By Philip, but Melissa also added in some snarky comments that are in italics.
We are not investing professionals, in fact we were previously investing idiots. **Bet you’re glad you’re reading our blog.** Fortunately we’ve learned some very simple tips that will save us hundreds of thousands of dollars in the future.
While we were paying off our student loans were were not doing very much investing. We decided that we should at least be getting the match on my 401k that my company offers but we did nothing beyond that. When we finished off our loans we thought we would be responsible, smart grown ups and hire a financial advisor to help us set up and manage our retirement accounts. Our advisor helped us set up a couple Roth IRAs and managed our funds for us. We decided to have a small amount put into each fund every month and our advisor would purchase stocks that he liked with the funds. I would only look at the statements occasionally and didn’t fully understand everything I was reading. What I did understand was our accounts were not growing very much.
I’m so glad I listened to this podcast relatively early in my investing life. It isn’t very long but is packed with the basics of what you need to know to change your investments now. I’ll break down some of the major points.
- Stop investing in high cost mutual funds, hedge funds or anything with a high expense ratio. An expense ratio (ER) is the percentage of fund assets used in administrative, managerial, or other expenses. With out getting too technical it means when you make money from a stock, a certain percentage of it goes back to the management of that stock and not you. So the higher your ER is, the less money you make. Index funds tend to have the lowest ER. An index fund is a type of mutual fund that has a portfolio meant to match the market as a whole. So think of investing in an index fund as investing in the entire American stock market. A common high cost mutual fund ER would be 1%, contrast that with a whole market index fund like Vanguard’s VTSAX at 0.04%. Those both look like small numbers but I’ll show you below how big of a difference it can make.
- Get rid of your financial advisor. There are very few people with the insight to outperform the market long term. You might be thinking, well Warren Buffett seems to be doing alright. Warren Buffett is the exception, not the rule. If a person is truly that good at investing, chances are they aren’t going to be helping you or me with our small amounts of money. What a financial advisor will do is charge you a fee, usually 1% of assets under management. You might think 1% does not sound like much. What’s $1 out of every $100? Chump change right? Well, not when we are talking about longterm investments.
- Stay away from actively managed funds. Every time you buy and sell there is a cost. The more you do it, the less money you will have when you retire. If you are lucky, an actively managed fund will revert to the mean at some point. If you are unlucky you will lose a lot of money. 99.9% of people can’t outperform the market so don’t waste your time or money by trying to time the market. Time in the market is more important than timing the market.
In the podcast linked above, Brad breaks down three scenarios using the Dave Ramsey investment calculator. Most of us don’t have 100k to drop into an investment today but just look at these numbers. These numbers assume a growth of 8% which has been the average for a few decades.
Scenario 1: Invest $100k in VTSAX and let it grow for 40 years = $2.13 million
Scenario 2: Invest $100k in VTSAX, through an investment advisor for 40 years = $1.46 million
Scenario 3: Invest $100k in actively managed fund, with an advisor for 40 years = $1.03 million
Those numbers are absurd. We were living in scenario 3 for a few years, and I can’t express how lucky we are to have come across this information. After learning these things, I fired our advisor and started managing our own investments. **And by fired, we also mean that our advisor dropped off the face of the planet. His company email and phone number didn’t work, and when we did some digging, we think he might have been in jail? But not for stealing money, possibly for a physical altercation? It was weird. But here’s the thing, he had like the biggest muscles I’ve ever seen, like comically big. Like stupid big. So if anyone was going to be in jail for using muscles, it wouldn’t surprise me that it was him. Okay, back to Philip.** I transferred our Roth IRAs to Vanguard and started investing everything in VTSAX. I changed my 401k allocations to invest in the S & P 500 because that was the best fund available to me. We started doing a lot of other things that I will cover in future posts, but these things helped eliminate all the money were were losing on just fees. Since switching to VTSAX in August of 2019 our small IRAs have made about 5 times as much as they did in 3 years with an advisor. It’s a very mixed bag of emotions. I’m happy we are making more and very mad at the wasted time and money. But we are here to help you avoid the same pitfalls.
If you want to learn more from smarter people than me, then I would recommend checking out this stock series by J.L. Collins, which he later turned into this book. You can also check out this book by John Bogle who is the founder of Vanguard.
Speaking of smart people, lets go back to Warren Buffett. In a letter to the shareholders of Berkshire Hathaway, Buffet’s holding company, he laid out a plan for what his trustee should do with his money when he passes. He said:
“My advice to the trustee couldn’t 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.”
It’s simple advice that’s echoed by John Bogle of Vanguard. He says you should own the stock market; buy in at low cost, invest for the long term and don’t trade. I love this quote from John:
“I think in general the best rule is stay the course…when you get your retirement plan statement every month, don’t open it. Don’t peek. When you retire, open the statement and believe me if you’ve been putting money in there for 40 or 50 years, you’ll need a cardiologist standing by you when you open it.…Time is your friend and impulse is your enemy. It’s the market return that’s going to be your best investment for a lifetime.”
So there it is, manage your own investments, buy low cost index funds, set it and forget it. If you need help walking through this process, please let us know! **Melissa here again. I had listened to this same podcast a year before Philip did and had the thought, “Yes yes yes, this all makes perfect sense, and I will do absolutely nothing about it.” So if you’re like me and making big changes like this is difficult, please reach out to us! We would be happy to answer questions you might have about transferring these types of accounts to these low-cost index funds.**