Yesterday, I examined the four arguments made by two of my favorite financial experts and writers, William Bernstein and Larry Swedroe. Their take was that investors should use financial advisers. I disagreed with three out of four of their arguments.
I did agree with them that most investors don't have the discipline to rebalance and avoid chasing the latest hot investment. Considering the vast majority of investment advisers don't either, I must differ on the value that could be added here by professionals. The sad truth of my profession, as noted in a forthcoming study in The Review of Financial Studies entitled "Assessing the Costs and Benefits of Brokers in the Mutual Fund Industry," is that investors going it alone do better on average than those using an adviser. Why? Mainly because the adviser merely sells what they have been paid to sell. When it comes to investing, I am a big believer in the minimalist approach, by which I mean keeping it simple. Yet the distinction I labor day in and day out to make is that simple doesn't equate to easy. In order to embrace the benefits of low-cost, broad financial investments, investors must be willing to surrender the sexy rush that comes with chasing complexity. And recognizing the value of rebalancing requires investors to go against every human instinct we have. This is why there are very few individuals or investment advisers that can actually execute with brilliant simplicity.
I'm of the opinion that most investors and investment advisers shouldn't be in the stock market at all. After paying penalties for expenses and emotions, the depressing truth is that most will earn less than a low cost bond-like return.
So my take is that, whether you go it alone or use an investment adviser, do what William Bernstein, Larry Swedroe, and I often write about.
- Keep costs dirt low. As John Bogle says "you get what you don't pay for."
- Diversify - own the entire market.
- Avoid the herd - As Warren Buffett says "be fearful when others are greedy and greedy when others are fearful."
Avoiding our predictably irrational behavior also isn't easy. It can, however, be accomplished by a good investor or investment adviser who understands both the market and our destructive behavioral traits in investing. Unfortunately, both happen to be fairly rare.