Last Updated Aug 14, 2009 12:34 PM EDT
Bill used to think most people could handle their investments with little or no assistance, since "After all, the flesh was willing, the vehicles were available, and the math wasn't that hard." But there's simply more to investing than that. I agreed with his post on his Web site Efficient Frontier that there are four requirements to be a successful investor:
- "An interest in investing. It's no different from cooking, gardening, or parenting. If you don't enjoy it, you'll do a lousy job. Most people enjoy finance about as much as Carmela Soprano enjoys her husband's concept of marital fidelity."
- "The horsepower to do the math ... The Discounted Dividend Model, or at least the Gordon Equation? Geometric versus arithmetic return? Standard deviation? Correlation,for God's sake? Fuggedaboudit!"
- "The knowledge base -- Fama, French, Malkiel, Thaler, Bogle, Shiller -- seven decades of evidence-based finance back to Cowles. Plus, the 'database' itself -- a working knowledge of financial history, from the South Sea Bubble to Yahoo!."
- "The emotional discipline to execute faithfully, come hell, high water, or Bob Prechter. Mr. Bogle makes it sound almost easy: 'Stay the course.' Alas, it is not."
While there are individuals who can do it themselves, they're few and far between. Unfortunately, as the academic research demonstrates, far too many are overconfident of their abilities. A good financial advisor adds value by:
- Developing an investment plan that provides the greatest chance of achieving your financial goals without exceeding your ability, willingness or need to take risk.
- Integrating your investment plan into an overall estate, tax and risk management plan.
- Helping you act like a postage stamp -- sticking to your plan until you reach your financial goal.