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How do you handle financial questions from friends/family?


matjone

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A friend is setting up her 401k and asked me a question about what she should do with it.  I think she's in her mid twenties.  I am tempted to tell her put it all in a total world stock index and leave it alone for 30 years.

 

There are a lot of reasons to not answer these questions.  I'm not certified, they could lose money and blame me, etc.

 

On the other hand, these people really have no idea what they are doing, and if they go it alone they might end up doing some really dumb things like buying high expense, underperforming funds, investing too much in fixed income and getting killed by inflation, and so on.

 

I think that technically the best answer is to tell them to talk to a financial planner, but it kind of sounds like a brush off, like I'm refusing to help them, and I feel like an ass saying it.  The other problem with that response is that I know these people and there is about zero chance of them going to the trouble of seeking out a financial planner or doing any research on investments.

 

So what would you tell her?

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A friend is setting up her 401k and asked me a question about what she should do with it.  I think she's in her mid twenties.  I am tempted to tell her put it all in a total world stock index and leave it alone for 30 years.

 

There are a lot of reasons to not answer these questions.  I'm not certified, they could lose money and blame me, etc.

 

On the other hand, these people really have no idea what they are doing, and if they go it alone they might end up doing some really dumb things like buying high expense, underperforming funds, investing too much in fixed income and getting killed by inflation, and so on.

 

I think that technically the best answer is to tell them to talk to a financial planner, but it kind of sounds like a brush off, like I'm refusing to help them, and I feel like an ass saying it.  The other problem with that response is that I know these people and there is about zero chance of them going to the trouble of seeking out a financial planner or doing any research on investments.

 

So what would you tell her?

Index funds, index funds, index funds.

 

Some people will do it; many will do it and withdraw at inopportune times, others will do it and tire and go do something stupid with the money. Either way, no one will be worse off from that advice.

 

But tbf I have continually offered this advice to people I know (who have asked) and yet to find even a single person who has heeded it (except my parents, whose accounts I control).

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Stick it in one fund and ignore it is pretty terrible advice.

 

If you don't want to advise her directly about what to do, but still want to give helpful and actionable advice, encourage her to . . . 

 

1) start contributing now to take advantage of her age and her employer's matching (stash it in cash for the time being or some sort of balanced asset allocation fund)

2) talk with her employer's 401k advisor about her plan's options

3) read Bogle's little book on investing

4) read up on asset allocation (e.g., Ferri's All about Asset Allocation)

5) own her financial future by being proactively involved in understanding and choosing her own financial path

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I will often cite the morningstar study regarding the outperformance of investors in target date funds over the actual fund's performance and the underperformance of most other fund investors versus the funds they own.  This is apparently due to dollar cost averaging and the elimination of the temptation to buy high and sell low.  If they have a decently low cost target date fund option and are not into finance, I would probably tell them they might consider that option.

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I simply suggest dollar cost averaging into a low cost index fund on a set date, every quarter, every year. I sometimes even tell them exactly which one.

 

I explain the algorithm to them; and if I notice that they are actually wondering why the algorithm, then I explain to them what it would do.

 

I suspect none of them ever follow through long enough for a host of emotional reasons that all value investors are aware of.

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Stick it in one fund and ignore it is pretty terrible advice.

 

Why? Apart from 401k's and other stuff that I don't understand being non-American I would say this is excellent advice for 90% of all people. Just pump excess money in a Vanguard targeted retirement fund (or something similar) and forget about it.

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Stick it in one fund and ignore it is pretty terrible advice.

 

Why? Apart from 401k's and other stuff that I don't understand being non-American I would say this is excellent advice for 90% of all people. Just pump excess money in a Vanguard targeted retirement fund (or something similar) and forget about it.

 

Well, his specific suggestion was an equity index, not a fund of funds target retirement fund.  So, I should qualify my original reaction.  Using a target retirement fund wouldn't be a terrible choice, certainly better than a straight stock index.  My biggest objection would be the "forget it" part.  Just ignoring your savings/investments is how you wind up nearing retirement in 2008 with all your assets in stocks and wondering why half your money disappeared at such an inopportune time.  Any advice that doesn't include suggesting someone be actively engaged in understanding what they're investing in and why is incomplete at best.

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Stick it in one fund and ignore it is pretty terrible advice.

 

Why? Apart from 401k's and other stuff that I don't understand being non-American I would say this is excellent advice for 90% of all people. Just pump excess money in a Vanguard targeted retirement fund (or something similar) and forget about it.

 

Well, his specific suggestion was an equity index, not a fund of funds target retirement fund.  So, I should qualify my original reaction.  Using a target retirement fund wouldn't be a terrible choice, certainly better than a straight stock index.  My biggest objection would be the "forget it" part.  Just ignoring your savings/investments is how you wind up nearing retirement in 2008 with all your assets in stocks and wondering why half your money disappeared at such an inopportune time.  Any advice that doesn't include suggesting someone be actively engaged in understanding what they're investing in and why is incomplete at best.

 

 

 

I definitely agree with what you're saying.

 

I just wish more people take the time to understand basic financial literacy and long-term investing.

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IMHO, she should put it into the highest risk, highest return asset class she can find. This is a very long term investment vehicle, that she will not use for at least 30 years, so the goal is to make the highest possible return, and given zero liquidity needs, risk is immaterial.

 

So 100% small cap index fund for me.

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Well, his specific suggestion was an equity index, not a fund of funds target retirement fund.  So, I should qualify my original reaction.  Using a target retirement fund wouldn't be a terrible choice, certainly better than a straight stock index.  My biggest objection would be the "forget it" part.  Just ignoring your savings/investments is how you wind up nearing retirement in 2008 with all your assets in stocks and wondering why half your money disappeared at such an inopportune time.  Any advice that doesn't include suggesting someone be actively engaged in understanding what they're investing in and why is incomplete at best.

 

What's wrong with sticking it into a single index fund and forgetting it? As for 2008, it was not a predictable event that a naive investor could have planned for and adjusted his allocation to deal with.

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Well, his specific suggestion was an equity index, not a fund of funds target retirement fund.  So, I should qualify my original reaction.  Using a target retirement fund wouldn't be a terrible choice, certainly better than a straight stock index.  My biggest objection would be the "forget it" part.  Just ignoring your savings/investments is how you wind up nearing retirement in 2008 with all your assets in stocks and wondering why half your money disappeared at such an inopportune time.  Any advice that doesn't include suggesting someone be actively engaged in understanding what they're investing in and why is incomplete at best.

 

What's wrong with sticking it into a single index fund and forgetting it? As for 2008, it was not a predictable event that a naive investor could have planned for and adjusted his allocation to deal with.

 

A naive investor that can follow one or two simple asset allocation rules could prevent being 100% anything at the worst possible moment.  I'm not talking about predicting 2008, but adjusting your holdings for your time frame.  Being 100% stock at age 28 is different from being 100% stock at age 58.

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There's no reason you can't give her advice to act on now and still tell her to go to a financial planner when she can find one.  While putting the money into a target retirement fund isn't the best choice, it is the best choice for someone who doesn't want to do much work or doesn't have the capacity to manage their own investments.  Even picking mutual funds will trip up most people.

 

This is a 401k, so I assume it is for retirement, but anytime someone is asking for advice about money (formally or informally) their time horizon is the first question to ask.

 

I would recommend that she go to a financial planner, but would let her know to do the target retirement fund first.  I've seen first hand from my friends that many people delay investing at all when they don't understand what to do.  They freeze, sometimes for years.  She can get started compounding her money now in a "second best" solution and when she has real assets later the advisors will find her. 

 

I agree that you should tell her to forget about it.  Tell her to give you a call when she gets nervous.  Stay the course is almost universally the best advice for people in their 20s and 30s when investing for retirement.

 

 

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This is not an advice on where to put her money.  But if her employer matches her contribution, then she should max out whatever the matching is.  If the company matches 100% of her contribution, she just did a double her money at the instant she made the contribution. 

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I actually get very uncomfortable when people ask my advice about investing.  The strategies that I use and the decisions that I take are driven by several years of formal education, many years of reading and a temperment that I have developed over time.  I cannot recommend something to another person without first understanding their level of knowledge, which is usually close to zero....and their risk tolerance which is also usually close to zero.  You can't just tell somebody like this that they should buy FFH or BAC or something which requires a depth of knowledge.

 

In the end, I usually feel like I would need to teach these folks a basic course in finance before we even begin.  But who really wants to do that?  I have neither the time nor the interest to teach people the basics of fixed income investing, equities, options, etc.

 

In this context, the best thing to do would to advise them to buy SPY, and just hope that the advantage of the low management fee offsets any disadvantage from lack of diversification.  :(

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I agree with the index fund approach.  People want me to advise them how to invest $20, or 50 k.  And of course they have no idea how much goes into what we do.  20 hrs per week for 16 years.

 

The other day I advised my Sister in Law to just pay down her mortgage.  She is single, will have a work pension, and CPP, and OAS.  She wanted to know if she should put money in an RRSp.  I just told her to forget it and pay down her mortgage.  Fastest way to retirement she will find.

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I agree with the trend here. A mix of 50% broad index and 50% bonds would be appropriate for most people.

 

I kinda disagree about financial planners, they are paid to sell you stuff and the stuff that makes them money is not low cost ETF. Heck most financial planners would try to sell a 60 year old person a universal life insurance policy as a great investment.

 

What frustrates me the most is the confusion when I tell them:

[*]Open a brokerage account. It's like a bank account but you can hold dollars or any other securities in there

[*]Buy ETX X and ETF Y based on your time horizon

[*]Repeat step 2 every time you have 2000$

[*]Enjoy your life knowing you made a great deal by buying something that banks would sell you 10 times more

 

BeerBaron

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Excellent question! Deal with this all the time. I tell them dont take ANYONE's stock picks (including myself). I tell them if they want to invest for the long term open a Vanguard account and offer to give them a list of some good books on asset allocation (like Peter Bernstein). For so many reasons I refuse to recommend specific securities. It might not be the most ideal method, but i think its the best for starters (and for many advanced investors).

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Thanks for the replies.  I told her to pick a low cost fund that is either mostly or completely in equities.

 

May have been a mistake.  There are a lot of good reasons to not talk about money, especially with your friends. But I think if I refused to tell her anything I'd feel bad, and I'd be worried she might have her money invested in some high expense, poorly performing fund.

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I used to say low cost broad market funds, but am starting to think that those are a bad idea. It seems to me that there are too many people doing that sort of thing now, and that they only increase market volatility (which, probably isn't the healthiest thing for someone to see happen to their nest egg/retirement account). We might be entering into a time where small mutual funds might actually be able to out do the market. Think about the stuff that Paul Sonkin is doing for Gabelli. I'd feel comfortable with someone investing in that.

 

That, or tell them to buy into BRK like companies (FFH, MRKL, LUK, etc). At this point, BRK is kind of a market fund anyway, but run by people who actually get the whole price/value thing. I don't know that we can say that about a whole hell of a lot of the companies out there with multi billion dollar valuations.

 

Speaking of this, why has no one put together a value investor ETF? Just load it up with the companies that I mentioned, and sell it as a product, taking a percent or 2 for managing it? Monish Pabrai talked about a guy doing this with the A shares of BRK, before the Bs came out, if I remember correctly.

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That is exactly why the B-shares were created... Buffett didn't like that people got screwed over by intermediaries.

 

I also doubt how big the impact of ETF's is. People used to invest in mutual funds with high fees that were often closet indexers anyway. Now they simply pay a low fee, and there is no pretense of what they are buying. I do think that (some) small mutual funds are able to outperform, but I think that has always been the case.

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