May 25, 2010

Lower Fees = Money In Your Pocket

I have always said that fees are everything.  Here is a marketing piece from Vanguard.  I am not a shill, nor do I work with Vanguard but I do like their mutual funds and exchange traded funds (etf's) largely because they are the lowest cost, period.


It may be hard to read but this is the comparison of $50,000 invested over twenty years in two funds, both with returns of 8%. The higher cost fund has fees of 1.19% (which is very normal) and is compared with 0.20% for the lower cost fund. You can see that the difference is almost $40,000!  This is money in your pocket or not, your choice!
Now I know you like your stockbroker / financial advisor but you are paying him and his firm a ridiculous amount of money for the exact same product.  If you like him that much, great, buy him a car because thats about what you are paying.

May 20, 2010

Go Away In May They Say, Good Strategy?

Go away in May they say, keep your cash for another day.  Thats a great old Wall Street saying which means sell in May and buy again in the fall. 
Studies have shown that strategy to be mostly false.
There is a negligible difference as compared to buying and holding and besides, you will incur commissions, costs and fees to sell and buy again in the fall.
Additionally, just like trading, sure its nice when you are right but hurts when you are wrong and unless you have a crystal ball, you end up like the dog chasing his tail and get nowhere.
A great example would have been 2009, it sure looked like after a nice runup from the lows in March after the bear market of 2008-9 that selling in May might be a great idea, well, it wasn't and alot of people sold and missed a massive run since and some never got back in.
While its tempting to try and beat the market (aka S&P 500) just dont.  Remember that over 90% of professional money managers can't so your chances are pretty slim.

May 19, 2010

Do I Really Need A Stockbroker Or Financial Planner?

I am frequently asked the question, do I need a stockbroker, financial advisor or financial planner?

You'd be surprised at the 'training' stockbrokers are given before they start to handle your money, its really shockingly little.  Most of the 'training' is on the job which is not ok with my money, maybe you are ok with that.  Your decision of course.

Given the wealth of resources available online and the fact that even the discounters such as Fidelity, Schwab, TD Ameritrade and Scottrade have advisors that you can lean on for advice for free, it really doesn't make sense to pay anyone for something you can do for yourself.  You pump your own gas right?  You buy your own groceries!

People will say that it takes too much time which is simply not true.  I think some people just don't want to make decisions for themselves and want to have someone to blame if things go wrong.  That's fine as long as you don't mind paying 5-10 times for the same exact service and that you go into the relationship knowing what you are paying for.  If you feel thats a value for you great then go ahead.

Make no mistake, the broker-client relationship is like other relationships, in that its hard to breakup which might make you stay after you realize there is little value which ends up costing you more and more.

Also, fees are the most important factor in investment success, not which investments you pick (something the investerati would have you believe they can do and you can't) and not timing (which some people believe they can do but have never proven it).

And stockbrokers and financial planners will be the first to tell you that they are not tax or legal experts and that you will need consult those experts as well as them so given that, what exactly does your financial guy do for you anyway?

So the answer to the question is that it depends on you but my opinion is that you do not need the advice of a stockbroker or financial planner.  You can acheive the same or better results by yourself.

May 4, 2010

Personal Finances and Productivity

There is an inverse relationship between time spent on personal finances and both productivity and investment returns.  Have your cake and eat it too!

Most everyone has heard that people spent a lot of time at work goofing around.  The number one time killer to no ones surprise is technology.  Time wasted surfing the Internet, etc.  But the number two time killer in the workplace is a surprise to most and that is the time employees spend on their personal finances. This can be time chatting with a friend about a hot stock, trading stocks online, filling out a mortgage application, debt consolidation, etc. I have even seen studies showing some people rebalance their 401k everyday!

Studies show that people spend as much as 30-45 minutes a day on their personal finances, thats as much as half a work day each week!  Everyone understands that you have to have a life and that sometimes, personal stuff has to be done during normal work hours however few employers are ok with you trading stocks during the day.

The irony is that the more time spent trading, rebalancing your retirement accounts and talking to a stockbroker are all detrimental to your fiscal health.  Every study on the subject conclusively proves that passive investing beats active investing. In the book, How The Investment Business Really Works and in my workshops, I go into much greater detail as to exactly what people should be doing and more importantly, what they shouldn't be doing.

Moral of the story is to place your investable assets in the lowest fee possible index fund and leave it alone.  With that simple strategy, you will beat over 90% of the 'professional' money managers AND you will be more productive at work in addition to having less stress!