The Tricky Part of Investing

Like many endeavors, investing is comprised of two very different parts:  first, setting out a strategy and sticking to the strategy and secondly, putting the strategy in place.  The second part is a hurdle for many investors.

The strategy I recommend, at least for 90% of investable assets, is pretty straight forward and comes endorsed by the likes of John Bogle, Burton Malkiel, Charles Ellis, and many other stalwarts in the investment field.  It is comprised of 3 parts:  get an appropriate asset allocation (i.e., percentage of stocks and bonds), use low-cost, well-diversified funds, and monitor and rebalance.  These 3 steps have been described in numerous posts here as well as by those mentioned above.

The DIY investor who can put this strategy into effect can save investment management fees which, in turn, typically run between 1% and 2% of AUM (assets under management)!  Over the longer term, these fees can subtract meaningfully from the nest egg.

But getting to the point of being able to implement the strategy effectively can be tricky in some cases. Take a typical example.  Dan, a DIY investor wannabe, has numerous accounts including a brokerage account, a 401(k), a couple of IRAs (including a Roth).  Dan's wife has a 403(b) and a traditional IRA. Thus, they have several providers, a number of different mutual funds (of various fund classes), and typically have lost sight of their overall asset allocation.  Dan and his wife may own company stock and may be contemplating changing jobs.

It is at this point that a knowledgeable investment person typically can add considerable value by  discussing such things as the location of investments, the special way to handle rolling over  company stock, and even the appropriate funds to choose in the company 401(k) plan.  In some cases, an evaluation of a 401(k) may dictate that contributions be minimized.

What Dan and his wife needs is a knowledgeable person who will charge by the hour or manage
assets over a short period of time.  In the interview process, they need to stress that they have a philosophy they want to follow.  More times than not, an advisor will try to convince them that they are great stock pickers, can choose the best high-priced mutual funds, or even are great market timers.  But with a little work, by choosing the right advisor, they will be on their way with a clearly-defined investment philosophy which minimizes costs and prospers through the ups and downs of the market.