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.