Financial Advisors vs Monkey Throwing Darts, Like REALTORS?

Disclosure: I am not a financial advisor. This is not financial advice, and you’d be an idiot to follow what I do personally.

I personally only own ONE “stock”, and that is called SPY. The #1 bought and sold stock in America, meanwhile most individual investors don’t know about it.

It is an Index Fund (also called an EFT, Exchange Traded Fund) that has all of the S&P 500 rolled into one stock with virtually no fees and no annual maintenance. Motley Fool wrote that “3 out of 4 mutual funds don’t beat the market.” (ie SPY)

So why not just be average and beat 75% of the funds every year?

The Wall Street Journal used to have a competition. They would have a monkey throw darts at a group of stocks and compare the results to the experts. I believe the monkey repeatedly won. What does this mean? This means that the market is too efficient for somebody to consistently beat it.

Just yesterday my girlfriend asked me to review what her financial advisor sent her. It was 25 pages of gibberish. It appeared as if the entire intent was to confuse the reader into thinking, “Wow, they really must know what they are doing, I’ll just tell them YES.” (Sound familiar? Some Realtors take the approach of, “overwhelm the client with BS to scare them into signing.”)

So, I looked up the 10 Mutual Funds in her report. I compared them to my SPY and I was impressed... my monkey theory was blown. 8 of the 10 blew away the industry average (S&P 500 & SPY). This couldn’t be… So I had her log into her account. I then looked at what her account had. They were totally different mutual funds!

Upon rereading the manifesto, those well performing funds were the “RECOMMENDED funds” for the future. Are you freaking kidding me!!? The funds she owned did horribly! Probably 10% worse than SPY! So what they did was take 10 random funds that DID do well and say “we recommend you buy these, look how well they did, you will do great next year.” Are you kidding me?

So much for a long term plan to leave the funds untouched for 5-10 years. The worst thing you can do is dump the under performing ones (all of them) every year and chase the next big thing. (Re-Disclosure: Ignore me, I am not a financial advisor).

Oh yeah, for those that don’t know, there is something called Churning an Account. Sometimes they only make money when they buy and sell, not when it sits. So not only did their initial picks blow, they now want to sell and rebuy new funds to get another round of commissions.

What did we decide to do? We sold everything (they were down from the purchase date, so no taxes, actually a tax break). And we bought just SPY (The S&P 500 rolled into 1 “index” stock).

Why haven’t you heard about the #1 stock (in volume, look for yourself) being bought and sold in America everyday!??? Because the financial advisors make squat on it! And magazines are always looking to beat the market and promote their advertisers (mutual funds). Nobody gets rich pushing SPY.

Even the torch bearer of truth, the Motley Fool, figured out that they don’t make money on pushing “dumb” reliable and outperforming SPY, instead they receive millions from Mutual Funds to sell their products. This link even talks about how 75% of mutual funds stink and their theory on how to find that 25% (which is nearly impossible in the long run, but they make money watching people try!).

Compare your funds to SPY here, and report back in the comments.


(Sidenote: One reason to consider NOT unloading your funds would be the tax ramifications. For my girlfriend’s IRA it was a Tax-Free no brainer so we sold and converted to SPY last year, but we held off on her other funds since she would have to pay capital gains for the gains. Now that the market has pulled back, and they are nearly all losses, we are cutting bait and switching to SPY. By the way, we would have been much better off if we had paid the tax and swapped last year.)

For those consumers that hate Realtors as much as I hate this one particular financial advisor, I now better understand them.

Hopefully by explaining better what we do, and talking straight, and not feeding you BS, we can separate us from Financial Advisors like this.

I’d love to hear from a Financial Advisor and debate the practice above.

Please correct me. Show me what I am missing (I really want to know!). Nobody in the history of mutual funds has consistently beaten the average, so why buy Mutual Funds which:

  1. Start 1-2% behind every year in management fees (don’t be fooled by “no-load” funds, they got fees)
  2. Only have a 25% chance of beating the average, with all the downside risk of doing much worse
  3. Paying a fund manager $400,000 a year, and he can’t even beat a monkey.


Also I am making no opinion on whether or not to get into the stock market, but if you did, how did you decide what to buy?

Feel free to forward this post, and don’t forget to sign up via email for future posts in the upper right corner of

Update 6-1-08: I just went to a wedding and ran into a Financial Advisor that was not happy with this post. Saying that he is going to tell people to go FSBO and not use a Realtor. I think he missed the point and missed a great opportunity. I want to be corrected! I want somebody to come in and help my misunderstandings and misconceptions. I blog so that consumers better understand what we do, and a good Financial Planner should take this opportunity to help everyone understand how a good advisor works (feel free to add a link to your site even, or contact info).

– Written by Frank Borges LL0SA- Realtor (not a Financial Advisor) Please report typos

Read more here at Motley Fool: Why ETFs [like SPY] Beat Mutual Funds

  • 1
  • May
  • 2008

38 Responses to “Financial Advisors vs Monkey Throwing Darts, Like REALTORS?”

  1. Brian Block -- Northern Virginia & D.C. Real Estate says:

    Frank, this is why the average person is better off picking an index fund or an industry sector fund (i.e. health care, energy, precious metals) that they believe in and then just sticking with it and dollar-cost-averaging their investments. Professional or amateur stockpicking doesn’t do much better than a random selection unless you get lucky.

    Love the picture of the monkey throwing darts!

  2. Emily Lowe - Nashville, TN Realtor says:

    I am no financial expert myself, but that does sound insane. The way that I pay my advisor is with a commission that is ONLY paid if my stocks make money. If they don’t make money, then he does not get paid. So it is in his best interest to be following my money very closely.

    My personal philosophy is that if you want to make quick money in the stock market, then watch the 13-15 year old kids. Whatever is starting to make the rounds with these guys is about to make a lot of money! Buy the product low, then sell it at the peak!

  3. Fran 'The Title Man' Gaspari Title Insurance-PA & NJ says:


    Great post…amazing how far a little common sense goes…and how rare it is!!! Thanks, Fran

  4. Joe Virnig, "No Ordinary Joe" says:

    Most of my IRA is invested in an S&P 500 index fund. Low fees, no load, no worries!

  5. Bill Exeter (1031 Exchange Expert) says:

    Hi Frank,

    Great post! I especially loved the graphic with the monkey. Your comments are right on the money. You should never “chase” yields or returns or performance, and yet that is exactly what most investors do. The trick is to pick mutual funds that will perform well going forward and not pick mutual funds that have done well in the past. You can also look at their 5, 10 and lifetime performance numbers to see how well they hold up over the long run. It is still difficult to do this, so buying an index fund can be a great way to keep investing and not worry about it.

  6. Paul McFadden says:

    Frank: As with anything, it’s all about trust and working with someone who is competent. Whether you’re a realtor (you), a mortgage broker (me) or a financial advisor, it pays to know what we’re doing so we are working in our clients’ best interests.


  7. FRANK LL0SA Va Broker- says:

    Hey Brian,

    I disagree (kinda). Even picking a sector index fund is still risky. Too many uncertain ups and downs.

    So I have sold everything and just took the average approach. Lowest risk. I grab the Wall Street Journal and I can see on the front page, I did what the market did. If I really want to mix it up, I might get some DIA or QQQ if I want some technology (higher risk and higher return, google it).


  8. FRANK LL0SA Va Broker- says:


    I’d say look over VERY carefully how you incentivize (spell check doesn’t like that word) your advisor. Go look at your last two reports. How did you do versus SPY?

    Also you might be unknowingly ENCOURAGING him to take on HIGHER risk products in hopes of getting a cut of the big win, versus a more reliable result with SPY.

  9. FRANK LL0SA Va Broker- says:

    Hey Paul,

    I agree with you. But with the financial advisor, this person has worked for my girlfriend’s family for 15-20 years managing their money. I just don’t get it. I want a “good” financial advisor to challenge this post.

    When we converted all of her funds last year, they showed all these stats on how putting it all into S&P 500 wasn’t diversified enough. How she was missing out on international, or utilities. But the problem is, those fluctuate a huge amount and on average, don’t beat the average.

    While I CAN see how they might help with planning your IRA, or deciding how much stock to buy, vs a type of home, or tax matters… but when it comes to buying stocks, if you decide that you want to be in the market, I see zero benefit in their recommended, high kick-back Mutual Funds. It seems like a huge scam to me.


  10. million says:

    Frank, you’re correct. it is a huge scam. read Malkiel’s Random Walk. i’d send you my copy but i loaned it out a year ago and haven’t seen it since.

    also, a good starting point for any financial novice is Personal Finance and/or Mutual Funds from the Dummies series. they discuss, and expose, the financial analyst profession.

    bottom line: they are salesmen, same as the Realtor profession. you sell homes, they sell securities. caveat emptor.

  11. Tom says:

    Another great post, Frank. However, your article too deeply discounts two fundamental concepts in economic decison making: opportuniy cost and specialization.

    Regarding opportuniy cost – Yes, you can choose your own funds, which requires a fair amount of due diligence (or at least it should0 or you can have a financial planner does all this legwork for you, which would leave you time to seek economic rents from activities that would yield greater utility.

    Regarding specialization – Should an investor forgo having a financial planner and take on the responsibilites of performing their own due diligence, they can certainly do so, at a detrimental opportunity cost to themselves; however, given that a financial planner specializes in such activity, the layperson will require significantly more time to complete the due diligence and runs the risk of performing the task insufficiently and increasing risk in the transaction.

    Of course there is going to be moral hazard in any transaction of this nature due to what I believe is a natural predispostion towards self-dealing, but this can also be mitigated by hiring a properly vetted advisor and performing a second round of due diligence based on the findings of said advisor.

    Last, I would point out that a financial advisor is just that, an advisor, not a finaical decision maker. I am not a financial advisor, but I deal with them day in and day out in my dealings as a banker and can say that like realtors, there are good ones and bad ones.

    I don’t perform my own plumbing, electrical or legal work. I hire a plubmer, electrician or attorney for those tasks. I consider myself a fairly intelligent individual and could likely fix a leaky pipe, hang a ceiling fan or draft a will, but should I screw up, I will have no one to blame but myself and still be out the initial cost savings at the end of the day due to having to hire the same professional I chose to forgo to come in and clean up my mess.

  12. Larry says:

    In general, I agree with your conclusions. But several factors may still lead one to choose an active mutual fund rather than passive index fund:
    a. SPY only invests in large US companies. Healthy diversification likely includes small caps & non-USDollar securities, which are often less market-efficient that the SP500 and hence less appealing to index.
    b. While no fund always outperforms SPY, some funds have outperformed for a long period of time: e.g., Magellan in the 1980s & 90s. Someone has to make the market efficient.
    c. Individual investors often have longer time-horizons than institutions. An individual can look Riverside County CA and say, “This is subprime stuff is nuts; I’m going dump all real estate stocks before the bubble bursts.” While an institution often says, “Countryside is trading at a below-average PE: time to buy.”

  13. cpa1 says:

    I will take up the realtor bashing.

    Why doesn’t the NAR propose a tougher licensing process. From what I have heard the real estate license exam is a joke. Do they think a majority of their 1.3 million members would bail out? I feel like it is so tough to choose a realtor. Just going by word of mouth is tough.

    Also, realtors need to be held accountable for the services they provide. In any other industry where such a large asset is changing hands, the sales person follows up on the purchase and provides customer service beyond the point of sale. Once a realtor makes the sale, they just move on, and if they did a horrible job, so what. There needs to be something in their contract that makes them follow up in 6 months or a year.

    Also, the exculsive listing contracts are crap. I don’t know much about these, but I have heard that if the person selling the house wants out of the contract, the realtor doesn’t have to let them out. Is this true? If it is, that is beyond stupid. Realtors are supposed to be providing a service, if they don’t fulfill their end of the bargain, everyone should just walk away from the agreement.

    I’m sure I have more, I will think about it for a little while and then rant some more.

  14. Anonymous says:

    There are people who have consistently smoked your SPY, and for long periods of time.

    The folks at LLPFX are one contemporary example. For a certain perspective on how that is possible –

  15. FRANK LL0SA Va Broker- says:

    Hey Anonymous,

    I was happy to see your post. It linked to a long page of gibberish.

    So then I took your ticker and compared it to SPY.

    It was about 6% LOWER than SPY, and that doesn’t consider extra fees that your fund might have up front or hidden management fees annually.

    Here is the 2 year difference:
    12% lower.

    And 5 years:
    30% lower.

    I was hopeful, but in the end, “nobody beats the whiz”

  16. Anonymous says:

    Hi Frank,

    The indexing strategy you are describing is for most individuals a good alternative – however by only selecting the S&P 500 index you are missing the diversification benefit of owning other asset classes that would yield a higher return. Part of the management fee would have just paid for that advice. The fee would also help pay for the Ivy League educated math PHds that can quantify this long term gain over your single index strategy.

    BUT do not get me wrong I think it is not smart to pay 1-2% of assets to a guy who just tells you to choose a highly efficient portfolio – that is why I hedged with a comment about your strategy being appropriate for most people.

    The “other group” is usually highly compensated, educated and sophisticated. They do not deal with stock jockeys. They want alpha (performance above the benchmark index) and are willing to pay for it. They want and are willing to pay to be represented by the best. The financial advisor profile and pedigree for the type of advisor servicing this other group is much different then the guy who gave your girlfriend expensive 401k advice.

    Why pay a portfolio manager $400k -because adding 25 bps of alpha to a $10B fund has just made investors $2.5 million.

  17. FRANK LL0SA Va Broker- says:

    Hey Tom,

    I completely agree with the Specialization concept. But my plan no longer has thinking and time involved. It is just a simple “beat 75% of the market with the lowest risk and lowest fees.”

    I don’t believe in doing Due Diligence in picking mutual funds. How does one do that? Buy a Wall Street SmartMoney magazine of “top funds?” And read their ads? Even somebody doing their homework will make less 75% of the time. (in my opinion)

    But you are probably right, I might not have met a “good” one yet. (no solicitations please, well maybe 1 or 2 can email me, but be prepared)

    The purpose of this post is to have people question where their money goes and who they are entrusting.
    To help them take a 101 snapshot and compare how their advisor is doing vs SPY.

    And yes I maintain that they overly
    complicate things, just to confuse and give perceived value.

    If I knew that 75% of painters would do a worse job then my neighbor that wanted to do it for nearly free… somebody knocking on my door promising that last 25% service, better be awesome and they better prove it.

  18. gregoryw says:

    You’ll make a lot more money with the SPX if you sell it in bear markets and wait it out in US Treasuries. There’s an easy timing signal – when the 50 week moving average crosses the 20 by more than 1%. It’s never been wrong.

    In case you’re wondering, we are in a bear market. Reasonable investment professionals know we’re going to see the SP tumble to the low 1000s and there’s a solid case for a three digit SP500 in the next 36 months. Gold and treasuries for now.

  19. Anonymous says:

    Hi Frank.

    Your confidence, ignorance, and links are quite amusing.

    Perhaps a financial advisor could tell you about the reinvestment of mutual fund distributions, how to factor them into your investment returns, and Yahoo finance charts!

    funny, too, calling a great piece of writing and thinking by one of the greatest investors of all time (that would be Warren Buffett) “gibberish”!

  20. Colin says:

    That was actually a fund I have been following for about 5 years…definitely high risk and if I had invested in it I would have moved out of it a year ago. Easy to say I know, but when I first discovered it, it was already closed to new investors (and I had nothing to invest anyway).

    Here is a fund I currently do own and have for the past 6 years.;range=5y;compare=nbgex;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefined

    I can’t say this is even that great of a fund, it was just simply the best fund available in my 401 k selections. Right now it is shit, but so is everything else in it’s category. I can still say that this fund will likely continue to outperform SPY over the long term in combination with other other investments in other market sectors. Not really high risk, VERY low fees. Good fund overall. Still there are better funds out there. You just have to be really really careful about selecting them. Still I agree that for most people who are not inclined to do research on their funds purchase history, turnover, what stocks the fund is even linked to, etc., they would be better of just investing in index funds or ETFs.

    I do believe that it is possible to selectively invest and come out better for it in the end if you are smart. Investing is not a zero sum game like gambling. The market as a whole is growing so there is money to be made. Plus with all the information that is available these days it is easier than ever to be an informed investor. Of course the big caveat there is: IF you have time or interest to do so.

  21. Ferrari says:

    great post. I was in the same situation as your sister 5 years ago. I started reading everything I could on how to pick a financial advisor. Then once I figured out what where the criteria I also find out I already had 90% of the knowledge to do the job myself and save the 1-2% commission. The main realization is that, if at all possible, to beat the market you need to have better information, which means you need to check follow the market 365/24/7, which very few people care to do.

    So coming back to reality here are my total return I just checked on Vanguard:
    1yr: 0.1%
    3yr: 11.6%
    5yr: 10.6%

    while the SPY returned
    1yr: -4.11
    3yr: 7.98
    5yr: 10.33

    how I did that? I follow the main idea from free articles on asset allocation at I choose only low cost Vanguard funds, 100% equity, half in US and half international with a yearly rebalancing. This technique is proven to provide better results that SPY (average of +2% a year) with less risk (lower standard deviation).

    PS: Incidentally I feel when I will buy a house I will follow the same strategy. Read everything I can, and then hopefully I will find somebody to be more informed than me, only in that case I will be happy to pay his/her commission.

  22. Ferrari says:

    here some working links on specific articles:

    1) Basic understanding of Buy&Hold:

    2) Assett allocation tuning:

    PS:If you are willing to spend 1hr a year to keep track of your investment, then there is no need to spend 1-2% in commission.

  23. Anonymous says:

    I agree with your post. Earlier this year I parted ways with my financial advisor after his ETF and mutual fund picks had lost money – and he refused to sell them.

    So the only criticism I could make is that while the SPY is great, investing in an index outside of the USA might be even better.

    For example, there are several ETFs now that offer investors the chance to invest in these indices. I own ILF, which has been amazing and will probably continue to do well. It represents stocks in several companies from Brazil and Latin America – countries with robust economies.

    BTW, thanks for all of the no nonsense information you provide. I like your style!

  24. Anonymous says:

    I am a Certified Financial Planner and have been in the financial services industry for over a decade. Here is my 2 cents:

    The debate of whether to use index funds/ETFs or actively managed funds will go on forever. Either approach can be effective. However, you are missing the bigger picture. A man by the name of Harry Markowitz won the nobel prize for his theory on asset allocation. He studied large endowments and pension funds and how they invest there money. What he found was that over long periods of time (10+ yrs.) 90% of a portfolio’s return was determined by its asset allocation (i.e. what percentages are invested in large company stocks, small company stocks, international stocks, bonds, cash, real estate, commodities, etc.). The other 10% of the return was determined by security selection (i.e. should I buy the actively managed large cap fund or invest in the SPY as you suggest) and market timing (i.e. do I buy today or wait until tomorrow b/c I think the market is going to fall today).

    Despite these findings the average individual investor still spends most of their time worrying about which fund or ETF to choose and when to buy or sell it, when they should be worrying the most about their asset allocation.

    The primary flaw with your recommendation to invest exclusively in the SPY is that this only tracks the performance of one slice of the market (large cap stocks). Investing 101 teaches us that you need to be diversified. Not just diversified amongst different stocks (which the SPY accomplishes by investing in the 500 largest publicly traded stocks in the US), but also diversified by asset class.

    So if you like the idea of using all index funds/ETFs, fine. Just make sure that you incorporate a index fund to track small and mid-sized stocks, international stocks, and bonds at bare minimum. There are plenty to choose from and they are all very similar. As your portfolio grows you may want to increase the diversification further and add some alternative asset classes to your portfolio such as real estate, currency, and/or commodities (all of which tend to have a fairly low correlation with stocks and bonds and can therefore help to smooth out the returns in your portfolio).

    One last thing, I hate when people generalize and talk about all financial advisors being sleazy sales people, just like I am sure you hate when people talk about realtors this way. If you don’t want to pay the fees associated with an advisor and you are comfortable doing things on your own fine. If you are working with an advisor or thinking about it look for a Certified Financial Planner (CFP), they have undergone extensive training and education to acquire and maintain that certification much like an accountant who is a CPA. Also, look for a fee-based planner (they can charge fees to advise you on your portfolio or develop a comprehensive financial plan for you). This avoids a lot of the conflicts of interest that have been prevalent in the financial services industry. Lastly, avoid anyone who promises outsized returns. A good financial advisor should spend most of the time talking about all of the disciplined strategies that they can use to help you achieve your goals (asset allocation, dollar-cost-averaging, rebalancing, tax strategies, etc.), not bragging about the returns they can get you (which we all know they have no control over).

    Anyway, that’s my thoughts. Hope it helps.

  25. FRANK LL0SA Va Broker- says:

    Hey CFP!
    Thank you so much for your comment. The goal of this post was to get people like you to tell me better what you do.

    Why didn’t you leave your name and contact information?

    As for the fee based services, are you referring to the advisors that charge 1% of your portfolio, regardless of churn, or are you talking about an hourly fee.

    As for diversification, I hear you. There technically is an Index stock out there that offers diversification through at least the US stock market right?

    What did Harry Markowitz find in regards to managed portfolios vs the index in the long term?

    Also I don’t think I was recommending SPY (maybe I was), but I meant to say that that is what I decided to do personally since my girlfriend’s financial advisor wasn’t any good, in my opinion.

    Thanks again, I hope that more Advisors will chime in, instead of just giving me grief verbally.


  26. Warren says:

    I believe you’re pretty much correct, but there is a decent case to made that the only good reason to invest long-term in something other than an S&P index fund is to add some international exposure to your portfolio. That said, I think a wise investor could be putting 80% into their S&P, 10% into a developed market fund and 10% into a developing market fund. But hey, I don’t completely follow my own advice, I put 50% into S&P, 10 into foreign developed, 10 into foreign developing and split the rest between some low cost mid and small cap value funds to get some exposure there.

  27. FRANK LL0SA Va Broker- says:

    Hey Warren,
    I hear that all the time. International exposure.
    I have two issues with that.
    1) The US 500 companies already have built in international exposure. SOme of them already get 40% of their business overseas.
    2) Sorry but the rest of the world doesn’t work like the US. Growing up, my family had international exposure in Mexico. The currency was devalued and it went down like 70%. Obviously anything can happen, but I think it is MORE likely to happen overseas. So yes, the returns are higher, but with it, the risk is substantially higher.

    So I personally don’t bother with it.

  28. Warren says:

    Good points, and I truly don’t think you can go too far wrong sticking with the S&P, I’m simply saying I think a good case can be made.

    First, like you said, the rest of the world does not operate the same as the US. While most places are a lot ‘worse’, some stock exchanges (like the London Stock Exchange) are actually pulling ahead in terms of technology and fiscal accountability requirements. The rest of Europe is also finally modernizing their exchanges away from being an old boys club.

    I also believe that countries like India (and perhaps Brazil) will eventually wind up being economic power houses.

    Your comment on Mexico is very apt: if you put all your eggs in one basket, look out. The value of the US dollar has plunged in the last 5 years, meaning my US investments have really (at best) treaded water in international terms. Meanwhile, I have about a 50% ROI over the last few years on the Canadian dollars and Euros I have left over from trips sitting in a shoe box. (Also, none of the international funds would invest solely in one economy, so that risk to an index fund would be minimal).

    Like you said before, past performance is not necessarily the best indicator of future performance. I just don’t think that the next 40 years can possibly mirror the last 50 years: how much farther can the US pull ahead? Surely other countries economies can and will at least grow faster (if not catch up).

    I think the financial advisor guy explained why you might want to invest in small / mid-cap indexes better than I could.

    Anyways, if you’re comfortable with the international exposure in the S&P, I’d definately say stick with it. After the much larger expense ratios of an international fund, you certainly may be right.

  29. Thomas says:


    It wasn’t Markowitz that did the study. You are referring to a study by Brinson, Hood, Beebower published in 1986 with follow on studies by Ibbotson. The study is controversial at best and is weighted way too heavily by financial advisors. Do a little research on the paper and I think you will agree.

    To everyone – pick up a copy of David Swensen’s “Unconventional Success”. He runs the Yale pension fund and has outperformed the market year after year after year. He will shred the mutual fund industry, give you a good indexing model and some foundation on the markets and how to invest with a little wisdom and prudence.

    Frank – yes, the model that you refer to where financial advisors are paid by mutual fund companies is severely flawed in that advisors’ interest are not aligned with you the client. They are tempted to front the highest paying mutual funds and not necessarily the best ones for the client. The industry is moving away from this and towards, albeit slowly, a model where the advisor is paid solely by the client.

    The challenge in this model is to find an advisor that does his/her homework well enough and has a deep/broad enough understanding of economics, markets, and finance to construct a portfolio that can outperform a simple indexed portfolio. And it has to outperform at least by the 1% – 2% fee that you pay the advisor. Is this possible? Yes. However, you have to really do your homework in finding the right advisor and the good ones have minimums, typically 500K to 1 million.

    David Swensen recommends that individuals index. Warren Buffett recommends the same thing. So does Malkeil as mentioned in an earlier post.

    If you are going to do it yourself and you don’t want to invest a lot of time then use the indexing models that Swensen or Malkeil recommends.

    I manage client’s portfolios with discretion using a globally diversified allocation model that I manage. I buy/sell stocks and some ETFs directly in clients, by block trading accounts, very different from mutual funds. There’s no transaction costs , redemption fees, or entry fees. Just one annual management fee. I leverage teams of analysts to vet the investments and I use economists to help determine where around the globe to invest. It’s a very complex actively managed model. Do I outperform SPY? Yes. So far this year my strategy is down about ½ the market, net of fees, and last year it outperformed the market by a good margin. Is it hard to do? Absolutely. Can I consistently do it? I think so. As soon as I don’t rest assured I will move to an indexing model and look for a new career, maybe real estate.

  30. Anonymous says:

    Its CFP again. Harry Markowitz won the nobel prize in 1990 for his research on efficient portfolios. I understand that there is a difference between academic research and real life investing, but to discount nobel prize winning research as controversial at best is quite a leap to take. You point out portfolio managers who have consistently outperformed the index. There is however several flaws with your rationale. First of all the most talented managers, which there are very few of, are usually not accessible to individual investors. Why, because once they have built up their reputation they jump ship from their mutual fund manager duties to where the real money is (running a large pension fund, hedge fund, or institutional portfolio) which the average investor either does not have access to or does not have the $1-10 Million minimum investment required to get in. Secondly, just because a manager has a great run does not mean her or she is invinsible. Case and point, Bill Miller, the manager of Legg Mason Value Trust. He beat the S&P 500 for 15 years straight calendar years from ’91-’05, one of the longest streaks ever by a mutual fund manager of beating the S&P 500. The problem is that since ’05 he has gone on a terrible cold streak, trailing the S&P by over 10% per year. This year the fund is down roughly 30% and is trailing the S&P by over 16%.

    Believe it or not, I actually do believe in using actively managed funds. I just feel like your approach is wrong. If you go in bragging about beating the market you are setting unrealistic expectations with the client and you are setting yourself up for failure. A good financial planner is going to focus on the things that they truly can control: setting up a well balanced and diversified portfolio that is in alignment with the clients risk tolerance and goals, implementing a good tax strategy, reviewing the client’s estate plan and insurance coverage, and when it comes to investing the biggest value an advisor provides is saving clients from making classic mistakes (chasing returns/hot investment ideas and panicking and selling near market bottoms). I can’t tell you how many times I have had clients ask about investing in commodities this year, just like they were asking me about dot-com stocks and tech funds in ’99.

    I guess this is just more of a philisophical difference between a financial planner and a broker/money manager. The problem I think is that a lot of the time the public does not know the difference or understand what it is that both types of professionals can and can’t do for them.

  31. BreAnna says:

    I just happened upon your blog, and I might have a different perspective on your argument. To give some background on me, I am an auditor. I have my Bachelor’s and Master’s degree in accounting.
    I have had a slew of finance and accounting classes, and I work for the largest public accounting firm. I have a bit of knowledge of how things work.
    While I tend to deal more with the financials, I also have an understanding of the market and how things work. I enjoy doing my own research and investing.
    In my opinion, mutual funds are recommended and used by investors, because of diversification and the lack of financial knowledge.
    I will first talk about financial knowledge. Most people don’t know how to read a financial statement. They don’t know how or why the numbers are posted. If they see a footnote on the financial statement in regards to operating performance they don’t really understand what it is saying.
    We (financial professionals) have our own language. For instance, there is a huge difference between possible and plausible, and those two words can make or break a scenario and my opinion the ability of a company to meet or exceed next quarters/years/whatever performance.
    Diversification is key. Some people think that if they own stock in oil, retail, and a construction company, that they are disverfied. How wrong they are! Now they are wondering what has gone wrong when the portfolio is down 30% and they are seeing the stock market falls, on a daily basis it seems. To be diversified, you need to have some money in stocks, bonds, bills, and whatever else.
    Stocks deal with financial statements, and bonds do as well, however, can the beginning/average investor tell me how a premium is calculated on the bond, how about the discount? And how does that premium/ discount actually affect them? What about if the payments are made on an annual basis? How/ when the interest is compound? Does it matter if the stated rate is higher than the Yield? What about bonds that have a call feature? How is that going to affect the interest rate of the bond?
    What I have mentioned above is just the –beginning- of things you not only need to know but truly –understand- to be effect when investing.
    People use financial advisor because they don’t understand this. People invest in mutual funds so they don’t have to understand all of that.
    Mutual funds are –NOT- a bad thing! Financial Advisors are –NOT- a horse and pony show.
    There is a HUGE difference between a REAL financial advisor and someone who tries to say they are one. Kind of like real estate, you have good ones and bad ones.
    Just because the gentlemen had been the advisor for her family for 10-15 years doesn’t mean your girlfriend should blindly trust him. It is and was her responsibility to know who and what she is dealing with. I mean had she never logged on to her account to make sure she had what he said she had? Like you did? If she had looked previously shouldn’t she have known there was an issue?
    I have a tendency to blame the investor, just as much as the advisor.
    Yes you trust the advisor with your assets, and you don’t know about financial statements.
    It is the advisors job to recommend investing opportunities to you, but it is your job to evaluate their ability to do their job and you can’t do that if you don’t have –some- idea of what they are doing. Trusting anyone blindly is just… not wise. Kind of like your observation of having cousin Susie sell your house because she just got her certification from the national realtors associate.
    But if you were going to jump out of the plane for the first time, wouldn’t you check to make sure the person you were skydiving with knew what they were doing? Would you take a sky diving class or two before jumping? Or do you just say… well uh my dad jumps all of the time and he is safe… so I’m good to go. Let’s jump!

  32. Anonymous says:

    You say you put ALL your money in SPY? How's it doing now, as of Nov. 21, 2008? Proper diversification is a key element to investing. Along with SPY, you should own things like commodities, low-risk bonds, emerging market stocks, REITs, currency plays, etc. Diversification means owning assets that do not correlate to the benchmark, usually considered the S&P 500. By investing only in the S&P, you've taken unnecessary risk. You were lucky to get the returns that you did for as long as you did. Monkeys do well because they get lucky. Invest in the right thing at the right time and you too may get lucky. Investing is not only about achieving return, but also mitigating risk. A good financial advisor understands this and knows how to protect assets. Hopefully you sold while your index fund was down only slightly, otherwise you've seen your portfolio decrease 50% in one year.

  33. FRANK LL0SA Va Broker- says:

    Hello Pleasant Anonymous poster.

    I don’t think you read my post. As your comment made no sense.

    To recap, my post said IF you decide to buy equities (In no way did it recommend buying stocks) that the best option was to buy SPY and NOT individual stocks (like GM! or C!) or mutual funds.

    I stand by SPY, even in a down market, has outperformed 80% of the managed funds out there.

    My current strategy is to sell at the money covered calls each month. It pays 8% monthly. Obviously there is more to it than that, but that would require another post.

  34. Jay -- Arlington Virginia Condos says:

    I SPY with my little eye…my own ignorance on financial investing outside of real estate. Also I’m learning about long term use of whole life insurance, etc. The ramifications of all these choices are large $$$. I need to learn more….


  35. Chris says:

    Fact: To Gamble or Not

    Let’s stop the sugar coating. I worked for a wirehouse for years. Assets are gathered to generate fees for company performance. No fee products can do just as well as fee based. Tax deferred will save you a ton if your Long term estate planning strategy is really good.

    The most return you will ever see is investing in your own recession proof business (healthcare industry) that you control the expenses.
    If you don’t have the time or the expertise then you are left to the mercy of investment vehicles in the gambling world called the Markets.

    There is no free lunch!!

  36. Tommy says:

    Hi Frank,

    I wanted to see what your thoughts were on VTI, and if you think that it might be a better investment than SPY?

  37. says:

    Hey Tommy, I have no idea. I’m just a Realtor. I prefer the higher volume trade because I think it would have less manipulation and volatility and lower costs. But I could be wrong.

  38. […] If you have no alternative, sure why not beat the average by 0.25% (heck I do that with how I buy stocks via index funds) […]

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