Fidelity was cheap at 3%.  You bought actively managed funds because everybody knew Peter Lynch of Fidelity Magellan was a maven, and he was!  He consistently returned an average yearly 29% return, twice the S&P 500! (according to the advertising)  You needed twice the S&P to make up for the 3% loads and fee structure!    In 1975 there was no internet PC’s to speak of (I had some computers I built and programmed but primitive primitive.  My memory storage medium was a stereo cassette tape deck and my monitor was an old TV.)  You made trades over the phone and got market data from the news paper.  If you bought and sold a stock it cost $400 for a round trip.  IRA’s were initiated in 1975 and had a $1500 contribution limit.  Brokerages and brokers got rich not their clients.  This is where the prejudice of the “rip off FA” started.  I was a two for you, one, two, three for me kind of deal.  It felt like a rip off but at 29% a year it was better than a passbook acct which might pay prime at best.   Magellan by my calc has returned 5.5% over 38 years and lost it’s way after the dot com bust.   Understanding a bit about the history of the financial services industry is important because financial services are all about sales and hype.  Even Vanguard is hype else wise they would just have a bond fund and a stock fund, so no matter what you’re buying hype.  Money magazine was hype, Kipplingers was hype it all was hype.   

In ’92 I was listening to Alan Greenspan on CNBC in the surgical lounge and someone asked him “what would you invest in?” and he said I would invest in the whole market.  I never heard that before and it was entirely different than what I had been taught by the hype.  He obviously was a student of Harry Markowitz and understood diversity.   ’92 was the age of Compaq MSFT, Dell and Cisco.  One of the Internists bought Cisco and turned it into 10M in about 5 years.  He later got  Alzheimer’s and it didn’t do him much good.  The Greenspan comment started me on a journey to understand this different kind of “own everything” investing.   Own everything investing was Vanguards claim to fame and legitimacy, that and the .com bust.  After that people started looking for rationality.   People won Bigley in .com gambling, investing in smoke and lost even more Bigley.   I was day trading in those days but I also had a diversified investment account side by side with my speculative trading account.  I made money trading but it was a heck of a lot of work and a lot of stress.  After GE peaked at $60 in 2000 and was $20 in 2003, I understood my exuberance was irrational and I decided to give uncle Alan’s approach a try and plowed 1M into SPY in April of 2003.  I liquidated all of my losers and collected the LT cap loss and this 1M was my remaining cash.  It wasn’t all of my portfolio, but it was a chance to buy low.  It was the beginning of Gulf war 2 and the market was in the toilet and I asked myself should I vote for or against the US.  I was in the Navy during Gulf war 1 and decided FOR.  Right decision. 

Along about this time I decided I wanted some professional help, no not mental health but investing.  I was in B&N and a book by Phil DeMuth and Ben Stein caught my eye so I bought it.  It was all about the efficient frontier and how to invest effectively.  I read a few other books by these jokers.  One day I called up Phil and we talked and I sent him 1M to start with the promise to send more if I liked what he did for me.   Shortly there after 2008 happened, but it allowed me to compare efficiently risked money with my SPY kind of money and watch the rates of recovery.  Phil’s style won.  The other advantage is being involved with a manager made me invest correctly all the time and on time.  I still had cash not invested but it was cash I intended to not have invested not the result of indecision or poor choices.  I also  had access to investment grade funds as opposed to retail funds which were based on Fama-French tilts.  In those days FF tilts paid a premium at very low cost.  Over 100+bp/yr compared to an extra 10 bp differential between Vanguard and the tilted funds.  I’ll take an extra 1+% any day.  That difference has since been arbitraged away IMHO but it was nice while it lasted.  Phil also streamlined my taxes and tax loss harvested for me.  By retirement I had about 600K of tax loss harvest (TLH) accumulated.  TLH is like free money.  Phil’s software kept track of tax lots and their basis so I was always trading at max efficiency when I did trade or make a AA change.  When we would strategize a change I would get a complete analysis of what it was going to cost and it was easy to do cost benefit analysis.  When it came time to Roth convert I used 120K of the 600K TLH to scare up some cash to live on and to pay Roth conversion taxes.  That money came out of my post tax account tax free.  I also use that TLH money against cap gains on my post tax money come tax time.  Knocks hell out of my tax bill.  Phil also sent me journal  articles on topics like SORR and AA peri-retirement so my understanding of risk was much enhanced and it prompted me to do my own research.  We’ve concocted a good solid Roth conversion plan, highly efficient.  I’ve done most the work, he is my error check and I have access to his software to “what if” scenarios and he always adds a little twist to the analysis I didn’t think of.  I take the little twist and run with it and optimize it.  I’ve written my own spreadsheets but it’s nice to know professional grade software shows close agreement on my conclusions and have a professional looking over your shoulder.  My post retirement is set up to maximally optimize my tax picture.  My tax savings are in the hundreds of thousands over decades.

My Roth conversion provides exactly the portfolio safety I desire.  My portfolio is sub-divided into cash, LT cap loss, ST cap loss (small amount), Post tax brokerage, TIRA, Roth IRA and my Home.  My portfolio is quite a bit larger that my 30 year need so I can convert the Roth money into something of a self insurance account.  As I age and my wife ages eventually we will incur medical expense estimated at 300K per person from age 65 to death.  There are may things Medicare does not cover like assisted living or 24/7 memory care.  The Roth will be filled and then not touched as insurance against catastrophe.  1M in 10 years will be 1.8M, in 20 years will be 3.2M (my age 85) and 6.4M by my wife’s age 90 (she’s a lot younger), so plenty of money against catastrophe, or if we both drive into a bridge at a high rate of speed my kids will be ecstatic.  Either way the Roth has a job to do and it’s to protect our security, not to fund our cash flow.  I will get my daily hamburgers from other assets like SS some TIRA RMD, and post tax brokerage money mixed with TLH.   My situation is a bit complex and my wife has interest in the plan and can follow the arguments but does not eat and sleep it like me.  Phil acts as protection in the case of my demise.  The plan is the plan and will be executed and she can turn to Phil for guidance.  One kid is out of college and on her own and the other is 2 years away from fini so that whole Curly shuffle is winding down.  

I pay nothing like 1% for this security, I won’t say how much except it’s way less.  It’s money well spent.  I’ve made far more in streamlined returns in the last 10 years than 20 years of professional financial advice will cost me.  You may think DIY is wise but if you loose in the end because of ignorance, arrogance, simple mindedness, bad risk analysis or abject stupidity based on internet boilerplate it will cost you far more.  Investing is not about a dopamine induced fog but clarity of purpose and risk management.   The other thing is implementing a plan like this takes time and it takes staging in the accumulation phase in what I call epochs. 

Epochs occur over years to decades.  If you fund your retirement’s self insurance 40 years out, most of that will be in place as interest by the time you retire.  You could call that the retirement insurance epoch.  You already fund a 529 and rely on the interest to carry that through, you could call that the college expense epoch.  Just think of it like that.  Do not be mesmerized by the necessity of pre-tax money the restrictions are often more costly than the benefit. 

Color me contrarian.  

6 Replies to “Financial Advice”

  1. You are a very smart fella. That’s the diff. And you have the respect of your advisor. I can not do what you do.

    I have a tendency to pay all the “helpers” well. But it often seems they tend to drop the ball. It’s always been like that.

    I would be careful of how well they would take care of things for your wife when you are now around. I am beginning to see that it is YOU who is the protection. They know you are too sharp for them to tool around with your stuff. They know you would expect answers big time. And that you are probably smarter than they are at their own game.

    Neither my husband or I are the type of folks who command rapt attention. I best design an idiot proof plan. In my situation it’s likely the best I can get.

    Mine is not overconfidence. It is more the resignation that that is just the way it is for us. And I have learned to work around it. ?

    1. Your concerns are real. There are all kinds of “advisers” The protection in my situation is built into the asset allocation as my portfolio is a tweak of a broad based market based strategy using risk management as the control variable and letting return be the dependent variable so there isn’t any high power secret stock or strategy so there isn’t an advantage to churning or anything like that. My biggest concern is tax streamlining and Phil actually wrote the book on that: ( If he screws her up I’ll come back and haunt his ass! We actually have a close partnership and Phil has a quarter of a billion under management so it’s not to his advantage to ruin his rep.

      A bogglehead approach uses a reward based control variable and lets risk ride without much thought to risk optimization but in general something like a 2 fund is on the efficient frontier and so ignoring risk is not a problem. When you start adding stuff in the name of “diversity” and you don’t know what you’re doing it becomes more problematic in terms of risk. So our approach is very good because a simple portfolio like a 2 fund tends to not pay for return with too much risk. Optimization of a 2 fund is to re-balance every so often like every year and a month to keep the cap gains long term, and to make investing as automatic as possible. If you have a windfall stick it all in the market. Your money only compounds if it’s in the market so sitting in a bank effectively dilutes your chosen AA. You can dollar cost average and you get paid say once a month because it does the same thing it gets even a little extra money compounding earlier. When the crash comes re-balance back to your AA and use some of that bond money to buy cheap stocks to supercharge the assent once the crash is over. Personally I think something closer to 60/40 is the best AA because in a very long accumulation your risk premium doesn’t crash you as much as high equities and so you get back to zero much sooner often years sooner and I think that’s a winner. In 2008 I was back to zero in 2011 and the S&P wasn’t back to zero till 2013. By 2013, I was up about 13%.

  2. I see your point that we must not have our blinders on and just look at expense ratios in the never ending quest to get the lowest fees.

    The bottom line that you should concentrate on is which gives you the biggest return net of fees. If I pay 1% fees to an advisor and get 50 basis points higher return net of fees than it is a slam dunk.

    My only issue is that you have to really have an advisor on his or her game (looks like you found one) but they do not grow on trees. For every great advisor I would venture to say there is a magnitude or higher more of advisors that can actually do more harm to your portfolio than if you just did index fund investing DIY.

    The one big thing you mentioned is that even if you are incredible at DIY investing, your spouse/heirs may not be. In the event of your demise the transition will be a lot smoother if you had an advisor on board that can direct them in a similar path (of course DIY people have ways to do this as well as is evidence by those posting their “letter to my spouse” directives.

    1. It turns out the “average DIY does over 4% worse than the market every year. I read another place the “average DIY” has done only 3% return over the past 10 years. They fail because they don’t do what they should either out of fear or stupidity of the bad advice they get online. If your going to maximize DIY you need to know what you are doing and make it machine like in the way it operates. Variability kills. But you’ll still screw up with advice like “max out your pre-retirement accounts” bla bla bla. That just buys you a Big RMD and an accelerating tax bill when you get old and it’s impossible to fix once you RMD.

  3. I’ve witnessed the value of an advisor over the past year, watching a family member enter widowhood.

    I was not at all a fan of their 4H advisory – hubris, hedge funds, high loads and high ERs – but they accompanied the widow through financial events that she would not have managed at alone, and that we could not easily have managed for her from afar.

    It’s an admittedly steep price to pay for staying the course of the investing plan, but I saw it in action and have a newfound respect for the value of FAs in transition.

    As for the inefficiencies of DIY Bogleheads, you are correct they may not optimize RMDs, taxes, and many other facets of finance at first blush – but it’s important to acknowledge this is a form of luxury bitching. Those who have made it that far are already 1-2 standard deviations beyond the mean. I’d be glad to pull that bell-shaped curve further to the right with an unthinking embrace of Bogleheadery for most docs. Once we’re there, sure, let’s critique the shortcomings and get everyone into the AP investing course.

    Enjoy your take as always, my friend.

    1. In reality I don’t care what people do with their dough. No skin off my ass. And I think it’s great they are doing something! It just chaffs me when they create a straw man “why those bastards charge 1%!!! and don’t do anything I can’t do myself, why I’m saving millions I tell ya, millions!!!”, which is true if you actually know what you’re doing and bother to do it, and are not just reading off a cereal box. If you’re like the “Average Investor” and leaving 4% on the table in order to save 0.5% on a FA you’re a dumb ass. (not you personally of course) That being said picking a FA is not trivial either. There is a lot of chaff mixed in with that bucket of the wheat. My pleasure as always!

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