It astounds me how many of my relatives and friends really do not have a clue about financial management. The American educational system should take time out from socialist indoctrination to teach something about financial responsibilty. And Bernie should be required to attend. Anyway...
Recently I became executor of an estate, the primary asset of which is a brokerage account. The first three things I did once I got control of the account was sell everything (about 10 mutual funds and exchange-traded funds), buy T-bills, and remove the financial advisor from the account. Since the plan is to pay out the account in six months, it was inappropriate to remain invested in equity funds, which can decrease in value. I dismissed the advisor because the estate doesn't need to pay a 1% advisory fee for T-bills. In looking at transactions done by the advisor in previous months, I felt even more secure in my decision. They screwed up badly selecting a supposed low-risk fund that managed to lose 50% of its value one day, then they spent the next month making lots of trades to rebalance the portfolio. Even though it was a fee-only advisor, they racked up considerable trading costs in a short time.
About 25 years ago, a friend of mine just starting out on her own as an advisor wanted to add me to her account list just to inflate the amount of assets under management. She wouldn't charge a fee and I would still control my account. She was putting clients into mutual funds, nothing exotic. After a few weeks she "fired" me because I was options trading, which didn't fit with the investment style she was pitching to prospective clients.
Ten years ago after I had my current house built, the salesman for the builder found a new job selling investments and tried to cold call me. He tried to ask me questions about my financial situation and my only reply was, "It's taken care of."
One of my favorite TV shows is American Greed on CNBC. Often the cautionary tales involve a supposed financial expert who takes the money entrusted to him and blows it on gambling and hookers, perpetuating the scheme by sending out phony statements showing spectacular results.
All of the above illustrate why I am not going to trust someone else to manage my finances. If I was 30 years old and had $100,000 saved up (which when I was 30, I did not), I would a open a brokerage account at Vanguard and invest in just a few issues. I would open a brokerage account rather than a mutual fund account so i could buy ETFs instead of mutual funds, and T-bills & CDs rather than bond funds. Vanguard ETFs have lower fees than the corresponding mutual funds, and I buy T-bills and CDs because I have a deep mistrust of bond funds. A $100,000 portfolio might look something like this: $10,000 in cash, $15,000 in a six-month T-bill or CD ladder, $50,000 in the Vanguard Total Stock Market ETF (VTI), $20,000 in the Vanguard All-World Except US ETF (VEU), and $5,000 for 38 shares of Johnson & Johnson (JNJ). For the ETFs and JNJ, I would select the option to reinvest dividends.
Structuring the account this way accomplishes several things:
- It teaches the mechanics of buying ETFs, stock, T-bills and CDs.
- The ETFs spread the investment across thousands of US and international companies.
- The cash and the ladder provide an emergency fund.
- Buying a few shares of JNJ is an introduction to the world of dividend investing.
I would add money to the account as often as I could. I wouldn't look at the account every day. I would ignore the news. Selling on a downturn is the stupidest thing anyone can do. I lost a lot of money on paper in 2007-08. But then the market turned around and I got it all back, and then some. You can't predict the downturn, you can't predict the recovery, and neither can the so-called experts.
So how often should you look at an account? If you set up a T-bill/CD ladder, you'll have to go in every few months to reinvest proceeds as the bonds mature. At the same time you can consider adding to your other positions if you have built up some cash.
I don't like bond funds, particularly now, because they lose value when interest rates rise (interest rate risk). I've been wrong for the past 10 years until just recently, but I think rates will come off historic lows and return to "normal," which in my mind is short-term rates of 4-5% (currently 2%). When you buy short-term individual issues, there is no interest rate risk. If interest rates continue to rise, you get higher rates each time you reinvest. Once rates approach 5%, I would think about stretching out the terms to 2 years or 5 years. I still reminisce about getting a 5-year Treasury bond yielding 7.7% in the mid-90s.
In my example starting at age 30, as I got older I would capitalize on experience with JNJ by adding other dividend stocks. The only investment advice I pay for is the Dividend Investor newsletter from Morningstar. You might be able to find it at your local library. One stock that newsletter recommends is Realty Income (O), which invests in real estate. "O" might own the Walgreens location that you drive by every day.
In the real world, do I follow the advice to my younger self by owning just a few things and holding them forever? No, not really, but I have owned JNJ shares for more than 20 years. Managing your own finances should be guided by a clear strategy, but that doesn't mean it will easy paint-by-the-numbers. It is a learning process, which is why many feel overwhelmed, give up, and just turn it over to a supposed expert. I know this happens, but I find it hard to understand. Your financial position determines your quality of life in retirement. How do you turn that over to a stranger? At the very least, if you do hire someone, read whatever they send you, don't be afraid to ask questions, and don't be afraid to ask followup questions.
Disclaimer: The above is presented only as an example. Your circumstances will vary and you are responsible for your own life. I do have a Vanguard brokerage account and own VEU, JNJ and O, along with lots of other stuff that I accumulated by not trusting some else to take care of it.