You know how all the politicians talk about the middle class like they’re a group of people who can turn broken monitors into delicious pizza? The media does the same thing with small investors. “Oh, the financial industry is so bad! Only the rich can navigate it successfully! Whatever will we do with the small investors?!?!?!?” (hits fainting couch).
Okay, it’s not that bad. They do have a point.
Let’s say you’re just starting out and you have $10,000 to invest. Your options include:
- Go to a bank and plunk it into some mutual funds.
- Go to a fee-only financial planner and get them to tell you what to do.
- Ask your smart friend what to do with the money, hoping your smart friend doesn’t just talk a big game.
- Find some website and do whatever the guy there says he’s going.
- Put it all into dividend stocks which are guaranteed to go up and probably turn into millions. That’s the power of dividends.
Most people are likely to choose option A. They go to the bank, ogle the attractive young lady selling the funds, and a half an hour later they walk out the proud owner of some balanced fund. It’s easy, but maybe not so effective.
There are downsides to this, of course. Mutual fund fees are worse than cancer in puppies. That 1-2% fee will result in thousands of dollars in losses over the lifetime of a portfolio. So we tell small investors to do something else, like visit a fee-only financial planner.
I don’t want to disparage what the fee-only folks do, because I’ve met a few of them and they’re really quite pleasant and knowledgable. But dear God, there’s no way a small investor should be stepping into the office of a planner that charges more than $100 per hour. It’s just not worth it. “What should I invest in” turns into a question that costs $500, complete with charts and pie graphs and other things that aren’t adding any value. There’s a place for fee-only planners. Telling 23-year old recent grads what to invest in isn’t one of them.
So what’s the solution? Traditional financial advisors rip off small investors with funds that cost too much. Fee-only planners aren’t the answer either, at least until the small investor becomes more than that. And for every piece of good content online about investing, there’s 14 more that suck worse than the guy who bought Danier Leather.
Here’s what I propose we do to help the small investor.
We live in this world where we believe that we can just transfer our problems to someone else. Too lazy to count out your change? Dump it in the dumbest invention in the history of the world, a Coinstar Machine. Too busy to ensure you’re not living in filth? Just hire someone to show up and clean up after you. We refuse to learn to do things because we’re either too lazy or too busy, even though we binge-watched 14 episodes of Deadwood on Netflix over the weekend.
Like with anything in life, you have to learn the hard way. And if you’re not interested, expect to pay dearly when it comes to getting someone else to do it for you. It’s easy to build your own portfolio using ETFs — provided you know how. If you’re a financial newbie, it’s a lot tougher. It’s not impossible, but it will involve some reading and some paperwork. If you’re not willing to do that work, then you deserve to pay high fees.
In a world where literally any piece of information is available to you in a matter of seconds, you have no excuse about your lack of education in something, whether it’s investing or learning how to cook a piece of chicken. I have all the sympathy in the world for someone who screws up trying something new, provided they actually tried. I have zero sympathy for someone who just gave their money to a banker for twenty years without lifting a G.D. finger to Google the alternatives.
No, the banker didn’t rip you off. Your laziness ripped yourself off. There’s a big difference between those two statements.
It is not a bank’s job to “take care” of your investments. That’s your job. The bank’s job is to a) lay out the terms of the agreement and b) not outright defraud you. If they say they’re going to charge you 10% per year and you sign off on it without knowing the consequences, that is not the bank’s fault.
I’m not saying to never go and see a professional, because they exist for a reason. But here’s the typical exchange between investor and advisor:
“I don’t want to lose much money.”
“Okay, we’ll put you in a nice balanced fund. Lots of bonds, with some equity exposure.”
(Five years later)
“WHAT THE ACTUAL HELL IS WRONG WITH YOU? I’M GETTING CRUSHED BY THE MARKET. YOU ARE USELESS AND I HATE YOU.”
“But it’s a bull market in equities. That’s the nature of the fund. In fact-”
“EAT A BAG OF POO AND DIE.”
We end up with a bunch of small investors who don’t really understand what they’re investing in, and blame their portfolio underperformance on anyone but themselves. They transferred the risk to the advisor, so it’s not their fault. But it is their money, and they should be a better steward of it.
A little bit of education goes a long way, especially when you’re first starting out. That’s really all you need in order to set up a passive portfolio that’ll do pretty well. If you’re not willing to put in the small amount of work it takes to set something like that up, I say you deserve to have a lifetime of underperformance. Small investors do get screwed. But most of it is self-imposed.