Indexing Without An Advisor

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© Brendan Ross

At Ross Asset Advisors, we view our role as having two components:

  1. Demystifying the markets. We do this through our website for free, and then in a more personal way with our clients individually.
  2. Investing Advice.  The work we do for paying clients on portfolio construction, evolution, and maintenance.

Investing well takes fortitude to handle market movements, patience to withstand long market lows, and the technical knowledge to ensure that you’re getting the maximum return for whatever risk you’re willing to assume.

Reinforcing fortitude and patience

Investment Advisors can be surprisingly helpful when it comes to reinforcing fortitude and patience.  Most investors quickly abandon their strategy in the face of a sharp drop in performance.  This results in buying high and selling low – an unproductive strategy.  There will come a time for most investors when their confidence is low.  That is generally a bad time to sell.  You will want a professional to answer your questions and keep you on track.

The technical knowledge required to invest well

It’s difficult to capture the breadth of technical knowledge that is required to construct proper portfolios.  Here are some questions that should help you get a sense of whether you know enough to invest on your own.

  • If I want a small-cap or value tilt, what is the best way to achieve that without having too many highly-specific funds, which results in portfolio turnover and increased capital gains taxes.
  • Are commodities considered an asset class, and if so what is the proper way to expose my portfolio to them?  Should gold be treated differently from other commodities?
  • What are international currency funds, how are they different from international fixed-income in general, and how should I allocate across them?
  • What portion of my portfolio should be put towards real estate, and should this be in taxable or tax-sheltered accounts?
  • How much international equity exposure is correct, and how should it be divided between developed and emerging marketing?
  • How exactly should I treat my taxable and non-taxable accounts differently?
  • Should an aggressive portfolio contain only stocks, or are there certain bond assets classes that are desirable?
  • If I want to liquidate a large chunk of assets, how exactly should I do it so as to minimize taxes?
  • Rebalancing has transaction and liquidation costs, including taxes.  How often should I be rebalancing, and is this different for taxable vs non-taxable accounts?

Investing with less volatility

Note that these are normal questions applicable to virtually all investors, not a list of ringers.  Proper diversification has universal principles and should include equities, bonds, commodities, and real estate.  Improperly diversified portfolios carry unnecessary risk, meaning they will be more volatile than necessary.  With help you can either create a less volatile portfolio, or one with the same volatility that generates superior returns.  There’s a lot to consider.

If you have learned nothing new from this website, then you may be just fine without counsel.  If you are confident that you can construct a diversified portfolio, then unless you are too busy to manage your portfolio you can probably be successful on your own.

Proper investing won’t happen without a professional

For most people, proper investing just won’t happen without a professional.  Considering the power of compounded long term exposure to equity market risk, procrastinating tends to be a far worse choice than paying for help.  If the articles on this website ring true, yet your investments lie unchanged, you need some help.

By charging a quarterly retainer, we believe we are offering expert advice that you cannot easily replicate for yourself, and that our rate is responsible and appropriate. 

Learn more about Our Approach.

There are some groups that should not pay an investment advisor.

If your current savings is going to be consumed in a down payment on your first house, then you do not need an investment advisor.  You should compare rates on 6-month or 1-year CDs to savings rates at INGDirect and EmigrantDirect.  Park your money and sit tight.  You cannot afford any level of risk to your downpayment.

If you have less than $100,000, then you shouldn’t pay for professional advice.  Best is to read some books from our recommended reading.  If you know you won’t follow through on the reading, then divide your money, including inside and outside your 401K, into 3 pieces.  You won’t really be properly diversified, but that can wait until you have more assets and can afford help. 

Model portfolio for anyone with less than $100K:

  • 40% US Stocks – Go for the iShares Russell 3000 if you want an ETF or the Vanguard Total Market Index in either mutual fund or ETF form.  These are market cap weighted, so you’re exposed more to the larger stocks.  If you want to increase your risk, you can put 25% of whatever you have in US Stocks into a Russell 2000 or Vanguard Extended Market.  This will increase your weighting on smaller stocks.
  • 20% International Stocks – You can use Vanguard’s Total International Stock Index (VGTSX).  This will give you exposure to Europe, the Pacific Rim, and emerging markets.  This fund has a penalty for early withdrawal within 2 months of depositing.
  • 40% Bonds – For tax exempt accounts you can use the Vanguard Total Bond Market Fund, and if you want more risk you can allocate 10% to the Vanguard High Yield Corporate.  For taxable accounts, if you make over $50K you’ll want to choose a tax-exempt fund.  The national funds such as Vanguard Limited Term Tax Exempt will still trigger state taxes, so if you live in a high tax state you’ll want to pick a  state-specific fund if you can find one.

There’s no question that individual investors have a lot to learn.  If you sense that your trajectory is towards having more wealth in a few years, then keep your investments simple, stay focused on your career, and hire an investment advisor when you can afford one.

For those with more than $200K

Those with $200K or more will almost certainly do better with an investment advisor, and we encourage you to get in touch.