I posted this over on SA as well but found it interesting. This is a link to article by Ted Seides, a hedge fund advocate and manager. Seven years ago he bet Warren Buffett that his hedge fund choices would outperform an index fund over a ten year time span. Not surprisingly, after seven years he is getting his rear kicked.
Note how much of any investment gains are chewed up by fees in the hedge fund returns. Based on these returns, I’m thinking I might switch careers and become a hedge fund manager!
Seven years ago he bet… that his hedge fund choices would outperform an index fund over a ten year time span. Not surprisingly, after seven years he is getting his rear kicked.
Of course. It’s because hedge funds usually bet on zero-sum games: Currency fluctuations, interest rate spreads, commodities, options. On each of these one (hedge-fund) bettor bets it’s going up and one bets it’s going down. At the end, one wins exactly the same amount that the other loses. (That’s why it’s called zero-sum). In the stock market, on the other hand, over almost all 10 year periods, the market goes up. It’s a no-brainer which will come out ahead.
How in the world do they get away with taking 1-2% of their clients assets every year?? What a sham. Not only are the clients losing 1-2% but they are missing out on the opportunity cost of that 1-2% every year going forward.
How in the world do they get away with taking 1-2% of their clients assets every year?? What a sham. Not only are the clients losing 1-2% but they are missing out on the opportunity cost of that 1-2% every year going forward.
Dave,
There are many financial advisors who are taking 1-2% of the portfolio and not adding nearly that much value. There are others who re not doing a good job managing their clients money. I personally would never consider paying someone to manage my money because I believe I can do it better. But there are many people who do not understand financial matters let alone how to make prudent investment decisions. I have many friends who are approaching 50 who have no idea. I talked to one of them yesterday. He complained about his 3.3% return in 2014 and told me that he doesn’t want to work until he’s 70 so he needs better returns. He told me a little about how his money is invested. All his investments aside from real estate are with one brokerage company and that company met with him to discuss his risk appetite and based on that and some other factors put him in some funds. He shared with me his allocations and it turns out that about 25% of his money is in bonds. I explained that being in bonds when interest rates can only go up is a sure way to get really low returns and maybe not even beat inflation. My friend is somewhat risk averse and believes, as many people seem to believe, that stocks are super risky. So when he met with the brokerage firm advisor and told him that he wanted low risk (chose from low medium or high) he was put into 25% bonds.
My friend asked if I would manage his money for him. I know he would be happy to pay me 1-2%. There are many people like this. People who have worked hard for 2-3 decades and have accumulated a nice chunk of cash. Many do not know the first thing about investing. The sad thing is that when you know so little, it is very difficult to access whether the money manager who you are about to select is any good. Basically all these people have to go on is to look at the manager’s historical performance. Unfortunately, past performance can mask whether someone is good or not. Why can’t these people learn to invest their money? Well, they could but they usually say that they don’t have the time. Job, family obligations, etc. So they are left to try it on their own, pick a money manager, invest in index funds, or leave their money sitting in cash because they are afraid to lose their hard earned money. I am finding that there are many,many people who as still scared from the dot com bust and the financial crisis. They believe that the stock market is a gambling machine. Lots of people have had their money in cash since the financial crisis. They are guaranteed to lose about 2% a year.
For people who lack the knowledge and/or time and interest to manage their own money, there are qualified financial advisors out there. I have a friend who is one and he provides his clients with a lot of value. Most of his clients are high net worth people and my friend’s primary job for most of them is to ensure that they preserve their wealth and only secondarily make a decent return. He makes sure they have enough insurance and helps them make all kinds of financial choices, everything from whether they should buy this or that new business or how much life insurance they need.
So there are very good financial advisors and not so good financial advisors out there. Over the past 2 years, I have considered becoming a financial advisor because I think that there are many people out there who could use the help. If I do decide to do it, it will not be for the money. I have enough money, I do not work a job, and my investments are growing faster than I am spending. I enjoy managing my own money and I feel that I am getting better and better at it the more I work on it. But I do wonder if it would still be fun if I was responsible for someone else’s life’s savings, if I had to justify investing decisions, if I had restrictions placed on my own investing because I’m managing other people’s money also.
I guess the point of this lengthy post is say that there is a need for good financial advisors.
I guess the point of this lengthy post is say that there is a need for good financial advisors.
Chris
Yes, there is. The difficulty is finding one who is both competent and honest. My personal experience is that competent and honest advisors are outnumbered by three or four to one by advisors who give the industry a bad name. And managed accounts don’t come with a money back guarantee. You buy a faulty washing machine and you get your money back. You hire a faulty advisor and you bear the loss.
Over the past 2 years, I have considered becoming a financial advisor because I think that there are many people out there who could use the help. If I do decide to do it, it will not be for the money. I have enough money, I do not work a job, and my investments are growing faster than I am spending. I enjoy managing my own money and I feel that I am getting better and better at it the more I work on it. But I do wonder if it would still be fun if I was responsible for someone else’s life’s savings, if I had to justify investing decisions, if I had restrictions placed on my own investing because I’m managing other people’s money also.
Chris, from my own investing experience, it would not be fun to do it for someone else. About 15 years ago, two of my doctor friends about my own age, seeing that I had been able to retire and they were still working (one is working still), asked me to manage accounts for them. It lasted just a few months. They were used to very conservative investments (bonds, bluest of blue chips, etc) and the first time that anything went down they panicked and closed the accounts.
When you invest for yourself, you know everything won’t work out perfect, you know you’ll make little mistakes, but that in the long run, it will all work out. And if it doesn’t and one year you are down, it’s your money and you know that you’ll win out in the long run. When it’s someone else money, and you have to be prepared to justify every little trade and explain why you did it, it’s a nightmare. As well as a responsibility.
If you want to have fun investing, just keep posting here. It’s been a lot of fun actually.
Saul
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