All about investments and financial advsors (1 Viewer)

[Roslyn Mowbray]

I practically grew up with frugal parents who have always been interested in saving for all sorts of things, be it for emergency, for leisure, for retirement..Name it, they have it. Recently, my dad has been asking me to read about investing into mutual funds and blue chip stock market. He said, this is a good start. He even introduced me to a friend who is a financial advisor..My dad has been so passionate about this whole thing really.

My question is, why do we even need financial advisor in the first place when in fact we can already know the risk we have in investing. I do not really see the need because basically, what they know is also the same info right?

Your thoughts on this?

 

[Chronost]

I practically grew up with frugal parents who have always been interested in saving for all sorts of things, be it for emergency, for leisure, for retirement..Name it, they have it. Recently, my dad has been asking me to read about investing into mutual funds and blue chip stock market. He said, this is a good start. He even introduced me to a friend who is a financial advisor..My dad has been so passionate about this whole thing really.

My question is, why do we even need financial advisor in the first place when in fact we can already know the risk we have in investing. I do not really see the need because basically, what they know is also the same info right?

Your thoughts on this?

You need to understand that Finance and investments are really, really broad - Financial advisors do not just talk/sell investing - they are essentially there to help you grow your money - they help you budget and save - which seems exactly what your parents like to do. They are able to offer a range of different products that your parents likely have not yet researched or known about - and lastly they do this as a full-time job so most likely know the type of situation your parents are in and the best (ahem *most commission*) choices for them.

You can do lots of research and do things yourself - the financial advisor is there doing the same thing with more experience and for money instead (so you save time)

 

[xetamine]

Do your own research and you will beat investment advisers 100%. The reason is simple: Investing is a zero sum game. The more fees you pay, the less returns you can get. Just go with low cost index funds like Vanguards.

I suggest reading Jack Bogle's Common Sense book on investing. It'll change your mind on how you approach investing, and you will never touch a financial adviser, managed fund, hedge fund, or anything with an expense ratio of more than 0.25% ever again.

 

[Chronost]

Do your own research and you will beat investment advisers 100%. The reason is simple: Investing is a zero sum game. The more fees you pay, the less returns you can get. Just go with low cost index funds like Vanguards.

I suggest reading Jack Bogle's Common Sense book on investing. It'll change your mind on how you approach investing, and you will never touch a financial adviser, managed fund, hedge fund, or anything with an expense ratio of more than 0.25% ever again.

It's really short sighted to say you can beat investment advisors 100%, especially the likes of certain hedge funds and private equity funds - not to mention the vanguard "index funds" you mentioned are managed funds by Vanguard

More fees has no correlation to what returns you can get - it can be higher or lower then your investment -depending on the fund and picks and a range of other factors.

One book does not mean your more of an expert in investing compared to someone who's an expert in the field who's probably read x10 more books then you and had many more years of trading experience then you.

 

[xetamine]

It's really short sighted to say you can beat investment advisors 100%, especially the likes of certain hedge funds and private equity funds - not to mention the vanguard "index funds" you mentioned are managed funds by Vanguard

Not at all. There have been numerous studies conducted and all unanimously have found that index funds beat the vast majority of index managed funds. Also, Vanguard is an index fund, it is not actively managed. Australia just calls "mutual funds" (the correct and internationally accepted terminology) as "managed funds" (which is ripe for confusion, as evident in your post).

Over 16 years, index funds beat 88% of managed funds, according to a study conducted by Rick Ferri and Alex Benke. http://www.rickferri.com/WhitePaper.pdf

Vanguard's own study show similar results, with index funds beating 85% of managed funds over a 15 year period. https://personal.vanguard.com/pdf/ISGIDX_032015_Secure.pdf

For comparison, if you chose investments by flipping coins, you would beat the index 50% of the time!

You might think, "hey at least 12-15% of managed funds outperform and produce positive alpha, right?" Wrong. Most of these lucky managed funds outperformed due to luck. (Remember: Just flipping coins will let you beat the index 50% of the time. Active managers get BEATEN by the index 88% of the time.)

What percentage of managed funds consistently outperform the market, and has a statistically significant alpha? Take a guess first and then read on.

S&P conducted a study to try and find this.

A study by S&P Dow Jones Indices looked at 2,862 actively managed, domestic stock mutual funds and pulled out the ones that were top performers in the 12 months starting March 2009, when the market bottomed out and the bull market began.

It then looked at which of those funds stayed in the top 25 percent for four years, through March 2014. Jeff Sommer explained the results in the New York Times this weekend:

Just two funds — the Hodges Small Cap fund and the AMG SouthernSun Small Cap fund — managed to hold on to their berths in the top quarter every year for five years running. And for the 2,862 funds as a whole, that record is even a little worse than you would have expected from random chance alone.

In other words, if all of the managers of the 2,862 funds hadn’t bothered to try to pick stocks at all — if they had merely flipped coins — they would, as a group, probably have produced better numbers.

https://www.washingtonpost.com/news...any-mutual-funds-ever-beat-the-market-hardly/

Yes. 2 out of 2862. That's less than 0.1%.

More fees has no correlation to what returns you can get - it can be higher or lower then your investment -depending on the fund and picks and a range of other factors.

That's incorrect, and has been proven correct on a both quantitative and qualitative level. Studies have shown a strong negative correlation between fees and returns. http://econ.berkeley.edu/sites/default/files/Kremnitzer.pdf The higher fees, the lower net returns.

Why is this? It's because developed markets are very efficient, and the price of a security tends to almost perfectly reflect its risk / reward, relative to the overall asset class. There is very little "picking out hidden winners" that can be done, because these opportunities are arbitraged away by the market rapidly. So when active fund managers cannot select better stocks except through luck, the more fees they charge the worse you'll do.

One book does not mean your more of an expert in investing compared to someone who's an expert in the field who's probably read x10 more books then you and had many more years of trading experience then you.

You are correct. Managed funds do outperform indexes by a very small amount (~0.15%), through exploiting the very small inefficiencies in markets. However, their fees (2-3.5%) completely decimate their alpha and result in a losing proposition.

I can confidently state that index investing will beat actively managed funds. There's a wealth of unanimous research and studies on the topic, go do some research. I haven't even mentioned the tax advantages to passive index investing (long term CGT vs short term CGT; the government is effectively giving you a 50% discount on your taxes if you go index!), the higher buy/sell spread of managed funds, etc.

It doesn't take more than several hours of research to conclude that you'd be a fool to invest in a managed fund. Unfortunately, a fool and his money is easily parted.

 

[xetamine]

You might also be interested in what arguably the most experienced investor alive today, Warren Buffet, has to say:

What I advise here is essentially identical to certain instructions I’ve laid out in my will. One bequest provides that cash will be delivered to a trustee for my wife’s benefit. (I have to use cash for individual bequests, because all of my Berkshire shares will be fully distributed to certain philanthropic organisations over the 10 years following the closing of my estate.) My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors — whether pension funds, institutions or individuals — who employ high-fee managers.

http://www.businessinsider.com.au/warren-buffett-recommends-sp-500-index-2014-3

Ok, not just say, but that's literally in his will. Oh, and he recommends Vanguard.

Think about it for a second: If Warren Buffet knows an active manager that he trusts will outperform the market, he'd leave his will to them. Even Warren Buffet does not know someone who can consistently beat the index.

Do you think you do?

 

[Chronost]

Obivously you need to study my words abit more - I've already read all this research about "index funds" which btw are still managed funds, and also index funds, you are not wrong or right.

Secondly we were talking about financial advisors not about "managed funds" - in addition your "100%" is wrong as well, even stated indirectly by yourself.

This whole topic about funds is actually irrelevant too since this thread is about financial advisors who are just as likely to recommend Vanguard as other picks.

I've still made alot more investing individual stocks then index funds - index funds are for the less risk adverse who have no time to research actual stock picks - Just saying, that 100% you stated is so short sighted.

I will say your right about the fees part - my meaning to what i meant was different, but realised is irrelevant to this

 

[xetamine]

Obivously you need to study my words abit more - I've already read all this research about "index funds" which btw are still managed funds, and also index funds, you are not wrong or right.

Secondly we were talking about financial advisors not about "managed funds" - in addition your "100%" is wrong as well, even stated indirectly by yourself.

This whole topic about funds is actually irrelevant too since this thread is about financial advisors who are just as likely to recommend Vanguard as other picks.

I've still made alot more investing individual stocks then index funds - index funds are for the less risk adverse who have no time to research actual stock picks - Just saying, that 100% you stated is so short sighted.

I will say your right about the fees part - my meaning to what i meant was different, but realised is irrelevant to this

I apologise for being a little blunt, but youre not special in that you can get an alpha of more than 0.15% that the best stockpickers can get. As investing in developed markets is primarily random walk based, short term out performance is not statistically significant.

I am not trying to dismiss stockpicking altogether, but people need to be aware of the reality. Of course, if rigorous research, statistics, and established financial theories don't convince you, please continue what you're doing so my index funds make more money.

 

[Chronost]

I apologise for being a little blunt, but youre not special in that you can get an alpha of more than 0.15% that the best stockpickers can get. As investing in developed markets is primarily random walk based, short term out performance is not statistically significant.

I am not trying to dismiss stockpicking altogether, but people need to be aware of the reality. Of course, if rigorous research, statistics, and established financial theories don't convince you, please continue what you're doing so my index funds make more money.

I've been stockpicking with real money for a good 2 years now - I don't necessarily consider that short-term but definitely not long term, that being said I've made well well over the average of any fund gains that have been had, and I could sit on this for 8 years and the gains would still be larger then 8 years in an index fund, all you need to is good constant research on a few stocks and you just need to trade them at the right value and know the market and their pattern.

Honestly most of the oldies are in index funds, and the all too common whirpool user.