Monday, June 10, 2013

Breaking Up Is Hard To Do

After a winters worth of research, I'm fairly certain that there are betters ways to invest my stock options as they are gradually cashed out over the next five years. Last year they increased in value by 42% so I'm not in any hurry to cash them out but by law, they must start cashing them out 20% per year until no more. The way most of the people before me have gone is to hire a financial consultant to invest the money for them. I don't think I will go this route.

I already have a financial adviser and have had one for well over a decade. Compared to my previous attempts to pick funds to invest in through my employer's 401k plans, he was and still is well worth the money I pay him. He works on a flat percentage of any money that I give him and will manage that money for life. In his hands, my portfolio has grown faster than it did in the previous decade with my attempts at picking funds out of the handful offered in our 401k plan.

So the obvious thing would be for me to let him take the reigns of my stock options but things have changed. When I gave him small sums of money before, his percentage take off the top seemed small and insignificant. Now that I have a very large sum to give, his percentage take seems obscene for the effort he has to put forth to invest this money. Secondly, I discovered Jack Bogle and his philosophy about investing. Namely that the deck is stacked against you because 80% of financial advisers or investors do worse than the stock index average. Of those 20% who manage to do better, by the time you figure in the investor management fees and the fund management fees, only a handful still do better than what I could do by putting my money in a low fund management fee index mirror fund. There is just no way I can convince myself that I'm better than those handful of people and I won't try to beat them but when I can easily beat 95% of the people by sticking my money in an index fund and waiting, they got my attention.

So my financial adviser called a meeting last week to discuss various things but I knew that he was itching to talk about my stock options which I begin receiving in just under two months from now. He rolled out his various plans that he had for my money and because he is a very nice guy, I'm sure he had my best interest in heart. But he is confined to offer funds that his company offers and of course, he needs to earn a living.

He was pretty deflated when I told him that he wasn't going to be investing my stock options but he took it professionally. I left him a little slack by telling him that if it doesn't work out the first couple years that I receive my options and invest them myself, I will certainly keep him in mind for the later distributions. He did tried to change my mind by whipping out a chart showing two decades of averages. The stock market index over that time grew nearly 8% a year, the average investor only 3.2%, inflation 4% and his company nearly 6%. It was obvious that he was saying that I would fall in the 3.2% category that wouldn't match inflation or his company. But then I told him that he just proved my point. I could invest in an index fund that would match that 8% per year growth and I didn't even have any of the fees that probably weren't included in that chart's calculations. He responded that I was absolutely right and switched subjects.

I felt bad breaking up with my financial adviser. He still has money of mine and I plan on keeping it with him since I've already paid all the fees for the rest of that money's life with his company. But I've outgrown the relationship we've had and it is time to strike out on my own. It is my money after all and I deserve to use every penny of it. So my journey into self investing in my retirement begins. I'm excited and nervous at the same time. But whatever the outcome, I won't regret it. It was time for a change.


Anonymous said...

Buying t-bills would give you better return than that lower number, and that the darn risk free rate. Plus his ROR is only 2% over the RFR.
The Chicago numbers for the last 80 years point to a steady 7.5% growth of the market.
Why I expect the rate of return would be below the T-bill risk free rate is the management costs.

Best of luck.

sage said...

Diversity, even when you are buying indexes! Of course, even when buying an index, there are still some fee (but it is much lower than fees for actively managed acoounts).