Early Savers
Congratulations - You’re a Capitalist!
There comes a time in the career of every successful person when you begin to build wealth. You now have an obligation to your future self to invest wisely. Fortunately, you’re coming into money at a great time. In the 21st century, Early Savers can invest just as wisely as the very wealthy.
To understand what a modern financial advisor can do for you, and why you can afford top-quality advice, you need to learn a little history about wealth management and how computers leveled the playing field for Early Savers.
How it all began: Financial advice for the wealthy
For centuries, the very wealthy have hired financial advisors to manage their investments. Traditionally, this was someone that would select investments based on their opinions of risks and prospects for growth. Monitoring this portfolio of investments required constant attention. As each investment ripened, it might be sold and the money moved to something new. This was skilled work, and it was time-consuming.
Fees for these advisors ranged from 1-2% of assets each year. An advisor managing $10 million for a wealthy family would receive $100-200K annually for their efforts.
Mutual funds bring advice to the masses - for a price
Mutual funds were born in the 1920s, enabling the less wealthy to hire “part” of a financial advisor. The same fee model has stuck with us to this day, and actively-managed mutual funds continue to charge their investors 1-2% of assets each year. This was a pretty good deal in the first half of the 20th century, when information was more scarce and transaction costs high. Now, though, it’s a bad deal.
The computer age kicked off three trends that affected all investors:
- Widespread availability of information including prices, company news, and global news
- Reduced trading costs
- Increased number of traders worldwide
As a result of these trends, markets became efficient, meaning that prices almost instantly reflect all known relevant information.
Efficient Markets
Efficient Markets created a major problem for anyone who made a living beating the markets, since efficient markets can’t be beaten. Essay on Efficient Markets. Fortunately for individual investors, efficient markets are a very good thing, because if you can’t beat ‘em, you can join ‘em.
Three things follow from markets being efficient:
- The best strategy shifts from trying to “beat the market” to trying to earn market returns with the lowest possible fees. Since the US market has averaged over 11% annually since 1926, these are good returns if you can get them with few fees.
- Buy and Hold soundly outperforms frequent trading, which triggers fees and taxes
- Proper diversification, reducing expenses, and reducing taxes become the keys to improved performance, rather than stock selection and market timing which no longer work.
(Note: Some of the things we state as fact may seem radical to you. They really aren’t - and you don’t have to take our word for it. We recommend you start with Active vs Index Investing or our other Articles, where we draw from a variety of sources to debunk some of the marketing myths that emanate from Wall Street.)
The birth of index funds
Starting in the late 1970s, a new kind of mutual fund was created, an Index Fund. The idea was to cheaply buy ALL of the securities in a given market, then make them available to investors for low fees. Over the last three decades, index funds of all stripes were created to track everything from gold and real estate to stocks and bonds in US and International Markets. ETFs, a new kind of mutual fund that we use extensively, have recently emerged to complement traditional mutual funds.
Building a portfolio today
The mechanics of crafting and managing a portfolio are simpler than they were decades ago, allowing advisors to focus on the art of asset allocation, and on maintaining balance across a globally diversified portfoilo.
The cost of top quality advice
The portfolios of Early Savers are typically less complex than those of wealtheir investors, who often have complex combinations of family trusts, each with myrid legacy investments include huge bond-ladders. For this reason we do not charge Early Savers more than our standard 1%. We will not take all accounts, however, just those we believe have a strong trajectory. If you are earning well and believe your prospects are bright, then we’re happy to discuss your situation.
Getting the right advice is a profitable decision
A good investment advisor should be able to improve the returns of a smart, well-read layperson by 1-4% each year at any given level of risk. Anyone who tempts you with higher numbers is either gambling or not being honest. By charging at the bottom of this range, we remain confident that you’ll benefit from our help through both up and down markets.
Don’t fear the market crash
Finally, we’d note that Early Savers are fortunate to have many years in the markets. Those who start off right will find their good decisions compounded many times over. A devastating market crash just means that you’ll be buying assets cheaply for many years. Their value will inevitably go up before you need the money, decades from now.
We look forward to hearing from you.
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