John Waggoner, USA TODAY
When you read daily market commentary, you may become a bit confused. Bond prices are down! Stock prices are up! Gold prices are down! Oil prices are up!
And if you look at your own portfolio, you might become even more confused. Why do I own a money fund yielding 0.01%? When did I buy that technology fund, and why hasn't it broken even yet? Did I really buy Apple at $700?
All of which might lead you to consider hiring an investment adviser. Nothing wrong with that. But before you do, you might need to consider a few things, like the fact that they can be wrong; they can be expensive; and they might not actually want to talk to you.
People in the financial services industry like to mock individual investors for investing in the wrong thing at the wrong time. To cite just one example: Investors have poured $1 trillion into bond funds since the bull market in stocks began in March 2009. At the same time, investors have yanked $203 billion from stock funds. Silly investors!
There are two problems with this argument. The first is that investing in bond funds hasn't been such a bad idea. It just hasn't been as good as investing in the average large-company blend stock fund, which has gained an average 19.9% annualized return since March 31, 2009. Nevertheless, during the same time, the average government securities fund has gained 7.3%, and the average high-yield junk-bond fund has gained 16.9%. Those are respectable returns, without ups and downs that sometimes leave stock investors slack-jawed and buggy-eyed.
The second is that most of these morons who bought bond funds have done so with advisers by their sides. According to Strategic Insight, which tracks the funds, about two-thirds of all mutual fund assets are controlled by advisers, and about three-quarters of new money flowing into funds is guided there by advisers.
The lesson here isn't that advisers (or investors, for that matter) aren't stupid; they're human. This has been a particularly terrifying market cycle. About three people bought stocks in March 2009, and two of them are lying. Furthermore, advisers have to contend with clients who absolutely refuse to invest one cent more in stocks when it's a bear market. You can advise all you want to, but you need a client's consent, in most cases, to get them to follow through.
The next consideration when hiring an investment adviser is expense. Investment expenses reduce your returns over time, and if you're paying 1% of your assets to an adviser, you're reducing your returns by 1% a year, all other things being equal. Over time, that can be a considerable drag. A $100,000 account that earns 7% a year will be worth $363,000 after 20 years; one that earns 6% will be worth $59,000 less.
There's nothing nefarious about an adviser wanting to be paid, any more than you wanting to be paid for your work. If your adviser keeps you from buying Apple at $700 or a technology fund in 2000, she's done a good job. She's done a good job if she sets an asset allocation between stocks, bonds and cash that suits your needs and your temper, and keeps you to it. The cost of riding a stock down 50% or a fund down 80% is far more than what you'll pay her otherwise.
All of which brings us to the third point, which is that a $100,000 account may not get you a lot of attention from an adviser. A 1% fee means your adviser will get $1,000 from your account, and, if she grows it 6% a year for 20 years, $3,025. The family with the $3 million trust will get far more attention, for obvious reasons.
What's an investor to do?
• Don't be ashamed or reluctant to ask advice. Even a lousy adviser could do less harm to your portfolio than your Uncle Fred, who has a fondness for illiquid income partnerships. And some people have about as much interest in finance as they do with studying varieties of native succulents. Nothing wrong with that, either, but if that's the case, it's probably worth the money for advice.
• Check out online calculators offered by major mutual fund companies. Fidelity, Vanguard and T. Rowe Price offer thoughtful and easy-to-use calculators. They're a good way to start thinking about your portfolio, bearing in mind that these companies are, after all, in the business of managing and collecting assets.
• Consider an asset allocation fund. These funds will tailor their holdings according to your temperament (aggressive, moderate, conservative), or according to the date when you plan to retire. They're one-size-fits-all products, but they're better than your Uncle Fred and your own base instincts, in many cases. Moderate allocation funds have earned an average 6.24% the past five years, according to Morningstar, vs. 7.48% for large growth funds and 5.8% for intermediate-term bond funds.
• Consider investing in a few hours of a planner's time, rather than an ongoing percentage arrangement. If all you're looking for is a portfolio checkup every few years - and for many people, that may be all that's necessary - consider hiring a planner on an hourly basis, just as you would hire a lawyer. It will cost you, but the information you get will probably be worth your time. The Garrett Financial Planning Network will let you find an hourly planner who doesn't take commissions. www.garrettplanningnetwork.com.
Any time you seek a financial planner, you should check the planner and the firm carefully. FINRA, the independent securities industry regulator, offers a broker check service; so does the Securities and Exchange Commission.
Basic personal finance isn't brain surgery, or beyond the average person's abilities. But there's no shame in seeking help, either. Just remember that if you want help, you're going to pay for it.