Investing 101 -- Financial Advisors

Now with Boglesque Add On.

Because the monthly deadline for enrolling in the TAG 401(k) Plan is fast approaching (it's April 1st), I put up another post about tucking money away for later.

This one concerns the wonderful world of financial advisers. William J. Bernstein, one of the sages of investment strategies, writes this:

[In investing] I emphasize three main principles: first, to not be too greedy; second, to diversify as widely as possible; and third, to always be wary of the investment industry. People do not seek employment in investment banks, brokerage houses, and mutual fund companies with the same motivations as those who choose to work in fire departments or elementary schools. Whether investors know it or not, they are engaged in an ongoing zero sum, life and death struggle with pirhanas, and if rigorous precautions are not taken, the financial services industry will strip investors of their wealth faster than they can say “Bernie Madoff. ” ...

William J. Bernstein, "The Investors' Manifesto: Preparing for Prosperity, Armageddon, and Everything in Between."

Or, as Scott Adams (of Dilbert fame) has a financial advisor say:

"I recommend allocating 2% of [your money] to me, and 98% to things that sound good if you don't look at them too closely ..."

You know, things like funds with big commissions for the advisor, so he'll make even more money off you.

When I look at that Dilbert strip, I look at a quarter century of my life. Because I had, for over twenty-five years, a folksy, friendly stock broker who took me to lunch and invested my money and took 2% off the top, season after season.

And when I finally wised up and told him I was taking my money elsewhere, the friendliness faded a bit and he showed me with colorful bar graphs how much money he'd made me. (This was in the middle nineties, fifteen years into a bull market). And I asked him:

"Okay, this seems impressive. But after all the stock trading and strategizing, how much did you beat the benchmark by? You know, the S & P 500?"

We sat there and did the math. It turned out after all that time, after all the wheeling and dealing and jolly lunches, I had made 1% less than having the money in a freaking index fund. And I had paid him, for decades, 2% of my stash.

Neat. (And I haven't used a "financial advisor" since.)

This is what I say in 401(k) meetings, over and over:

* It's important to asset allocate between small company stocks, large company stocks, international stocks and bonds.

* It's important to keep doing this from your twenties to your sixties.

* If you're freaked out by the thought of losing money, then go conservative (more bonds than stocks), but invest.

The theory is simple. The execution is hard. Because people often jump into hot sectors around the time that sector is cooling off, and jump out of a sector just as it's bottoming.

The trick is to set up a good allocation plan and stick with it. And tune out all the noise from the Smart Money: ("American stocks are dooomed! The U.S. dollar will be worthless in two years! China's the place to put your money!" etc.)

The reality is, nobody can say with accuracy where various world markets will be in two years ... or ten ... or twenty. The dollar might be trading at five cents on the Swiss franc, but with the rest of the world in much the same shape as the U.S. of A., I would shrink from making that prediction. (When I was in my twenties, China was an economic basket case.)

So. Cover your ears. Put a chunk of every pay check into savings and retirement accounts, get it out of your head that you can time any market, and press forward. (It will seem like a bore now, but you'll be happy you did it when your hair is gray and you're swigging down Metamucil.)

Add On: John Bogle, who founded Vanguard Mutual Funds and knows as much about retirement investing as anyone, holds forth here. (Read his wisdom and act on it.)