Back in college, I learned the effectiveness of the KISS principle training in the gym. Basic compound movements gave the best value for my time in the gym, and the routines were easy to remember. After 30-40 minutes of basics, I was back to my studies feeling empowered.
Investing is like fitness. The simple path to fiscal fitness is like the path to physical fitness.
Investing doesn’t have to be complicated.
Although brokers would have you believe otherwise, investing doesn’t have to be complicated or expensive. The more complicated investing is made to look, the more money these stock brokers make… from your activity.
Investment advisors typically make money when their clients buy and sell securities. They also earn a percent of your total assets under management which is often at least 1% and can be as much as 2%. Over the course of your investing life, this compounds. People don’t realize that they may be paying hundreds of thousands of dollars for their investment advice.
If a person is really timid, a registered investment advisor (RIA) charges a fee for services, not a commission for your activity. In addition, an RIA acts in the “best interest” of his or her clients. A broker merely needs to provide “suitable” advice. It just so happens that that advice usually results in the highest commissions.
You might be wondering why people don’t always use an RIA. right? In my opinion, when people use an RIA, they see the money leaving their account as soon as the advice is given. Using a broker keeps the fees “invisible.” It’s an emotional decision, rationalized after the fact.
Finally, depending on the time period, 80%-90% of actively managed portfolios perform below the market.
The Simpler Path
What if instead of paying someone to badly pick individual investments in stocks and bonds, we just picked them all? How can you buy all the securities in the market?
When you buy a total stock market index funds (like VTSAX), you own a piece of over 3900 publicly traded companies in the US. Similarly, you can own the corporate debentures of over 10,000 companies with VBTLX.
Instant diversification! Plus, you’ll only be paying 0.04% and 0.05% expense ratios, respectively. That just $4 or $5 per $10,000 invested. And you’ll beat 4 out of 5 professional money managers. (Maybe 5 out of 5 if you include fees!)
VTSAX and VBTLX are for admiral shares, so there is a minimum investment. Not a problem. In the beginning we had to use the equivalent ETFs – VTI and BND – until we hit the minimum amount of $3000.
Okay, you’re sold on total market index funds. But your employer does not offer Vanguard investments. What do you do. You study the funds that you do have access to. Whether it’s Fidelity or Schwab or whichever, they offer something comparable to a total market index fund.
For example, Fidelity has the FSKAX. At the very least, they should offer an S&P 500 index fund. (My wife uses FXAIX in her 403b.) The S&P 500 represents about 80% of the total stock market index. These funds mirror very closely the total stock market index.
As Always…
Thanks for reading! I hope this information provides food for thought. Remember that I am not a certified financial planner, a certified public accountant, a licensed real estate agent, etc. My content is for educational purposes. I am a math educator who happens to have a finance degree. Like they say, never take financial advice from a math teacher! (Do they really say that?)
But you should spend less than you earn, invest the difference, and stay out of debt!
I would so appreciate your sharing my content with anyone you feel could benefit. And if you would like a free exploratory conversation or just want to shoot the breeze about personal finances, call me and leave a message or send a text to 570-731-0425.