Most of you would be better off managing your own investments. That’s my take on “money management.”
Here’s why I feel that way.
If you’re using a broker or advisor who claims the ability to “beat the market” by stock picking, market timing or selecting active mutual fund managers likely to outperform, it’s likely this advice will generate “negative alpha.” This is a fancy way of saying you could do better on your own, investing in a globally diversified portfolio of low management fee index funds.
The latest book to confirm my view is The Bogleheads Guide to the Three Fund Portfolio, by Taylor Larimore. Taylor is an icon to many of us, along with Jack Bogle, who wrote the foreword to his book.
It’s only 86 pages, including the index. You can read it in a couple of hours. It’s an excellent resource for those who want to understand how to manage their money.
A better review
Taylor was kind enough to send me a copy of his book. I was going to review it, until I came across this review from The White Coat Investor, an excellent resource for all investors. It’s far better than any review I could have done, so I will just refer you to it.
The bottom line is that most investors would be fine if they limited their investments to just three index funds:
- VanguardTotal Stock Market Index Fund
- Vanguard Total International Stock Market Index Fund
- Vanguard Total Bond Market Index Fund
Doing so would certainly be preferable to relying on those who claim stock picking and market timing expertise.
An investment in Taylor’s book has a very high expected return.
I recently asked Larry Swedroe, Director of Research for Buckingham Wealth Management and a prolific author and financial journalist, for his views on the value of providing investment advice. Here’s what he told me:
I’ve always believed that investment advisors are dead men walking–they will likely keep older clients who are reluctant to change horses, just not easy for humans, and the true wealth advisors will survive. Sadly what so many investors believe is that the value is in the investment advice, mainly choosing which funds to use. While that can make difference the great value is in planning (integrating a well thought out investment plan into a well thought out estate, tax and risk management plan) and adapting the plan to the persistently changing circumstances that cause the assumptions upon which the plan is based (even time passing, life events like death, divorce, inheritance, change of jobs, etc). Most people have not worked with true wealth advisors so they don’t know where the true value is.
Keep that in mind if the only service your advisor is providing is telling you which stocks, bonds or mutual funds should be in your portfolio.
Resource of the week
I recommend this review of Taylor Larimore’s book, The Boglehead’s Guide to the Three-Fund Portfolio.