Cutting through the noise on personal investing
I am often asked by friends and family for advice on personal investment/retirement strategy. It isn’t an easy question to answer these days because the signal-to-noise ratio has never been worse. Technology has opened up access to investing to us average Joses over the last 20 years — so much so, that the options available can be a bit overwhelming.
Robo-advisors, low-fee index funds, ETFs, zero-commission trading platforms…wtf is all this. Before the internet, investing was a pension/401k that you either did or did not have, and perhaps a broker that you called periodically. Long gone are those “simple” times (and along with them many middlemen).
In this noisy environment I find it helpful to follow a few simple principles when it comes to personal investing. Hopefully they can help you too :)
- Unless you want to be actively involved in your portfolio allocation or trades, you should go with the lowest possible fees. All of these guys now (mutual funds, investment advisors, robo/algo investments, etc) are basically doing the exact same thing. They are diversifying your portfolio so much (to mitigate risk) that it ends up being practically identical to a big index like the S&P 500. So, that means that if the index goes up 6% in a year so does your portfolio, if it goes down 10% so does yours. This index tracking does not require any “professional” investment experience or advice so to pay 1–2% a year is ridiculous when you could invest directly in an index and get the same returns for a tiny fraction of a percent (the cost of executing the trade with a broker, usually $5 a trade or free with some of the new guys).
- The only time these fees are justified is if your financial advisor is returning consistent alpha. There is extensive research on this subject but perhaps my favorite is this report which involves “simulated monkeys throwing darts to pick stocks”. In case you are curious, the monkeys crushed it. What’s been discovered is that your average financial advisor does not return enough alpha to justify their fee meaning you are missing out on sweet gains! Some advisors will have a good year (or a few good years) and say they are providing alpha but over time and averaged out they are losing you money via their fee. In order to justify a 2%+ fee you’d likely need to be with the top 10% of investors (top decile of hedge funds, pe firms, etc.) and access to these is not usually available to people with less than $1M to invest so unfortunately you and I don’t need to worry about those.
If you want more info, this book does an awesome job of explaining investment theory and finding what works for each individual without taking a stance. Good luck!
Disclaimer: These views are my own. Just me. Solo thoughts.