The Easiest Way to Invest
Readers of investing blogs tend to be those who enjoy spending time thinking and talking about investing. However, most people would rather talk about foot fungus than investing. These people see investing as a necessary evil and want to handle it in the easiest possible way.
It seems like a no-brainer that the easiest way to invest is to hand your money over to a financial advisor and just do whatever he or she says. Even if we ignore the high cost of paying the typical advisor, I’m not convinced that the answer is this obvious.
The term “DIY investor” conjures up images of a group of people boring their spouses at a party with endless talk of whether Apple or Google stock will go up or down. But it doesn’t have to be this way. An investment portfolio can be just about as simple as a bank account.
For example, an investor could just divide investment funds into thirds: one-third for a Canadian stock index, another for a U.S. stock index, and the last for a bond index. New money goes into whichever is lowest, and withdrawals come from whichever is highest. This may not be optimal, but it is dead simple, requires no paying attention to the financial media, and is likely to outperform investments recommended by the typical advisor.
I contend that the strategy I described is actually easier than having a financial advisor invest your money for you. I’d rather just do what I want to do with my money than have to talk to an advisor for all transactions. The main barrier for the “uninterested investor” is to gain enough knowledge to be able to ignore other input and just stick to a simple plan through thick and thin.
There is room for financial experts in people’s lives, but keep in mind that the typical person whom we call a financial advisor is not an expert. They just tell you which mutual funds to buy and do the buying for you. If you need complex legal, tax, or insurance advice, you need to find an expert. The same would be true whether you buy your own ETFs or let someone buy mutual funds for you.
With a modest amount of effort to gain some investing knowledge initially, investors can make their investing lives even easier with a simple DIY approach than they can by just handing their money over to someone else.
It seems like a no-brainer that the easiest way to invest is to hand your money over to a financial advisor and just do whatever he or she says. Even if we ignore the high cost of paying the typical advisor, I’m not convinced that the answer is this obvious.
The term “DIY investor” conjures up images of a group of people boring their spouses at a party with endless talk of whether Apple or Google stock will go up or down. But it doesn’t have to be this way. An investment portfolio can be just about as simple as a bank account.
For example, an investor could just divide investment funds into thirds: one-third for a Canadian stock index, another for a U.S. stock index, and the last for a bond index. New money goes into whichever is lowest, and withdrawals come from whichever is highest. This may not be optimal, but it is dead simple, requires no paying attention to the financial media, and is likely to outperform investments recommended by the typical advisor.
I contend that the strategy I described is actually easier than having a financial advisor invest your money for you. I’d rather just do what I want to do with my money than have to talk to an advisor for all transactions. The main barrier for the “uninterested investor” is to gain enough knowledge to be able to ignore other input and just stick to a simple plan through thick and thin.
There is room for financial experts in people’s lives, but keep in mind that the typical person whom we call a financial advisor is not an expert. They just tell you which mutual funds to buy and do the buying for you. If you need complex legal, tax, or insurance advice, you need to find an expert. The same would be true whether you buy your own ETFs or let someone buy mutual funds for you.
With a modest amount of effort to gain some investing knowledge initially, investors can make their investing lives even easier with a simple DIY approach than they can by just handing their money over to someone else.
Not only can they make their life easier but they can make their nest egg a lot bigger. Professional management is expensive and it has historically produced poor results.
ReplyDeleteBy reading a book like "The Elements of Investing" by Malkiel and Ellis many people could save an enormous in investment fees and do their own investing.
You made an excellent point on needing advice in other areas like taxes and financial planning.
@DIY Investor and Dale: I agree that low-cost passive DIY investing can save a lot of money over active approaches. But I wanted to address the perception that it takes a lot of work to save this money. A simple mechanical approach to investing can be less work than having a financial advisor.
ReplyDeleteI don't disagree that professional money management is expensive. And I understanding that you're not questioning the value it provides. We're talking about whether or not it takes a lot of work to invest your money for cheaper.
ReplyDeleteThe simple answer is "no", but I don't think it's ever that simple. There are many other issues that come into play. Here are some examples, just to think about.
Some people can pay a money manager and not think about their investments again for 12 months, whereas when buying their own investments they would constantly worry about them. Some people can pick an arbitrary allocation like 1/3 Canada, 1/3 US, 1/3 Global and find roughly equivalent ETFs (from competing companies) and invest, whereas others would want to understand why these decisions are made. Which allocation to which geographic area, using which index and which maket-cap or style from which ETF provider? And some people pay for the investment management to get the personal finance coaching for free, whereas they may not be disciplined enough to stick to their decisions on their own.
I'm not saying you're wrong. I'm only saying that it's never so simple to generalize.
For some reason a comment from Robert was delayed or lost:
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I don't disagree that professional money management is expensive. And I understand that you're not questioning the value it provides. We're talking about whether or not it takes a lot of work to invest your money for cheaper.
The simple answer is "no", but I don't think it's ever that simple. There are many other issues that come into play. Here are some examples, just to think about.
Some people can pay a money manager and not think about their investments again for 12 months, whereas when buying their own investments they would constantly worry about them. Some people can pick an arbitrary allocation like 1/3 Canada, 1/3 US, 1/3 Global and find roughly equivalent ETFs (from competing companies) and invest, whereas others would want to understand why these decisions are made. Which allocation to which geographic area, using which index and which maket-cap or style from which ETF provider? And some people pay for the investment management to get the personal finance coaching for free, whereas they may not be disciplined enough to stick to their decisions on their own.
I'm not saying you're wrong. I'm only saying that it's never so simple to generalize.
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@Robert: I agree that some people would worry less if their money were handled by a money manager rather than sitting in some mix of ETFs. But, this is based on ignorance. People often believe that professional money managers can prevent investment losses, but this is not true. All evidence available says that professional money managers cannot avoid market downturns.
There is definitely an emotional component to investing and sleeping well. But the comfort that comes from handing money over to an expert is often misguided. I think it makes sense to learn the basics of investing. An ironic consequence of this eduction is that it should leave people less nervous about handling their own investments and more nervous about handing them over to a professional.
Very sane point of view and that is what I keep repeating to my friends who seem to be crushed by the mental burden of investing by themselves. As our lives are complicated, we don't have the time or inclination to check our portfolios daily or even weekly and they should withstand this careless. It's less complicated than people think and even mediocre investment decisions can lead to better results than the investment style of some agents "sell you mutual funds, get commission, forget about you"
ReplyDelete@Andi: I agree that DIY investing can be easy, but it is best for your friends to start by learning enough to be able to pick a simple strategy and stick with it. A lack of knowledge can lead to insecurity and selling out at a bad time as so many people do.
ReplyDelete