Portfolio Management

It's tough to say what you should do or not do. If you don't have the time or don't want to spend the time to learn about managing your investments, then using a fee based management service may be what you want. I think Fidelity charges 1% of your portfolio a year. If you are investing in mutual funds only, you can get a model portfolio for free from the Fidelity or Schwab web site. Personally I wouldn't use a professional service for mutual funds. But I would for stocks.

You use the word 'schemes' which implies you doubt this. I agree wholeheartedly. The manager would have to be remarkable to 'beat' the market by more than his own fee, in which case you'd barely break even. In a perfect world, you would experience are return of the index(es) you follow minus a tiny fraction, maybe .10% or so. Chasing higher returns will likely lead to a far lower return. There's much evidence that you were already dong the right thing and should dismiss your collugue's advice.

JOE

But which pros? There are thousands of funds. Some have a good track record, some do not. Some that have preformed well in the past are not doing that well now -- and visa versa. They are all managed by "pros". If the "pros" _really_ knew what they were doing and could always get "an extra 2%" then we would only need 1 fund and everyone would own that fund. Just because they are pros doesn't mean that they won't lose your money.

Actually it's not really that difficult to beat the market in the long term by a significant percentage, with a diversified portfolio of well chosen stocks and bonds.

It can also be done with a portfolio of mutual funds, again in the long term. Both Fidelity and Schwab has on the their web sites free portfolio suggestions. There is no need to pay a manager.

If YOU are comfortable with what YOU are doing, the do not let your friend break you out of that comfort. If your friend was a good friend, he'll tell you the funds his broker recomends and let you choose the same/ similar ones for free. Then you'll earn more than your friend because you saved on the commissions.

Last year my wife and I had to make a similar decision: We had the opportunity to invest with a company that offers "separately managed accounts." That is, they build a portfolio for you and manage it on your behalf in a brokerage account. They claimed that their research offered enough of an edge over index funds to more than make up for their fees (which were about 1.5%/year).

What we did was to figure out what we thought would be a reasonable portfolio at Vanguard, and then compared that portfolio's performance over the past 10 years with how this company said its managed accounts had performed over the same period, net of fees.

We found that the two numbers were remarkably similar: I think the total performance over the 10-year period differed by less than half a percent. That's over 10 years, not per year.

So we came away with the tentative conclusion that we could hand our money over to this company and have them manage it for us, or we could do it ourselves at Vanguard, and we would probably not gain or lose much either way.

Many people in this situation would go with the other company. We decided to stick with Vanguard, because we felt that the education we would receive in the process would be worth the extra time we would spend managing our own portfolio, and we were willing to devote the time. If we wanted a turnkey operation, we would have been comfortable getting this company to manage our money for us.

Ya pays yer money and ya takes yer choice.

I agree that diversifying is good. But no matter how well chosen, if you are say 60/40 stocks/bonds, in the long run you will underperform the indexes by the amount of expenses you incur. My goal for the stock portion of my portfolio is to get as close as possible to the index, but I think I'd be kidding myself that I can beat it consistently. Trouncing it in one year (1999) was enough to feel I'm ahead over my lifetime, but year to year appears quite random, some years ahead, some behind. And 1999 was admittedly more luck than brains. JOE

I would disagree. Assuming in the long term and also adjusted for risk, a well constructed diversified portfolio would beat a broad market index.

"Andrew Koenig" wrote

I love the paragraph above. In fact, I think the willingness to learn new things that it reflects shows a particularly high degree of competence which of course can only lead to success.

There's no long term evidence the pros can do this, consistently. And you are taking a risk of *worse* performance.

I have checked out Fidelity which

You are doing absolutely the right thing, staying as you are. Don't get shaken by another's well meaning advice.

Costs are the absolute enemy of long term performance. And the record of active managers is very poor in the long run against the market index.

If you want to enhance returns, put 15% of your equity money into a small cap index value fund and 15% into an international stock index fund. You will suffer higher risks, but gain (in the very long term, like 10 years+) higher returns.

I'd concede that in any given year, half the stocks beat the other half. There will always be the funds in the top half of their index class. Few funds remain at the top year after year, it's easy to choose the successful funds in hindsight. The question is whether or not a randomly chosen advisor and/or fund manager will succeed in beating their index by more than their fee. No matter what the profile is, some index must be chosen for comparison, large cap, large cap growth, large cap value, etc., etc. And all the reading points to no way to have a manager consistently beat the averages. I'd need overwhelming evidence to the contrary before recommending the OP, who stated he is comfortable with his investments, spelling out what seemed to me, a well thought out mix of low cost indexes, move to a managed account.

Get out of the bonds and put it all in the index funds on a regular basis. At your age of 30 you will be way ahead when you are 60.

It all depends on your standpoint. If part of what you are doing is for the educational aspect, than continue along that path. However, let me be honest. Fund companies have products they sell, if you only look at one or two and make your decision, that's kind of like shopping one or two car lots and buying the car that's supposed to last you for the next 5 to 10 years. Shop around. As for professional managers...when my pipes break, I go to a plumber. I could read a bunch of books (the whole time, I'm loosing water and taking time away from my job, family, and hobbies I REALLY want to do), buy brand new tools that I will probably use once (we'll call this the cost of the investing lessons you might or might not learn the hard way) and fix the pipes myself. The job may work, but it won't be as good, and it won't last as long as it might have had I let the guy whose job it is do it in the first place. And after all I spent, and all the time away from the other things in my life, did I really save any money? You don't pay these guys for the funds, funds you can get anywhere, you pay them for their knowledge, their experience, and for them to do the things that take you away from what you want to do. I'm not saying that you can't get good returns on your own. I'm saying that if you do then one of two things is probably true: 1) It was more luck than skill or 2) your quality of life is not at the level it could be.

Would you mind sharing the rules for constructing your "well constructed diversified portfolio" that beats a broad market index? Thanks, Doug

"CMJohnson" wrote

Depends. Who is going to be most interested in a client's financial success? The client, or the financial planner s/he hires? Sometimes a person's greater personal interest in a goal means s/he will get better results learning on his/her own.

As for tools, this analogy does not work. Learning about investing is inexpensive, and the education will be implemented throughout life. If nothing else, the education will help the person better understand what any financial planner s/he pays is doing. I hope you agree that's important; that people blindly trusting others is a huge mistake. It's why we have people going into bankruptcy with these ridiculous creative mortgages. The lenders were experts too, weren't they? Whom to trust...

Please disclose whether you are in the financial planning business. If so, this does not subtract from your post, but it does ensure readers understand bias is possible.

It most certainly could be more skill than luck.

Not for a minute do I personally believe a financial planner can consistently do better, especially after accounting for costs.

In this day of internet access to get a dealer invoice, and telephone to call around, I bought a car, new, off the lot. Three friends had the same car, an Avalon, so I didn't waste any time shopping around. This analogy is lost on me.

Perhaps a better comparison is the guy who owns an apartment building, and finds at year end that the net is barely a profit. But his plumber bills are so much that he decides to learn the trade. Now, instead of spending all his time waiting for them to show up, he is his own plumber.

For individual stock picking, this may be true, but again, the OP states his comfort level with investing and educating himself. The 'obvious' thing to me is this; at $50K, my money is too little to get any attention for personalized service, I'd only get 'cookie cutter' plans I could construct on my own. At $2M, the 1% fee is enough that the education in finance would pay for itself many times over. To be fair, it's not for everyone, it certainly takes a level of understanding, below which the planner may keep you from a disaster. But the OP of this thread was a clear candidate for self management. And Elle's quote said it best, "Not for a minute do I personally believe a financial planner can consistently do better, especially after accounting for costs." I might only tack on, "when compared to an intelligent person willing to learn some basics of finance." JOE

I have been using the Kobren Insight Newsletter for several years and have found it quite helpful. Sometimes he makes mistakes and sometimes he finds "hidden gems". I always check his recommendations against Morningstar as well as my gut instincts. When we all agree, I follow Kobren.

But all I pay for this is the subscription price of the newsletter and the subscription price of Morningstar online.

Louise

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I suppose one of the beautiful things of these forums is the ability to disagree. But period-point-blank, if the industry of financial planning was not beneficial to the general public, the industry would not exist. To think that every financial planning firm is the same, and that the average Joe can not only beat out your average professional and do it in the most tax efficient manner, consistently, is a pipe dream. As for finding one that will help you more than themselves, there is an economics theory called "the invisible hand". It states that companies will find themselves doing the right thing because it benefits them, almost as though they were being guided to do the right thing by an invisible hand. If these companies could not return more than the average investor, THE COMPANIES WOULD NOT EXIST. No one would be referring their friends and family to "Joe, the guy who lost me a ton of money." As for this part:

"In this day of internet access to get a dealer invoice, and telephone to call around, I bought a car, new, off the lot. Three friends had the same car, an Avalon, so I didn't waste any time shopping around. This analogy is lost on me."

I can see that. You obviously shopped around on the internet and spoke with salesmen on the phone, and with your friends. The analogy I used wasn't designed to have the OP go to the office of every Financial Planner around, but to talk to other people and use the internet. There are firms and planners out there that will return higher than their fees, and higher that the average investor. That's just the truth. The important thing is to make sure that you do your due diligence and that you are comfortable with it. As for not getting real attention just because it's $50,000, and just getting a "cookie cutter" plan...that's laughable. To the OP: Look around, do some research and see what you are comfortable with. The best tool to use to gauge price and fees against return is on the NASD website here:

"CMJohnson" wrote

Interesting reasoning. One could say similar about the cigarette industry, among others.

Your post is way too black-and-white for me.

Why did you not post your interest in the financial planning business, by the way? I think a real professional comes clean.