So, I recently inherited a chunk of money from my father. I intend to invest this money towards my retirement, since I don’t have any immediate needs. For various reasons, I consulted a financial advisor, but now I don’t know if I should trust his advice.
Basically, his advice is to invest it in a basket of front-loaded mutual funds. In the past, whenever I have had the ability to invest money, I have gone with no-load or indexed mutual funds. He is basically telling me that a good fund manager can reliably beat the indexes, and a good financial advisor can tell me which fund managers are good.
So, is this good advice that I should follow, or is this a load of dingoes kidneys?
I just want to repeat that I am not looking for financial advice here, but advice about financial advice (and advisors).
I have used both, and see that the no-loads seem to grow faster - yes some of the loaded ones seem to have a higher per share value growth, but in terms of dollars it seems like the no loads grow to a higher $ amount faster.
The general suggestion when someone comes into money is to set up a ladder CD, (staggered due dates, perhaps 1 month apart for 2 years), this gives you a chance to try out a few things, dollar cost avergae into the markets and settle into a plan that you like.
The exception to this is if it’s a IRA, as there is a way for you to set it up so you can get it at no/little tax, but if you don’t follow strict instructions (or even look at it the wrong way), it becomes a taxiable event.
Another pice of advice about finnatial advisers, look for one that you pay for their time only not one that would make a commission if you buy what they suggest.
It’s a load of shit. Get away from him before he steals one more dime from you.
It’s pretty well established that 75% of actively managed mutual funds are outperformed by the S&P 500. And, that’s not accounting for what’s called “suvivorship bias”.
The best predictor of future performance is how low the fees are. Drop your advisor like a sack of shit, keep buying low-cost index funds, and don’t look back.
One of the (many) things I do is invest the assets of a billion-plus dollar pension plan, in which we seek investments that will beat appropriate benchmarks (while maintaining the level of risk). We use the best consultants for advice. We go out to the sites of the investment managers and interview them for hours. We use all kinds of industry research, and keep track of any personnel changes at the various funds. Even doing all of this, we consider ourselves very lucky if 60% of our 20-25 managers beat their benchmarks (net of fees) in a given year.
An individual investor cannot do this. He or she will never have the time or resources. When my friends ask me for investment advice, I tell them to always, ALWAYS! use index funds. Active managment is just not worth the headache for them.
And one concept that I can’t stress enough is that over the long run, asset allocation (and not the individual managers) will be the primary factor in the success of your portfolio. This means that you should spend your time on determining the types of assets in which to invest, and not on which manager. Based on your stage in life and your risk profile, you need to allocate appropriately between domestic equity, international equity, bonds, alternatives, etc. This is of utmost importance because even if you randomly pick active managers, some will outperform their indexes but others won’t. They’ll cancel each other out during the long-term while you’ll still pay the higher fees. But the allocation of the assets will eventually explain about 90% of the success of your portfolio.
Well, not really… but the question that you now have to answer is which funds (as opposed to the? The thing about buying a managed fund is that you are buying into the fund’s management, not the industry or the index.
If you manage money, you’ll come to know these things as a matter of your job. If you’re an average investor, finding out which funds offer stable management capable of earning consistently high yields, well, that’s gonna take a lot of work for somebody not working for an organization that’s paying $10,000+/year for the right to log into a lot of databases not offered the “little guy”. Sure, Yahoo Finance is nice for price quotes, SEC filings, and stuff, but it sure doesn’t track fund managers as they move from fund-to-fund, or groups of funds offered by companies (and a corporate listing would be of great help as you could literally track potential stars as they move up the line, managing bigger and greater funds.
This, I’m sure you can see, is more difficult than merely buying into an S&P Index fund or an industry-based fund, as you are measuring people and not metrics.
However, if you want a suggestion, try Dodge and Cox. They are my exception to my rule, and they’ve done very well for me.
(Upon re-reading, I note this is your financial advisor giving you this advice. Be ESPECIALLY LEERY, then.)
I agree with the suggestion to invest in index mutual funds. And if you want asset allocation, you might consider a lifecycle fund, such as the Vanguard Target Retirement Funds, which are allocated among stocks and bonds, and where the allocation changes as the target retirement date approaches. Another thing to consider is investing in exchange-traded funds, as they may be even lower cost than the index mutual funds.
If you must use a financial advisor, get one who is fee-only, rather than one who’s free but gets commissions on your trades.
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