The St Louis Fed publishes interesting material. I suppose the others might too, but I don’t notice them as often. In late 2014 they published a study that makes a profound case for why you need an advisor/conscience to implement your financial plan.
The Cost Of Chasing Returns The data suggests that equity fund investors buy when prices have risen and sell otherwise. People who try to time the market do poorly.
They point out that “Expectations of future returns tend to be closely tied to past stock market returns, but do not match up well with future stock market returns.” The effect is that returns over three years are diminished by about 3% annually. Sometimes as much as 5%.
A dollar now invested at 8% is $10 in 30 years. It is $4.32 at 5%. That other 3% matters.
Now ask yourself, “How many advisors tell you to time the market?” Answer – None. Buy and hold a diversified portfolio is the more likely advice. Why? Because it works better than chasing returns. 3% better. $5.68 better. Way more than that at 40 years.
Advisors cost some money because they add value and they have overhead and they like to live too. If you look only at their price then you make a mistake. The proper approach is to look at their price in context of their value.
Their price is about 1% plus the costs to operate the portfolio, pay taxes and to have others provide oversight. Portfolio costs exist either way. The cost to save the 1% according to the St Louis Fed is about 3%. .
An easy saving and over a lifetime and a huge amount of money.
Investing for profit is not idiot proof. It is easy in some ways but includes some subtle but costly pitfalls. Chasing gains is just one of them.
If you hire your advisor to help you control your emotions and help you overcome some of the logical failings we each possess, you will have received good value.
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Don Shaughnessy is a retired partner in an international public accounting firm and is now with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.