If you want to get rich quicker, read this confession… Only a handful of my friends have heard it, usually after a few beers — and almost always in response to a variation of the same question.
Before I tell you which secret I mean – and how my confession can help boost your long-term wealth – here’s some background to help you make sense of it.
I studied finance as an undergrad a long time ago (probably before some of you were born!). Since then, I’ve spent the years toiling in the dusty mines of stock research and money management, first peddling data to Wall Street’s “sell side” and “buy side.” Then doing research for independent research houses, and finally writing for publications like Street.com, RealMoney, and “do-it-yourself” champions The Motley Fool.
I spent my entire career studying and pushing investment ideas. Based entirely on the assumption that if you buy the right stocks at the right prices, you can “beat the market” and get fabulously rich. I still believe there’s some truth in that.
But only if you have a ton of time and patience. And luck. So here’s my confession: When it comes to my own money, I have more than 90% of it invested not in individual stocks – but in plain-vanilla index funds!
“If you had $20,000 to invest tonight, which stock would you buy?”
That’s a question I can’t answer. I’m stumped! On Wall Street, there’s a name for what I’ve become. I’m what you’d call a “closet indexer.”
You can see how this might be viewed as a bad thing. Professional advisors and fund managers pulling down a couple million a year asking their clients to fork over 2% of their assets each year to beat the market. Most of them fail.
But what if you’re a regular person whose only goal is to get wealthy with as little effort and regret as possible? Then it’s not so bad. If that guy sounds like you, let me make a quick case for indexing.
First, even for so-called pros, “beating the market” by investing in individual stocks is HARD. Eighty percent of mutual fund managers underperform the market. Trying to “time” the market’s ups and downs makes them do even worse.
Meanwhile, the fees and expenses you pay, both to “advisors” and the funds they buy for you eat into your returns. John Bogle, founder of Vanguard, says this could add up to 85% of your profit over your investing career.
Finally, the risk of making a poor decision – or even a poorly timed decision – can be considerable. Which is why research from Delbar among others confirms that average investors do even worse than the actual mutual funds they invest in!
So yes, I’m telling everyone!
I’m an index investor – and I’m proud of it. I’d recommend that you consider joining me. In more than 20 years, I haven’t seen convincing evidence that it makes sense for you to try to pick stocks.
Much less pay a “professional” stock picker or mutual fund manager a small fortune to invest for you. Can you get rich that way? Once in a while. But the odds are stacked against you.
More and more, old-school investors (even Warren Buffett himself) are warming to the idea that if your goal is to maximize your odds of making money as an investor, you’re better off “owning” the market than trying to “beat” it.
It’s smarter (and safer) to focus on maximizing your time in the market (invest early, buy and hold) than optimizing your timing in and out. Can you do this yourself with low-cost index funds and online allocation calculators? Sure. That’s what I did for years.
But if you want a little help or direction, there’s an interesting solution that wasn’t available for most of my investing career. It’s extremely effective, surprisingly easy to get started and very affordable.
It might be the thing for you…
A handful of non-traditional advisors are offering first-class investment advice at a fraction of what people traditionally pay. They may be onto something.
They can do it because they don’t pay a team of investment gurus, stock pickers and portfolio managers — you don’t need those expenses when you invest long-term to match the market. Instead, they operate almost exclusively online and rely on algorithms to manage your investments.
One upstart is called FutureAdvisor, and it offers a few unique advantages.
First, FutureAdvisor doesn’t force you to move your assets. It sends its software to major custodians like Fidelity and TDAmeritrade, where most investors already hold them. You may be able to leave your accounts right where they are.
That’s another serious advantage …
Second, FutureAdvisor looks across all your brokerage accounts, and can manage them without causing you to cash out and take a tax hit. This may be an even more important.
Remember, these industry disruptors – so-called “robo-advisors” – base their recommendations and advice on your age, risk-tolerance and your personal goals. I think they do a pretty nice job.
Given the low-cost convenience, automated tax-loss harvesting, and the benefits offered by broad-market exposure, I don’t know how “old-school” human investment managers will compete.
Either way, if you’d appreciate help maximizing your investment returns and don’t want to spend a fortune, you might give the “robos” a look. They make it pretty easy to get started and it beats forking over 2% of your assets for advice.
If nothing else, you can take advantage of their free aggregation tools — where you can get a good look at your net worth, get your portfolio analyzed, and even track your progress on a real time “dashboard” for as long as you find it useful.
If you want to take the next step and deepen the relationship – even have them automatically make your trades for you — that’s easy too. So there it is: I’m OUT! Now, I leave you with a second confession…
I’ve been tracking my portfolio on FutureAdvisor for almost a year and haven’t been kicked off yet. But that’s between us!