Investing your retirement savings is easy. You can do it yourself. All you need to be successful are a few broad market stock and bond index funds and you’re done. This simple and extremely low-cost strategy will outperform almost all the strategies offered by professional advisers, who charge 1% or more of your portfolio and then underperform the markets.
I know how the system works because I’ve been an adviser for more than 30 years. If you have an adviser who charges you based on the size of your portfolio, odds are very high that your portfolio is far more complicated and more costly than it needs to be, and that you’re underperforming the broad stock and bond markets. If you stop using the adviser, and adopt a simple portfolio that holds only a few index funds, you’ll save a lot of money and your performance will improve.
Complexity is job security in the adviser industry. If a portfolio strategy is complicated, people will think their adviser is smart and savvy, and owns a secret society ring that gives them special knowledge to outperform the markets. That’s not true, of course. What’s going on is marketing, and it’s time you learned that truth.
Show a potential client twenty different funds and talk in industry jargon about optimizations, efficiency, alpha, and factors, and people think this adviser is a whiz-bang genius who has the market nailed. That seems worth paying an average of 1% or more in fees, and this is before the fees of the twenty different funds they put in portfolios.
What adviser is going to show a potential client a simple portfolio of a couple of index funds that track the stock and bond markets? The potential client would say, “That’s easy. Why do I need you to do this?” It’s true. Anyone can create a simple portfolio that is low-cost and beats the complex portfolios of professional advisers after fees and this is why most advisers don’t recommend simple portfolios.
Advisers make things complicated by slicing and dicing the stock and bonds markets into many different pieces. They will then put those pieces back together again using multiple funds which essentially is a complicated and expensive way to get back to a total market index fund. They’ll do the same thing with international stock markets and the bond market. Slice, dice, glue, charge high fees – it’s a scam.
Complexity sells. Every adviser knows this and that makes complexity your enemy. If you don’t understand precisely what your adviser is talking about, and you don’t understand how much it’s costing you in total fees, then get rid of that adviser and self-manage with a simple portfolio of index funds.
I recommend buying three funds. For US stocks, I like the Vanguard Total Stock Market ETF (VTI – 0.03% fee) or the iShares Core S&P Total U.S. Stock Market ETF (ITOT – 0.03% fee). For international stocks, I like Vanguard Total International Stock ETF (VXUS – 0.09% fee) or the iShares Core MSCI Total International Stock ETF (IXUS – 0.10% fee). For bonds, the Vanguard Total Bond Market ETF (BND – 0.035% fee) or you can just create a portfolio of FDIC insured CDs. There are many similar low-cost index funds available from other providers.
I’m not saying all advisers are money hungry grubs who are making things complicated for the sake of job security. If you want an adviser or need an adviser, find a reasonably priced one who doesn’t make your portfolio complicated and charge you a lot of money for it. The cost of simple investing has come down to almost zero over the past 20 years due to low-fee index funds and the elimination of commission costs at Schwab, Fidelity, Vanguard, TD Ameritrade and other firms. The last bastion of gluttony is adviser fees. The average 1% fee for an adviser is far too high and that needs to come down.
If you search long and hard, you will find a growing number of hourly or fixed-fee advisers that charge reasonable fees to create and manage a simple portfolio that you can understand and self-manage if you want to. Their fee should be aligned with the actual time they spend working on your accounts and managing your money rather than charging 1% or more, regardless of how much effort they put in or how much you make.
Best of luck in 2020.
Rick Ferri, CFA, is the CEO of Ferri Investment Solutions, an as-needed hourly fee investment adviser. He has 30 years of experience in the investment industry as a financial consultant and portfolio manager. Visit www.RickFerri.com for information or listen to his podcast at www.bogleheads.podbean.com.