A Shocking Recommendation

There’s no doubt the “right” advisor can add significant value. However, a recent blog post by Jason Zweig, a financial journalist for The Wall Street Journal, should make you reconsider your expectations when using them.

Zweig notes most investors underperform the returns of the mutual funds in which they invested. He makes this stunning observation: Four out of five investors are using financial advisers when they invest in mutual funds. They might be getting shot in the foot, but if so, it must have been a financial adviser who pulled the trigger!

Think about that. Some advisors caused their clients to earn lower returns than the mutual funds actually earned, presumably because they got in and out of the funds rather than simply holding them for the long-term. Zweig concludes, [E]ither investors are behaving badly and their advisers aren’t stopping them, or advisers are giving bad advice and investors are following it.

Zweig has a solution to this problem, and I agree 100% with it. Tell your advisor you want almost all focus to be on financial planning. You want minimal effort spent on investment management because sound and intelligent investing is simple to understand and easy to implement. Just buy a globally diversified portfolio of low management fee index funds, in an asset allocation suitable for you. No sophisticated expertise is required to implement this prudent investment strategy.

You should be aware of this exception. If your advisor is authorized to place your assets in funds managed by Dimensional Fund Advisors, there’s credible evidence that tilting your portfolio towards small and value stocks (and perhaps incorporating other factors) may increase your returns over the long-term. While it’s possible to do this yourself using index funds and exchanged-traded funds (I tell you exactly how to do so in this book), you might find it too complicated to do on your own.

When you give these new instructions to your advisor, you’ve taken a giant step towards reaching your retirement goals. I strongly recommend you do so.

Resource of the Week

Please read this blog by Jason Zweig, which I reference in the newsletter. In it, Zweig addresses this question: Do all financial advisers turn their clients into better investors, or do some make their clients’ behavior even worse?

The answer will surprise -- and enlighten -- you.