N/A Money manager charges / %.

[David Megginson]

Our retirement accounts scare us. They earn/increase in value much faster than we earn our paychecks. Wonder how long that will last? I have the net amount in my portfolio now that I dreamed I’d have 15 years from now! (Enough to retire early.) Is it possible to believe in it? So much uncertainty, it’s hard to anticipate the unexpected when that “unexpected” could be nearly anything. It’s an interesting time in which we live, to be sure.

The markets also scare me. It makes no sense that stocks keep shooting up past any sane valuation, and that bond yields are staying so low, when both Canada and the US have record debt and rising inflation. I don't want to overreact, but I have recently shifted an extra 15% of my portfolio from regular equity ETFs to income and blue chip/dividend, just to cushion the blow if history's biggest bubble bursts now (while keeping enough in to benefit if it keeps going for another year or two).

Sure, I could pay an investment manager 1.25% to do that for me, but why? They'd only be pulling a wild guess out of their posteriors just like I am. Nobody knows when the bubble will actually burst, so it's just a matter of balancing the risk of losing, say, 35% in a crash vs the risk of missing out on another 50% in irrational growth. It's not math or science; just hedging your bets.

D

 

[airdale]

... the risk of losing, say, 35% in a crash ...

IMO thinking like this is not realistic. Every single market dip in history has been followed by a recovery. Sometimes it takes months, sometimes it takes years. I simply think of these cycles as periods when some of my money is temporarily unavailable. The only people who actually "lose" 35% are those who sell entire portfolios at the absolute bottom. I think these are few and far between.

If you want to fear something, fear inflation. There is never any recovery from a decline in the purchasing power of your money.

 

[Bell206]

, so it's just a matter of balancing the risk of losing, say, 35% in a crash vs the risk of missing out on another 50% in irrational growth

Or its also a matter of what your personal financial goals are. Some people dont put "50% in irrational growth" as a priority in their goals.

 

[Lachlan]

Sounds like you are starting to get some aversion to risk with the accounts. You need to talk to your financial advisor and discuss the possibility of making some investment changes. Nothing wrong with that, unless one gets overly nervous and moves too far into what is considered to be "safe" investments.

No risk aversion here whatsoever, only a sore jaw from it repeatedly hitting the floor every quarter as my portfolio gains obscene amounts of value. Risk aversion? Ha! No, it’s a case of “If something seems too good to be true…”. The whole stock market is bloated. I hope whatever it’s eating doesn’t get scarce.

 

[Mahneuvers]

...The markets also scare me....

The markets currently scare me too. When I was an economics (and computer science) major in the late 80s, I was required to read Malkeil's Random Walk Down Wall Street. That, and pretty much everything I've read since, tells me you cannot time the market. As a result, I'm a huge fan of index/low fee investing. It sure feels like we're set for a correction, but like I said, what do I know?

 

[David Megginson]

Nobody knows when the bubble will actually burst, so it's just a matter of balancing the risk of losing, say, 35% in a crash vs the risk of missing out on another 50% in irrational growth.

IMO thinking like this is not realistic. Every single market dip in history has been followed by a recovery. Sometimes it takes months, sometimes it takes years. I simply think of these cycles as periods when some of my money is temporarily unavailable.

It makes a big difference whether you're 35, 55, or 75 when the crash happens, and what your health is like — recovery may take too long to be useful, and limit the quality of much of the rest of your life.

 

[Bell206]

It makes a big difference whether you're 35, 55, or 75 when the crash happens,

In general, I don't think age makes a difference. What makes a difference is where you are at in your master plan. For example, I lost over 50% account value in 2008 at 46 due to my aggressive investment structure. Yet I retired with confidence at 52 with my re-imaged post-retirement plan.

As I've said in other posts, everyone's retirement path is very subjective to external influences. This is why I think your average wealth/financial advisors can only provide general advice because they never dig deep enough into the personal requirements of their clients. I had a dozen advisors tell me I could not do this and I'd be back working in 2 years.

Now at 7.5 years into it I've called back several of them to discuss their original advice. And in the same respect, I think you'll find a number of people are not honest with themselves when it comes to determining the real costs of living their lives or the lives they wish to live in retirement. This was my hardest hurdle to breach. But once I did come clean with myself the rest fell into place with the right guidance.

And part of that guidance is there is a huge difference in pre-retirement and post retirement planning strategies. Which on the post-retirement side can be the difference whether you need to seek re-employment after the next "market-correction" or not.

 

[airdale]

It makes a big difference whether you're 35, 55, or 75 when the crash happens, and what your health is like — recovery may take too long to be useful, and limit the quality of much of the rest of your life.

It does make a big difference, but what makes a bigger difference is intelligent asset allocation. At 35, 100% equities is a good strategy and one is young enough to ride out pretty much anything. At 55, one should be holding cash suitable for his/her retirement horizon. Retiring soon, more cash. Retiring at FRA, maybe less cash but building. At 75, one should be holding 5 or more years of cash with the equity tranche understood to be held primarily for heirs and beneficiaries -- who presumably have long horizons.

The other thing people tend to forget when they focus on "day 1 disaster" numbers is that the recovery almost always begins immediately. By three years out the recovery may well have happened but, if not, a substantial fraction of the recovery has happened. So an unlucky investor running out of cash will be selling equities but at much higher prices than he/she saw at the bottom.

So, short version, your doomsday scenarios are unlikely to happen to anyone who is paying attention to AA.

 

[David Megginson]

It does make a big difference, but what makes a bigger difference is intelligent asset allocation. At 35, 100% equities is a good strategy and one is young enough to ride out pretty much anything. At 55, one should be holding cash suitable for his/her retirement horizon. Retiring soon, more cash. Retiring at FRA, maybe less cash but building. At 75, one should be holding 5 or more years of cash with the equity tranche understood to be held primarily for heirs and beneficiaries -- who presumably have long horizons.

Exactly. I think we're saying the same thing in different ways.

 

[Lachlan]

It does make a big difference, but what makes a bigger difference is intelligent asset allocation. At 35, 100% equities is a good strategy and one is young enough to ride out pretty much anything. At 55, one should be holding cash suitable for his/her retirement horizon. Retiring soon, more cash. Retiring at FRA, maybe less cash but building. At 75, one should be holding 5 or more years of cash with the equity tranche understood to be held primarily for heirs and beneficiaries -- who presumably have long horizons.

The other thing people tend to forget when they focus on "day 1 disaster" numbers is that the recovery almost always begins immediately. By three years out the recovery may well have happened but, if not, a substantial fraction of the recovery has happened. So an unlucky investor running out of cash will be selling equities but at much higher prices than he/she saw at the bottom.

So, short version, your doomsday scenarios are unlikely to happen to anyone who is paying attention to AA.

I like equities a lot.

 

[judypilot]

As said already, that's a pretty typical fee. As said already, unless you are very rich (someone said ~$20 million or more), you probably don't need one. I'm very fortunate in that I am in TIAA, which assigns you a financial advisor after you reach a certain level of investment, and their financial advisors are very good and will look at your total portfolio (I have investment accounts outside TIAA, too, so this is really helpful). Having said that, they usually don't make many suggestions because I already have a pretty good handle on investing from having read John Bogle (may his memory be eternal). Yes, I'm a Boglehead, and it has stood me in very good stead. VERY good stead.

 

[ja_user]

Why do you assume that after 20M or so, that the advice changes? Or the Expertise does?

Because the AUM certily does not change much.

 

[Rgbeard]

Hi everyone.
I was talking to someone about what some money managers charge nowadays and finding that some are charging 1.25% regardless of if they make or lose money. Is that typical?
Last I've had anything to do with some they charged .25% and if they did not have any gains they did not charge anything. This was with a 401K in company but I would think that the difference should not be that much?
Any recent experience with any of them?
Thanks

yes, this is common. My wife retired from this industry. And she always made her clients FAR more than her fee every year, even in 2008/09.

If you want to save the fee, feel free to go self-managed and pay attention.

 

[David Megginson]

yes, this is common. My wife retired from this industry. And she always made her clients FAR more than her fee every year, even in 2008/09.

If you want to save the fee, feel free to go self-managed and pay attention.

Congrats to your spouse on a great career. What you write was true 25 years ago (and even 15, to a lesser extent), and I'm sure your spouse helped a lot of people well, but the world has changed: just like we don't pay by the minute for a long-distance call any more, we no longer need to give up 1.25% of our portfolio every year just to avoid the hassle of managing individual equities.

In the ETF age, you just choose your funds, and they do the rebalancing of individual equities and/or bonds for you to passively track a public index, typically for less than 0.25%/year. For help choosing the funds initially and balancing your portfolio, you can pay an advisor a one-time fee for service (like a lawyer or accountant).

So we now have the best of both worlds: low fees, and not having to pay constant attention. And you can talk to your friend in (say) Omaha on the phone as long as you want.

 

[David Megginson]

Why do you assume that after 20M or so, that the advice changes? Or the Expertise does?

Because the AUM certily does not change much.

There's some threshold (maybe not exactly $20M) when new opportunities open up to you, like private investment, and those do require some active management. I haven't looked into details, because I'll never get there.

 

[Mikey B]

There's some threshold (maybe not exactly $20M) when new opportunities open up to you, like private investment, and those do require some active management. I haven't looked into details, because I'll never get there.

It doesn't take anywhere near $20 million to be eligible for investments like private equity. The threshold to qualify as a high-net-worth investor varies between financial institutions, but as little as $1 million in investable assets can get you there. We have some through our brokerage.

 

[David Megginson]

It doesn't take anywhere near $20 million to be eligible for investments like private equity. The threshold to qualify as a high-net-worth investor varies between financial institutions, but as little as $1 million in investable assets can get you there. We have some through our brokerage.

I've heard that, too, but I'd be pretty nervous participating with such a small net worth (for that game). I'd be surrendering almost all of the small-investor protections that we take for granted in the public market, and on the private side, would probably be pooled with lots of other small investors and wouldn't personally have the ability to review the private company's books, etc.

Bringing $1m total liquid assets to private investment feels like bringing a bottle rocket to a missile fight. With $20m, OTOH, I'd be able to be one of the principles in, say, a first or even second VC round, with direct access to all the inside info, if I were interested in that level of risk (which I'm not).

 

[ja_user]

There's some threshold (maybe not exactly $20M) when new opportunities open up to you, like private investment, and those do require some active management. I haven't looked into details, because I'll never get there.

Oh sure they are available, but that doesn’t mean that an increased NW individual really benefits as much as the salesperson does.

 

[judypilot]

One nice thing TIAA investment advisors do is run simulations every year to predict how long your investments will last even if there is a 1970s-style recession. When my retirement investments got to the point where I still couldn't run out of money in that scenario even if I lived to 95, I felt secure. I'm convinced that one reason I've done so well is I rebalanced, meaning I bought stock funds, after the big crashes. As my brother always says, if you rebalance, you are automatically buying low and selling high.

 

[Lachlan]

As said already, that's a pretty typical fee. As said already, unless you are very rich (someone said ~$20 million or more), you probably don't need one. I'm very fortunate in that I am in TIAA, which assigns you a financial advisor after you reach a certain level of investment, and their financial advisors are very good and will look at your total portfolio (I have investment accounts outside TIAA, too, so this is really helpful). Having said that, they usually don't make many suggestions because I already have a pretty good handle on investing from having read John Bogle (may his memory be eternal). Yes, I'm a Boglehead, and it has stood me in very good stead. VERY good stead.

What is that threshold for TIAA to assign a FA? Feel free to reply here or PM. Cheers!

 

[airdale]

Oh sure they are available, but that doesn’t mean that an increased NW individual really benefits as much as the salesperson does.

Exactly. This. $20M portfolio is still a retail investor. Add a zero and you start to talk institutional investors.

I used to play around with private equity, though at the time it was called "private placements." All local stuff, deals put together by people I knew or at least knew of. Had a couple of home runs and one restaurant that disappeared without a ripple, together with my $50K. I never put serious money into the private placements; they were more like a hobby. All required "accredited investor" status. This is an SEC thing, not a local option, though rules have changed recently.

During that period I once got a fancy mailing for a private deal and a week later I got the follow-up phone call. What I told the salesman was that any deal that needed four-color brochures and cold-calling to sell was guaranteed to be stinky deal. Good bye.

Here's the logic: Marketing to retail investors is a PITA, where selling to institutions who write big checks is much less hassle. So the only deals that retail investors will see are deals where the promoter has been unable to attract the professionals who run the big money. (Guaranteed he has tried!) This is compounded by at least two levels of sales commissions baked into the retail price, making the retail offering even stinkier.

As the institutional world has fallen out of love with hucksters claiming stock picking ability or winning hedge fund wisdom, private equity has grown in institutional portfolios. This is an ideal product for hucksters because it involves products that are very hard to value, take a long time to prove or disprove the wisdom of the deal, and generate high fees along the way. Also, they are fodder for "castles in the sky" sales fictions (term from Burton Malkiel, IIRC). So ... what could go wrong?

$20M is not a big deal. 1% or less is a fair AUM fee for a portfolio of a million or more. Stock picking doesn't work. There is no magic in investing. Have I missed anything?

Warren Buffet: "Much success can be attributed to inactivity. Most investors cannot resist the temptation to constantly buy and sell. ... Lethargy bordering on sloth should remain the cornerstone of an investment style."

 

[Possum]

While some folks may consider these two books a bit dated, they are must reads for the individual investor. One Up On Wall Street by Peter Lynch and The Intelligent Investor by Benjamin Graham.

https://www.goodreads.com/work/quot...to-use-what-you-already-know-to-make-money-in

https://www.goodreads.com/book/show/106835.The_Intelligent_Investor

 

[airdale]

Agreed rel The Intelligent Investor. That's a 70 YO book and things have changed a bit. Be sure to get the edition with Jason Zweig's updating commentary.

 

[David Megginson]

Point:

One nice thing TIAA investment advisors do is run simulations every year to predict how long your investments will last even if there is a 1970s-style recession.

Counterpoint:

She ran analyses of our assets, Monte Carlo simulations of potential future market developments, etc., and determined that we could safely retire under any foreseeable scenario. So we did, and a year later the unforeseeable happened (the 2008-09 meltdown), and I had to go back to work for a few years.

Simulations have their value, but they're based on data models that are coarse-grained codifications of the designers' biases, with reshaping to fit historical data.

Corporations, governments, aid organisations, militaries etc all benefit from running simulations, but they can get badly burned when they put too much trust in the results, especially without extensive ground-truthing. It's all about keeping the right perspective.

 

[ja_user]

To be fair all those simulations are now available for free, so a person can do all the "What If's" that they want to do.

 

[judypilot]

Simulations have their value, but they're based on data models that are coarse-grained codifications of the designers' biases, with reshaping to fit historical data.

Oh, believe me, I know that, more than you can possibly know (although not a financial context). Let me put it this way. I still didn't retire the first time the <<1% probability that I would outlive my money was modeled, and now, many years later, my retirement cushion is, oh about three or four times as big. So I think I'm in pretty good shape.

 

[airdale]

I read a board where it's common for people to agonize when the simulation gives them 95% instead of 100%. My view is that these calculators, including the Monte Carlo ones, really can only say one of three or four things, like: "Doesn't look good," "Probably OK with a little luck," and "Looks pretty good but you always need luck." Providing two-digit numbers verges on consumer fraud.

Then there is always Taleb's Turkey: https://www.businessinsider.com/nassim-talebs-black-swan-thanksgiving-turkey-2014-11

 

[kyleb]

I read a board where it's common for people to agonize when the simulation gives them 95% instead of 100%. My view is that these calculators, including the Monte Carlo ones, really can only say one of three or four things, like: "Doesn't look good," "Probably OK with a little luck," and "Looks pretty good but you always need luck." Providing two-digit numbers verges on consumer fraud.

Exactly. I work in an organization where people love to over-math things. I laugh at people who tell me this project or investment (for instance) will save the company $431,562 next year. Um, how about $430K, Sparky, and I'll be happy if you're within 20% of your estimate.

 

[David Megginson]

Exactly. I work in an organization where people love to over-math things. I laugh at people who tell me this project or investment (for instance) will save the company $431,562 next year. Um, how about $430K, Sparky, and I'll be happy if you're within 20% of your estimate.

I make my aid colleagues uncomfortable by saying (with some exaggeration) that we should trust caseload numbers in a humanitarian emergency only as order-of-magnitude estimates.

For example, if a joint needs assessment a week after a typhoon says there are 200,000 people in need of assistance in country X, we can safely assume there are more than 20,000 and fewer than 2,000,000. If the estimate gets doubled or halved 3 days later, it really shouldn't be a surprise, and doesn't point to any incompetence on the part of the governments, multilaterals, and NGOs involved; it's just the way things are.