Money Myth Monday 7/22 – I have someone who manages my money so I don’t need to worry about it.
Ever thought: “I didn’t know what to do with my money so I thought the next best thing was to have someone else manage it for me. There is no reason to leave it in the bank.”
This is the exact thought process I have heard from many of my peers. They end up having successful careers, make a butt load of money, and don’t know what to do with it. The only logical thing to do is sign up with a financial advisor who will then manage the money for them.
Three key things are not realized in this scenario:
- Fees associated to having advisors manage your money are astronomical
- 98% of funds won’t beat the market over the long term
- The path is much simpler than financial advisors lead you to believe
Let’s dig into these three key things.
1. Fees Associated to having advisors manage your money are astronomical
There are many ways advisors can and will make their money. The most common being to charge a 1% fee on your assets under management. To provide an example, if you were to have $1,000,000 of assets under management, you would be paying $10,000 per year in fees. Now that 1% seems a little more than you thought?
The true kicker is the cost over a long time horizon. Let’s look at another example:
- Financial advisor cost of 1% assets under management
- Starting with $25,000 in a retirement fund
- Adding $10,000 per year to the fund
- Fund, on average, earns 7%
In this above example, over the timespan of 40 years, you would lose out on over $590,000 in returns due to the 1% advisor fee.
Now I know what you might be thinking. Are you freaking kidding me!? Nope. Unfortunately I am not. On a positive note, there is a better, more simple solution available.
Time to look at the second point.
2. 98% of funds won’t beat the market over the long term
The key to this statement is over the long term. Funds can and will beat the market this year and even 3 of the last 5 years. The issue becomes if you were to project out over the long term, only 2% of funds will beat the market. The challenge being the ability to pick winners each year. Based off research done by AEI we will take a look at how mid cap funds have performed over the long term.
In the first year, 46% of the funds beat the market. Almost a coin flip. Not too bad. Let’s continue to expand the time horizon.
In the first three years that number drops to 17%. We are now heading in the opposite direction from where we want to be.
Continuing to expand to a 10 year time horizon only 7% of funds are beating the market.
Expanding a little further to a 15 year time horizon and less than 5% of funds beat the market. Now imagine what the number would be looking 20/30/40 years out. Why try to beat the market picking funds or individual stocks when you can take the returns of the market.
Now let’s look at the last point.
3. The path is much simpler than financial advisors lead you to believe
If you have had any time to dig into the Financial Independence community, you would know the path is simple. There are hundreds of thousands of articles detailing out the simple path to wealth.
Financial advisors will overcomplicate things. They will make you believe the 1% fee they are charging will save you a ton of pain from managing your money. Don’t be fooled by these tactics.
There is a very simple path to wealth. I am by no means saying do this, but simply stating what I do. There are these incredible things called index funds you can invest in. They charge low fees (between 0 and .06%) and allow you to invest in the whole market. It is what I personally do with some of my current asset allocation.
If you don’t know what to do with your money and want to keep things simple, I recommend this path. It is simple yet effective.
- Don’t let financial advisors trick you into thinking managing your money is complex. It isn’t.
- 98% of funds won’t beat the market over the long term. Why waste time trying to get lucky and find the 2% of funds that do?
- Fees of financial advisors will cost you hundreds of thousands of dollars.