Do You Need An Adviser?

There have been many investors asking do I need an adviser? The answer to this question would be ‘no’ except for one fact ….you are human. And humans are emotional beings.

If your broker/agent takes your order and does whatever you ask. You don’t need an adviser. But if you are looking for advice and someone to help you through the maze of investments. You need an investor coach/fiduciary adviser.

You can never overcome your own humanity. As much as we would prefer to think that we make investment decisions based purely on logic, advertiser and journalists are well aware that emotion ultimately drives most investment decisions.

As a quick demonstration, consider the statements below. See if you can match each statement with the emotion being expressed. (Answers listed in the key below.)


  1. “It doesn’t matter how sophisticated his charts are or how much sense he makes, I just don’t feel comfortable letting him handle my money.”
  2. “I’m not sure I should have put my money in that fund. It lost 15% already. Maybe I’ll sell some of it tomorrow.”
  3. “My boss got 25% on his money. I only made 8%! I wish I got 25%.”
  4. “I’d wish I’d known that stock was going up, I would have bought more shares.”
  5. “My dad worked in that company all of his life and he left his shares to me in his will. It would be wrong to sell it just to diversify my portfolio.”

Answer key: 1. Trust 2. Regret 3. Envy 4. greed 5. Loyalty

We as people are naturally predisposed toward or against specific investing tactics. What is interesting is that no matter what our emotional tendency maybe, we can almost always find what looks like purely factual data to support our view. It is easy to overweight information that validates our perspective while minimizing any information that goes against what we inherently believe.

The Good News: Simple awareness of your emotions when it comes to financial and investing matters can make the difference between good and bad investment decisions. The recent up and now down markets have many investors on edge, asking….should I get out of the market for good?

Along with the six year old bull market have investors on edge.

This is really what the financial institutions want…they make money when money moves.

Here is a great example of why investors need an investor coach/fiduciary adviser. Your coach will help you build a prudent portfolio designed for you AND keep you disciplined to that strategy in both up and down markets.

As an investor you must remain disciplined to your strategy…you must own equities…globally diversify…..rebalance.

An Investor Protection Plan

Does your brokerfollow the fiduciary standard or the suitability standard? Brokerage and insurance firms have been fighting the fiduciary standard with zeal. Why?

broker (Photo credit: milo tobin)

Debunk Their “Expertise”A broker who loses a client to index funds typically responds with a dismissive statement indicating that he and his firm have the ability to select “market beating” fund managers. As discussed above, ask him to show you a peer reviewed article demonstrating the reliability of his methodology. In addition, ask him to provide you with a long term (10 years or more) analysis comparing the returns of the proprietary mutual funds of his firm (funds that have the name of the firm as part of the name of the fund) with their Morningstar assigned benchmark. After all, if they can pick superior managers, wouldn’t those managers be running their branded mutual funds? This is another report you are unlikely to receive.

There is an easier way to avoid becoming a victim. Don’t use any retail broker or adviser who tells you they have the ability to “beat the markets”.

If your broker or agent really could beat the market why would they need you? Another question to ask yourself is, if the big brokerage firms really knew who was going to be the best fund manager why do they have over 100 managers?

Please comment or call to discuss how this affects you and your portfolio.

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Their Confidence Is Killing Your Returns

English: Eugene Fama receiving the inaugural M...
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There is a scientific method of building a risk adjusted gloablly diversified portfolio. Trying to find the next hot asset class or stock or fund manager is a futile exercise. To succeed in reaching your long term financial goals you must remain disciplined to a prudent strategy.

At the request of a prospective client, I proposed a risk adjusted portfolio, consisting of low management fee, passively managed stock and bond funds. I tilted the portfolio towards small and value stocks, consistent with the research of Eugene Fama and Kenneth French. Their research explained the relationship between risk and return for stocks. It is known as the Fama-French three-factor model. Distilled to its essence, the Fama-French three-factor model holds that a portfolio tilted toward small and value stocks (which increases risk) has a higher expected return than a portfolio without this tilt, over the long term. You can read more about the Fama-French three factor model here. In my recent book, The Smartest Portfolio You’ll Ever Own, I recommended portfolios of index and exchange traded fundsat different risk levels that investors could implement themselves. These portfolios are based on the research of Fama and French.My prospective client showed my recommendations to a friend who is a well-known financial advisor. He derided them as “possibly” suitable for those who wanted to preserve wealth, but not to grow it. In order to grow wealth, he advised retaining his firm because of its ability to time the markets and “customize an individually tailored portfolio of stocks and bonds.”

The research supporting my recommended portfolio is extensive and is summarized in the bibliography to my book. His advisor friend provided no research validating his approach to investing, but he made up for the lack of data with his air of infallibility and aura of expertise.

We all want to know what will happen next. Who will be the best ‘stock picker’? There is a scientific method to developing you portfolio for superior long term results.

Your comments are welcome or as well as your calls.

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Paying More in Fees Can Get You Less in Returns

S&P 500 with trend lines from 1950 to 2008
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Expenses in mutual funds and insurance products can prove very costly to your long term financial goals. Remember the larger the organization the larger the paypoints involved. There is a cast for marketing, executives, managers….

The expense ratios of S&P 500 index funds range from very low to extremely high. For an egregious example of an indefensibly high expense ratio, consider the State Farm S&P 500 Index B (SNPBX). It has an expense ratio of 1.49%, and a deferred load of 5.00%. This fund has assets of $547 million.A small difference in expense ratios can have a dramatic effect on returns. Let’s assume an S&P 500 index fund and Vanguard’s both return 8% annually, before costs and you invest $10,000. A savings of only 1% annually on expenses would mean the lower cost fund would yield an additional $63,000 over forty years ($201,000 versus $138,000). That’s a big difference.

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Why Most People Pick the Wrong Funds for Their 401(k) and What You Can Do About It

Burning taxpayer & shareholder money -- "...
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Investors are looking for answers and they receive bad advice from most brokers. They would be better served with a managed portfolio via passive investments.

Well, as we’ve learned the hard way, what goes up must eventually come down (remember technology stocks in the late 90s and more recently, real estate in the early to mid-2000s). So what did you do when that mutual fund with the stellar track record first started losing steam? Think back to 2008. Some folks checked it every day on their computer while others didn’t even bother opening their monthly statements to avoid the pain. One way or another, most people waited and hoped it would come back soon.When things got really bad, many panicked and sold out. (You won’t believe the number of  people who told me that they will never invest in stocks again.) Unfortunately, they missed the chance to recover most of their losses in 2009 and 2010.  When stocks eventually reach new highs and there are stories everywhere of how much money people are making, what do you think all those who said they would “never invest in stocks again” will do? And so the “greed, hope, and fear” cycle repeats itself…

The result of all this is that investors end up buying funds when they’re priced relatively high and selling when they’re priced relatively low, the opposite of what we want to do.  According to the most recent Dalbar study, the S&P 500 Index returned an average of over 9% a year over the last 20 years while the average stock investor earned less than 4%. That could mean earning less than half as much for your retirement.

Investors repeat this cycle over and over primarily due to financial institutions feeding on our fear and greed. These institutions make money when money moves. This movement hurts investors and makes the brokers rich.

Please comment or call to discuss.

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