part 4
More broadly, lets talk about fees quickly:
A professor of mine once said, “Fees are only important in the absence of returns.” Sure ETFs have low annual internal operating expenses. That’s great. They follow an index passively. That’s great too.
What about Hedge Funds, Private Equity, Managed Futures? The fees on those can be astronomical. Why do some of the largest institutional players in the world, the endowments of Yale, Harvard, Princeton, pay the high fees?
Hypothetical moderate boglehead portfolio: VTI – 52.5% - 0.05% internal fees – US broad EQ CWI – 7.5% - 0.30% internal fees – Int broad EQ including DM and EM AGG – 35% - 0.08% internal fees – US broad FI Cash – 5% - 0.00% internal fees Net: 0.09% internal fees, 9.76% 5 year trailing TR in bull market, 7.38% 5 year Trailing SD in a bull market
ETFs ARE AN ESSNETIAL COMPONENT FOR ALMOST ANY PORTFOLIO. That being said, they are not the only solution and can be complemented with other assets and other strategies.
ECON 101
What are the traditional asset classes? Stocks, Bonds, and Cash What are alternate investments? Everything else.
What are some things that an advisor can do to outperform an index? Owning the stock and rolling short covered calls month to month IPOs Thematic investing Values based investing AI
Alternate investments: Alternate investments employ assets and strategies that are by definition nontraditional. They seek to pursue investment strategies unavailable to more traditional investments and permit they use of various tools and techniques not broadly permitted ore exercised in traditional formats, which may help improve the risk-adjusted returns of a portfolio. They: Use leverage, use derivatives, use short selling, employ heavy concentration, use illiquid or private investments. Core Real estate Global macro strategies Broad private equity Commodities Managed futures Credit long/short Equity long/short Emerging market long/short Event driven Relative value
AI isn’t for everyone, but neither is Boglehead. What really surprises me is nobody has talked about the risks of Boglehead… How people can blindly say “go with a three fund portfolio and ignore all market conditions” kind of bewilders me. If AGG or some US aggregate core bond ETF is your only fixed income holdings, how do you hedge interest rate/duration risk? Right around the corner in either September or December, the Fed will more than likely be raising rates. Seriously, how on earth do you manage your duration risk with one passively managed etf? How do you manage systematic risk if the US economy turns into a 6 year bear market after the past 6 year bull market? How do you manage the effect of the strengthening dollar? How do you manage China’s abrupt halt of commodities consumption and subsequent falling commodities prices? What does the Iran Nuclear deal mean for oil supply and the effect on the energy industry in the next 3-5 year? How do you manage slower GDP growth in the US? There are so many risks the Boglehead just ignores and says, “lower fees guarantees higher long term performance.”
If you employ Boglehead theory, just watch your booty. ETFs have seen a huge inflow of dollars as Mutual Funds have seen a huge outflow. Never follow the herd.
Other services
For vehicles 3 and 4 mentioned earlier, an advisor goes beyond just investment management. A good advisor will do your financial planning with you. How much does it cost to send my 1 year old to college when they turn 18? We can help with that. How much do I need to retire assuming my expenses are 49,000 a year?
The team I work has a full time staff concierge that comes with our fee-based and fee only platforms. Need the best rate or best price on a car? Hello concierge. Traveling and need help figuring out which credit card will maximize the points you get? Hello concierge. Need an emergency hotel when the Italian pilots in Florence go on strike? Hello concierge.
We can plan for retirement. We can plan for education. We can pay your bills if you want us to. We can plan for incapacitation. We can help implement tax minimization strategies. We can assist in estate planning. We strategize mandatory RMD withdrawals. We manage your wealth.
I could go on and on and on but this is already a wall of text and my wife is pissed I’ve been sitting here typing for 3 hours.
TD;LR All financial advisors are the devil incarnate, master of high fees and self depravity. All financial advisors aren’t Saint Michael the Archangel, slayer of bad returns and high volatility. Look before you leap. Boglehead works for some needs and objectives. Boglehead doesn’t work for some needs and objectives. Never stop learning. end part 4