4) When will we buy?
This is very closely related to “when do we sell.” And again, most advisors don’t have a clue. You’d think at least they would have this one covered, but most don’t.
And that’s unfortunate because there are two broad considerations to deal with here. Both have a direct impact on your money.
First, timing the markets is a bad idea. According to Barron’s, 85% of all buy/sell decisions are incorrect. That’s because emotional bias drives bad decisions, particularly when it comes to attempts to time the markets.
As for how much this will cost you…try 342% over 20 years.
The latest Dalbar data shows that the return of an average investor trying to time the market is a pathetic 1.9% per year versus the S&P 500 return of 8.4% over the same time period.
More than 90% of portfolio volatility comes from allocation. Get that right and chances are good that you’ll come out way ahead of the game, especially if you use something like our proprietary 50-40-10 portfolio.
Second, the markets have a decidedly upward bias over time. That means outstanding performance is a matter of identifying relative weakness and wading into it rather than running the other way.
For instance, take a look at this chart.
It is simple.
Investors who buy into the markets without understanding the big picture get hammered trying to chase returns. Yet, investors who buy when things are gloomiest tend to build legendary wealth.
You can argue that you’ll never see this in your lifetime, but you’d be dead wrong. Most investors will see 2-5 specific periods in their investing lives where the relative valuations favor more buying than selling.
That’s why I’d fire any advisor who does not recommend cautious additions to your portfolio when everybody else is running for the hills. Or at least re-balancing periodically to capitalize on prices that would otherwise not be so low.
5) Finally, how are you being compensated?
I don’t believe in paying people for performance they don’t deliver.
So I am not crazy about paying ginormous account management fees if I’m not getting good results. You shouldn’t be, either.
Over time, the typical 1%-2% management fees charged by many big investment houses and managers can really be a drag on performance that bleeds your retirement of much-needed momentum and future results.
I think fee-only advisors are a much better choice. They sit on your side of the table and have your vested interests in mind.
But because they are independent, they disclose all conflicts of interest in advance (or at least they should), and are not beholden to investment banking, ratings or other nonsense that lurks unbeknownst to most investors. They don’t have a financial stake in your investments.
I think that’s especially important at the moment for one simple reason — many of the conflicts that are inherent in today’s investment world are directly the result of conflicted choices. They are presented under the guise of comprehensive planning by brokerage firms that would like you to believe they perform the same functions as investment advisors. They don’t.
What if you don’t work with an advisor right now? Hire one…and don’t delay.
I know they may seem expensive but that’s a matter of perspective.
Putting $50,000 in to a mutual fund charging a 3% load works out to 10 hours of a professional, fee-only investment advisor’s time — and that’s at an hourly rate of $150!
Given the risks in today’s markets and the inherent problems with Wall Street — not the least of which are pronounced conflicts of interest — I think that is money well spent.
After all, it’s your money and your responsibility-even if you’re not in the richest 1%….yet.