A huge industry thrives based on a false premise.  It has convinced you it has the expertise to manage your money in such a way that your returns will be greater than if you invested on your own.  In exchange for its “skill,” you pay a fee, often based on a percentage of the assets you give them.

The Myth

The securities industry is great at marketing this myth.  It invests millions of dollars in advertising to perpetuate it.  The financial media is the recipient of these massive revenues.  It responds by giving these “experts” a forum for making predictions about the future price of stocks, the direction of the market and which mutual funds are likely to outperform.

It’s all part of an elaborate ruse to persuade you to entrust them with your money and generate massive fees.

Do-It-Yourself Portfolios

Financial author, Allan Roth, brought this point home in a recent blog post.  He compared a complex 16-fund portfolio assembled by Charles Schwab for its robo advisor clients, with two, simple, do-it-yourself portfolios.  One portfolio consisted of three Vanguard index funds.  I recommended a similar portfolio in 2006, when I wrote The Smartest Investment Book You’ll Ever Read.  I provided details about this portfolio in this blog post.

The second portfolio was just one fund:  Vanguard’s Target 2050 fund (VFIFX).

The period analyzed was March 27, 2015 to December 31, 2017.  The three-index fund portfolio was the winner, with annualized returns of 9.40%.  In second place was Vanguard’s Target fund, with annualized returns of 9.10%.  Schwab’s 16-fund portfolio came in last, with annualized returns of 7.70%.

A Well-Oiled Machine

The securities industry doesn’t consist of a group of skilled money managers.  It’s a well-oiled marketing machine, touting complex investment products likely to underperform low management fee index funds.

I’m amazed at the contortions investors go through in a misguided effort to “beat the market” when saving for retirement.  Buying actively managed mutual funds, investing in complex products, buying individual stocks, trying to predict the next market downturn and investing in Cryptocurrency, are all examples of poor investment practices.

Avoid them, and avoid those who recommend them.

Resource of the Week

Allan Roth’s blog post, referenced above, is well worth your attention.  His conclusion should guide your investing:  I’ve long since learned that complexity, expenses, and emotions are the enemies of the investor. So far, Schwab remains part of a very large group of investors that seek to outsmart simplicity.

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