(This is the third part in a three part article series designed to bring anyone up-to-speed on how to invest)
- Good investing is not sexy, it’s boring
- If you’re managing your own money, only trade to harvest taxes or rebalance your portfolio
- Don’t every pay more than a 0.30% fee for an investment advisor
- Only look for investment advisors that passively invest and “match the market return”
- If you’re the type of person who doesn’t need to interact with a person, invest in a software based advisor like Wealthfront or Betterment
- If you need human interaction, sign-up for Personal Capital, Vanguard Advisor, or LearnVest
Now if you already read the second part of this three article series you should already have your recommend risk tolerance level and thereby have a portfolio recommendation. Your sole goal is to track as closely as possible (within 5%) to that portfolio allocation. The only other time that you should be selling or buying to take advantage of tax losses to lower your income and pay less taxes for that year.
Lastly, as investing is all about keeping your costs as low as possible I recommend using either Vanguard or Charles Schwab as your brokerage firm. These firms offer free trades (buying or selling) of their own funds and they both have a large number of index funds to choose from.
With that in mind, there are really only three areas you should evaluate investment advisors:
- Passive investing strategy
Passive Investing Strategy
This is a simple one. You just need to ensure that the investment advisor is not actively trying to beat the market and passively investing by tracking the market. If the investment advisor is an ‘active’ investor, he will likely try to convince you that the only way to earn a good return is by trying to beat the market and may be even be able to provide some statistics. The key though is to continuously go back to the fact that the smartest investors in the world (Warren Buffett, John Bogle, and Nobel Laurates) have proved and believe that passive investing is the absolute best investing strategy.
The cost of an investment advisor cost should be very easy to determine (if it’s not, don’t even think about investing with them). Almost all are a percentage fee of the assets under management. Take for example, if you have $100,000 invested with an investment advisor with a 1.00% management fee, they would take $1,000 of your money regardless of whether your investment went up or down.
Investment advisors are inherently costly and I would personally not recommend the vast majority of advisors just because of the cost. However, there is a relatively new entrant into the investment advisory space – software that automatically invests using a passive investing strategy for very low management fees (typically in the range of 0.15% to 0.25%). Besides, the cost there are a number of other benefits of software based investing, such as daily automatic tax loss harvesting, automatic portfolio rebalancing, and risk tolerance adjustments. Some great software based investment advisors today are Wealthfront (get your first $15,000 managed free by using this link) and Betterment.
One of the biggest benefits that investments advisors offer is a personal relationship with an educated (hopefully) investment professional. The benefit of this relationship will vary significantly across different people and really depends on your own personal traits. For instances, when the market declines a significant amount (which is an inevitable risk of investing), you may be a person that would benefit from having a live person to talk to and reduce your worry. If you know that you are the type of person that has difficulty stomaching these risks of investing, you may want to look into a more personal relationship investment advisor such as Vanguard Personal Advisor.
I’ve compiled a list of my recommended brokerage firms and investment advisors below: