Many people believe investing is
an activity shrouded in mystery, requiring intricate
knowledge of arcane financial matters, plus a
lot of luck. Some become so intimidated at the
prospect of investing -- even in mutual funds
-- that they hire outside help.
Early this month the Investment Company Institute came out with a survey, "Mutual fund investors rely on professional advice," that underscores the apparent enigma of fund selection. Its revelation: Roughly half of shareholders with mutual funds outside of the workplace have relied on professional advisers for assistance in purchasing funds.
Too bad for them.
Let's get something straight. The ICI's stated mission is to advance the interests of investment firms, and investment firms are primarily interested in getting assets. Financial advisers play a key role in attracting assets. So the survey is a back massage for financial advisers. It's also a blatant effort to reinforce the idea that the average person is helpless without an adviser's assistance.
||Don't hire help; help yourself:
Don't get me wrong. Financial advisers offer valuable services
for those who need help with financial planning
or managing assets in retirement or complex tax
or estate planning issues -- as the ICI survey
states. But help with selecting funds? You don't
need to pay an adviser to help you find funds.
In fact, studies show it could be detrimental
to do so.
One study that I wrote about last
December revealed that between 1996 and 2002,
the weighted-average returns for equity funds
sold by advisers to individuals were 2.9 percent
per year on average, while do-it-yourself
investors earned 6.6 percent per year with
funds they bought on their own. That's a huge
margin of superiority over the so-called experts.
You can do better, too
John C. Bogle, founder of Vanguard Group and author of several investing books, makes the point that financial "helpers" are like vampires that suck the lifeblood from fund returns. He doesn't use that particular imagery, but that's what he means.
"Yes, after the costs of financial intermediation -- all those brokerage commissions, portfolio transaction costs and fund operating expenses; all those investment management fees; all those advertising dollars and all those marketing schemes; and all those legal costs and custodial fees that we pay, day after day and year after year -- beating the market is inevitably a game for losers," he says in his latest mini-tome, "The Little Book of Common Sense Investing."
Financial croupiers, he calls these intermediaries.
"Indeed, when we add the costs
of ... self-help investment books into the equation,
it becomes even more of a loser's game."