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Mister Fister
Mister Fister Reader
1/20/17 10:55 a.m.

The average financial advisor will outperform the average DIY investor by 2.6%, annualized. This 2.6% figure includes their fees as already paid (so if they're billing 1% they'll actually outperform by 3.6%).

I work with someone. I am very satisfied by his performance. I would highly recommend working with someone who will meet you at a minimum twice a year. I meet with mine every quarter.

The once a year or never meet guys aren't worth your time - you might as well just throw your E36 M3 into index funds, cross your fingers, and pray.

What these people do is twofold - yes, they will rebalance your portfolio routinely and move overweight into underweight categories, based on your goals and timeline.

But they also provide an emotional base. They have the discipline to keep you in when you need to be in and get you out when you need to get out. Remember, buy when people are selling and sell when people are buying. Easier said than done - these guys are pros at it.

mazdeuce
mazdeuce UltimaDork
1/20/17 11:03 a.m.

In reply to Mister Fister:

They outperform individual investors because individuals are historically dumb emotional animals. They don't outperform the market. The closer you get to market returns (low fee buy and hold) the more likely you are to beat an active advisor.

Robbie
Robbie GRM+ Memberand UltraDork
1/20/17 11:15 a.m.

Fi-du-ci-ary.

Say it with me folks. If you get someone to manage your money, make absolutely sure they are one of the above.

(That means they are legally bound to act in your best interest, like all doctors and lawyers).

dculberson
dculberson PowerDork
1/20/17 11:24 a.m.

In reply to BoxheadTim:

The share price of a stock goes down by exactly as much as the dividend amount. So if a stock is at $50 and pays out a $.50/share dividend then the share price immediately upon dividend payment is set at $49.50. That's how dividends work. I didn't know that until well after I owned some dividend focused stocks. Whoops!

While the mechanism of payout is different in dividends vs selling shares, they are functionally equivalent. Both are methods of having some of your investment in a company returned to you.

Dividend stocks do not immediately return to their pre-dividend value and it's not guaranteed that they will. They grow the same as any other stock but with an automatic reduction in value where that reduction of value is paid out to you. And that return of value is taxable even if you use it to buy more stock in the same company.

They also don't return more on average than any other stock when looked at long term and on a total return basis. the market has priced the dividends.

mazdeuce
mazdeuce UltimaDork
1/20/17 11:33 a.m.

In reply to dculberson:

That's not right at all. Stock price is set by the market. Gains are reduced because dividend companies grow slower because profits are paid out rather than re-invested or held as cash. Dividends make the company smaller so it's worth less, that's all. Companies can and do increase in value on the day they pay dividends. Divedends are simply a cost of doing business for those companies that pay them.

mfennell
mfennell Reader
1/20/17 11:41 a.m.
Hungary Bill wrote: My grandparents sold their house back in 2003-ish and invested the money through an investment manager we'll call "Todd". (I think the account is around $200k? ish) since then they tell me they've withdrawn $1000 a month and still have their original balance. This may be exaggerated a bit, I dunno since I know nothing about the potential returns of investments.

https://dqydj.com/sp-500-return-calculator/

I don't think Todd did such a great job.

Your grandparents have withdrawn at a 6% rate. According to the calculator I linked to above, the average return from January '03 to today is just under 9%. IOW (check my math!) they should have expected that $200k to grow to possibly as much as $300k despite the $1000/mo withdrawals. if they had done nothing but leave it in SPY, an S&P 500 ETF.

I ignored taxes in this calculation.

I have had two money managers who charged 1%. Ultimately, I have found I perform consistently better handling it on my own. I would be ahead if I had just put the money in SPY (SPY is currently 40% of my portfolio). I will concede that I did pretty well in the 2008 bloodbath buying a number of individual stocks on the advice of one of the managers.

dculberson
dculberson PowerDork
1/20/17 11:42 a.m.

In reply to mazdeuce:

I'm not clear on which part of my post you're saying isn't right.

Read this:

http://www.investopedia.com/articles/investing/091015/how-dividends-affect-stock-prices.asp

But the key part is this: "On the ex-dividend date, the exchange reduces the stock price by the amount of the dividend." Yes the share price can go up and down on any day like any other stock, but the dividend is definitely taken out of the share value on the day it is paid.

BoxheadTim
BoxheadTim GRM+ Memberand MegaDork
1/20/17 11:54 a.m.
mazdeuce wrote: In reply to Mister Fister: They outperform individual investors because individuals are historically dumb emotional animals. They don't outperform the market. The closer you get to market returns (low fee buy and hold) the more likely you are to beat an active advisor.

This. Important distinction. There are some good stats out there that show the average investor, usually due to ill-timed jumping and out of the market, tends to get something like 40-60% of the actual market gains.

Morningstar actually lists investor returns separately from the actual fund returns on their fund analysis pages.

Hungary Bill
Hungary Bill GRM+ Memberand UberDork
1/20/17 12:04 p.m.
mfennell wrote: I don't think Todd did such a great job.

You know, I had a feeling that was going to be the case.

I took JR's advice

jr02518 wrote: So, buy the four things you do every day: Turn on the lights, Use the telephone, Buy gasoline and Put food on the table.

and was looking at Vanguard's ETF performance. It appears to me like I could have invested in their Consumer Staples, Consumer Discretionary , S&P 500 (a Mrs. Hungary favorite), and the Utilities ETFs and any one of them would have doubled my investment over the course of the last 10 years*** without me adding a single penny.

*** except the S&P 500 which only tracks back 6 years but still doubles the initial investment.

What are y'all thoughts about putting money into those 4 (mentioned above)? Also interested in other ideas as well

Thanks!

Robbie
Robbie GRM+ Memberand UltraDork
1/20/17 12:05 p.m.
dculberson wrote: In reply to mazdeuce: I'm not clear on which part of my post you're saying isn't right. Read this: http://www.investopedia.com/articles/investing/091015/how-dividends-affect-stock-prices.asp But the key part is this: "On the ex-dividend date, the exchange reduces the stock price by the amount of the dividend." Yes the share price can go up and down on any day like any other stock, but the dividend is definitely taken out of the share value on the day it is paid.

me = not expert
/preface

It seems to me that that may be true for some dividend paying companies, but not all. The value of the stock is not necessarily directly related to the cashflow of the business. Think of two companies with a similar stock price and market cap. One has huge revenues but huge debt load and liabilities (like Ford). The other has small revenues but small debt load (like an internet startup). If ford pays out 100M in dividends, that would theoretically affect its balance sheet and therefore stock price much less than it would a small startup who made the same dividend payment.

So I guess my point is if the dividend payer elects to use its current market capital to pay the dividend then yes, your point sounds plausible. However, if the company elects to fund its dividend payment through another means, then that will not necessarily have a linear effect on stock price.

mfennell
mfennell Reader
1/20/17 12:27 p.m.
Hungary Bill wrote: What are y'all thoughts about putting money into those 4 (mentioned above)? Also interested in other ideas as well Thanks!

I'm friendly with a retired hedge fund manager. He has some nice cars. :) The standard advice he gives to non-professionals is 2/3 S&P500, 1/3 blended foreign ETF (he didn't say anything specific).

dculberson
dculberson PowerDork
1/20/17 12:30 p.m.

In reply to Robbie:

Companies have no method to fund dividends other than cash on hand or debt. What else would they use? Both affect the market value of the company. So it's automatic - the exchange that they are traded on automatically takes the dividend amount out of the share value the day the dividend is paid. That's what the article I linked to said. This isn't controversial or a "sometimes maybe" thing, it's just how it's done.

mtn
mtn MegaDork
1/20/17 12:31 p.m.
mfennell wrote:
Hungary Bill wrote: What are y'all thoughts about putting money into those 4 (mentioned above)? Also interested in other ideas as well Thanks!
I'm friendly with a retired hedge fund manager. He has some nice cars. :) The standard advice he gives to non-professionals is 2/3 S&P500, 1/3 blended foreign ETF (he didn't say anything specific).

I'm not a professional, but have spent probably more time researching this than a lot of professionals. That is pretty similar to what I ended up with in my IRA. My 401k would have been similar if not for the fees on the options that I have.

But I'm also young and have a high tolerance for risk.

pheller
pheller PowerDork
1/20/17 2:03 p.m.
BoxheadTim wrote: * I do think you should consider putting part of your money into a Roth IRA if you really intend to leave it somewhere for 5+ years. With a Roth - as opposed to a regular IRA - you can still withdraw your contributions without penalties, you just have to leave any gains in the account. The big advantage is that you don't have to pay income and other taxes on the gains when you withdraw them in retirement. I actually park the part of the emergency fund I hope I never have to use in a Roth for that exact reason.

Could someone help me clarify this?

So lets say I open a ROTH IRA with $10,000.

It makes me roughly $500 a year, or 5%.

I can then pull out the $10,000 without fees as long as the $500 sits in the account?

Am I getting that right? If that's the case, why wouldn't everyone in America do this? Or rather, what's the advantage of using a ROTH IRA over a normal investment fund?

mazdeuce
mazdeuce UltimaDork
1/20/17 2:16 p.m.

In reply to pheller:

I'd have to check the exact rules, but as to why people don't do this, it's because they want the account to continue to grow. If you leave the money in there then next year you have $10,500 generating returns for you. This is good. That's why the charts for my retirement accounts show that half of the money in there is from my contributions and half is from growth. There were a couple of scary years but watching growth over the last 8 has been worth it.

BoxheadTim
BoxheadTim GRM+ Memberand MegaDork
1/20/17 2:29 p.m.

Couple of reasons, I would say. There is a contribution limit of $5500 annually. Plus, most people don't know about this and choose a regular IRA for the tax deduction - you can't do the penalty free withdrawal on a regular IRA.

Not to mention that people also like the 'R' part and don't want to touch the money before retirement.

mazdeuce
mazdeuce UltimaDork
1/20/17 2:38 p.m.

The downside being there are income limits to contributing to a Roth.
That means you need to contribute to a traditional IRA and then do a Roth conversion and pay the taxes on it. It's an OK problem to have, but things do get weird eventually.

NOHOME
NOHOME PowerDork
1/20/17 2:43 p.m.
Hungary Bill wrote: We already have a target 401k through my work (that matches a portion of the contributions), and a target IRA through our bank. We were looking for investment income to eventually supplement our own income (like we pump money into it now while we have a little excess, so we can draw from it later when we're running a deficit).
Mazdeuce said: You're young and smart enough to learn to do it properly yourself.
in the 5-minutes (see dilbert) i've looked into this, I'm really leaning toward doing this myself. Vanguard came pretty highly recommended and their page allows me to track the performance of their funds. I'm really thinking this might happen I just need to pick which fund(s) I want to put it in to. Exciting and scary! Right now I'm liking Vanguards high dividend yield fund because of its consistent (but a bit slow) gains. Should I spread the cash across several vanguard funds, or is it "less is more"?

The highest praise I can give Vanguard is that they are not allowed into the Canadian Mutual fund market. If they were,and they kept their commissions as low as they do in the US, they would be the only guys left after a year.

M2Pilot
M2Pilot HalfDork
1/20/17 5:40 p.m.

It seems that I've read somewhere recently that all financial advisors will be required to be fiduciary at some point this year. I've no idea how that reg would be enforced.

There's a good bit of good discussion about your issues on the Mr. Money Moustache forums.

STM317
STM317 HalfDork
1/20/17 6:11 p.m.

In reply to Mister Fister:

A robo-advisor like Betterment or Wealthfront will do everything that your guy is doing, with lower fees. All you have to do is tell it your level of risk tolerance.

Of course, you could do it yourself too, and cut out the robo-advisor's fees too, provided you have the discipline to take a "buy and hold" approach and avoid freaking out if things start to go south.

Schmidlap
Schmidlap HalfDork
1/21/17 6:03 p.m.

One thing not to forget about when investing is the tax implications of what you're investing in, and where you're investing in it, and that's where a good advisor can really earn their commission. Holding the right investments (stocks vs bonds, US vs international) in the right accounts (401K vs IRA vs fully-taxed account) can get kind of complicated. Make sure you research that too, and make sure if you go with an advisor that they understand your situation and your goals (saving for retirement, saving for a down payment on a house, saving for college for your kids, etc).

Basil Exposition
Basil Exposition SuperDork
1/21/17 7:51 p.m.

I've got an MBA and I've worked in commercial banking for 35 years. I used to have my money with an advisor in a managed asset account where the advisor got a fixed percentage to manage my investments. Then I discovered Vanguard and yanked everything from her and put it in various Vanguard index funds. Between what she was charging me and the higher management fees in non-Vanguard vs Vanguard funds, I was losing around 2% yield on my money. That adds up to a E36 M3load over time. While the funds she put me in were OK investments, no way was she adding sufficient value to justify her fee. And, sorry, but there is plenty of evidence that, over time, virtually no one outperforms the market.

I became a bogle head and wished I had become one years earlier. There is a reason why Vanguard got 3 to 4 billion in investments moved to them last year and why there has been a giant sucking sound on Wall Street in their direction.

Johnboyjjb
Johnboyjjb Reader
1/22/17 8:07 a.m.

The current Money magazine has a good description of investing and lists the Money 50. I only mention this because there are some funds that are similar to the Vanguard fund with even lower expenses. You could also play with the Vanguard 4 fund tool. Among the FIRE community, VTSMX and it's like seem to be quite popular.

SVreX
SVreX MegaDork
1/22/17 8:34 a.m.

When looking for a "sure thing", the first guys to cross off your list are the ones who are a sure thing.

Hungary Bill
Hungary Bill GRM+ Memberand UberDork
5/31/17 4:18 a.m.

Update:

I've been watching the ETF's I mentioned earlier on Vanguard's website. Basically on the last day of each month I grab snapshot of how things are doing (DOW average, and then the individual ETF's I picked).

Had I started investing when I started this thread I would have seen almost a 6% average gain on my initial investment (actual gain would be 5.784%). I thought that was pretty decent considering I'm just a board idiot with a keyboard

I think in about 6 or so months I might have cajones big enough to actually put some of my money where my mouth is

Cheers guys.

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