There has been a discussion about financial planners on the "hp alumni" mailing list lately, triggered by someone wanting a fee-based financial planner. There's a lot of discussion about how to pick an advisor, how to pick investments, how to think about investments, etc. Someone talked about how financial planning isn't only about investments.
Here's a bit of our journey.
First, like many couples, we have somewhat disparate views about money. One of us would like to spend more, the other is never quite sure we're saving enough. Words like "deprived" and "paupers" have been used, blood pressure has risen. We love each other a lot, but that doesn't mean we don't have conflicts. How much is enough? What is our vision for what we're going to do when I really don't want to do any more of the high-tech thing, the commuting, the political stuff in the office, and all that? (Not to imply I'm unhappy with my job, for any of my colleagues reading this -- but there are some days I would rather catch up with things around the house, or at least away from the office.) We have no disagreement that we are saving proportionally more than our friends are and living more simply. That said, we have been to Europe three times since 1999 (twice including the kids), etc
Anyway, one thing we needed was some clarity about how much saving is enough. Another thing we wanted was some advice about how to invest the "retirement" funds. I wasn't sure if we needed ongoing help (I figured we could just consult the guy once a year for rebalancing, etc.), but we ended up opting for it.
So, although our planner does a bunch of financial stuff, a significant part of what he did for us was... getting us to talk about our visions for the future. What are the top 3 things we want to see happen before we die? If you were to die tomorrow, what would be your regrets? If you knew you were going to die some time between 5-10 years from now, if you had some oracular way to actually know that (but also that you'd feel fine up until the day you dropped dead), what would you change? He got us to talk about all this, to get closer to what a shared goal might look like for us.
OK, it's now 2/5. So here's a comment about stock pickers. I have not done the research myself, but to me it seems credible. Supposedly if you look at how well stock pickers do over time, most of them (not all) do no better than chance. (This kind of story comes out from time to time in the press.) There are exceptions! Peter Lynch and Warren Buffett come to mind. But it's too late to ride Peter Lynch's wave - he quit managing Magellan years ago. The other thing about people like Peter Lynch is that in order to have made a bunch of money with him, you would've had to have picked him out from the crowd before he began his 18-year (or however long it was) streak.
An illustration that made a lot of sense to us was the coin-flipper analogy. Imagine if you had hundreds of guys flipping coins daily for some years, and you reward them for flipping "heads". The vast majority of coin-flippers get results that statistics says are within a range attributable to chance, although for short periods some of these guys look like geniuses and others like idiots. A few, like Peter Lynch, consistently flip more "heads" over a long period of time than statistics would predict -- that is, they get results that are so good that it's not reasonable to say they just got lucky.The proposed alternative, which made sense to us, was to diversify, picking a basket of stocks slightly overweighted in small-caps. The other thing is to watch the asset allocation. Which brings me to the Fisher Investments thing. We got the mailings, responded to one, and ended up talking with one of their sales guys in our home. He was very convincing. The essence of his pitch was that they have very smart people who correctly guessed when the bubble was going to burst. Oops -- I mean "correctly forecasted" when the bubble was going to pop, and got their clients out of the market before the big slide. The conclusion (although everyone says past results are no guarantee of future performance) that we were supposed to reach is that the very smart people at Fisher will predict future trends as well as they did in the past.I just remembered a guy who retired from my former employer. He decided to go to the racetrack, and claimed he could beat the house. I found it astonishing that someone could actually believe something like that, but he said that by looking at the horses, etc., he could get better results than chance would forecast. Maybe he was right; I don't know. I suppose I'm less willing than some (most?) to believe this scheme could work, and maybe that's why we chose a planner over a stock picker. More on this below.
I think this is one of those personality-related or maybe temperament-related things. Do you want to base your investments on a group of very smart people who correctly forecast big movements in the past, or do you want to instead follow a system that doesn't rely as much on "very smart" people being right (or lucky, to take the opposite view) in their forecasting the markets?
Basically, there are two ways to do well when the stock market has big fluctuations. One is to guess or forecast when things are about to head downhill, and move a lot of money out of equities into cash for example. Then you have to forecast when stocks are going to move up again, and start buying.
The other way I'm aware of is to rebalance often enough to take care of things. So if we were hypothetically 70% in equities, 15% in bonds, 10% in real estate, 5% in cash, and stocks suddenly doubled, we'd rebalance the account to 70-15-10-5. When the market crashed, we'd rebalance it again and take advantage of rising stock prices that way.
This system requires insight and intelligence up front (and discipline in execution), but it does not require a bunch of very smart people to be right about when the market is going to soar or crash. You might make a little less money this way than by betting on very smart people, but you might lose a little (or a lot?) less money this way if the very smart people (think LTCM) turn out to be wrong.
That's essentially how we chose a financial planner over an investment company. No, it wasn't completely rational or logical. But what decisions do you make that are completely logical or rational? Only trivial ones! The really important ones -- who you will marry, whether to make a career move, how to handle the kids -- those are all made with the heart and the stomach. The head, too, but not only the head.
So we believe more in systems than in the ability of individuals to forecast the market.
Now, how do the accounts work? They're held in our name at Schwab. All the statements come to us. (they go to the investment advisor, too.) The investment advisor has the power to make certain trades, to withdraw their management fee, and to sell stuff and send the proceeds to us. Schwab doesn't let 'em sell stuff and keep the proceeds. This is all written on forms from Schwab. I don't know much about this industry, but it sure seems like a smart move on their part to provide this kind of account structure.
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