A Yachtie's Guide to Personal Finance

Do you really need a financial advisor?

Okay, so, we all know that the financial world is complicated and confusing, and guess what, it is made that way on purpose.

They (being a general blanket statement of money hungry financial advisor and banks) take advantage of confusing terms and contracts to ensure that customers are one step behind.

It is in their interest to keep us in the dark about what they do with our money because if we knew, we would do it ourselves.

Nobody cares about your money as much as you

However, it’s all fair game and legal. Technically, all the nitty gritty details and fees are mentioned within the contracts. So, yeah, it’s totally legal.

You sit down with your advisor whilst he/she half heartedly explains the somewhat selective terms & conditions to you.

Now, most people don’t want to seem unknowledgeable or ‘annoying’ so their questions often go unasked and their confusion increases ever the more.

So, then, do you really, like, REALLY, know what you’re signing?

Ensure you fully understand what your signing before you sign

Surely, if we don’t fully understand our investment contracts or ask the right questions then we don’t know exactly what we’re signing up to?

Never invest in a business you cannot understand

Warren buffet

Points to consider before hiring a financial advisor…

  • They are selling their own product
  • They are pushy, use fancy language and tend to gloss over fee details
  • They take a high fees which comes out of your pocket
  • They sometimes invest in the same funds you could invest in yourself
  • They can’t time the market, and neither can you
  • It has been shown that financial advisors generally don’t outperform index funds*
  • What are they really doing?
  • How do you know their worth?
If you want to go with a financial advisor, make sure you ask these questions.

High Fees

Fees are killers. Even a fee as low as 1.5% can have huge negative impacts on your returns.

Expense ratios (fancy term for fees) are much lower with Index Funds due it’s passive nature of investing. Here, passive indicates the absence of an advisor physically moving your money around for you.

More on passive investing below.

Although there is not a one-size-fits-all answer, an expense ratio of under 1% is ideal. Although, there are many factors to consider.

This shows what a 0.5% total fee would return (0.5% is still sorta high, but not bad)
This is a pretty normal fee (1.5%) and it proves how a small number makes a bug change
These numbers are from a real case study of a yachtie (note: this is a rare case but can happen)

Financial advisors/active investments underperform self-managed/index funds

This one is a tricky one because it involves so many variables, but, generally yes, active underperforms passive.

In 2018, the S&P500 (an index fund that holds the US 500 biggest companies) found in a study that ‘90% of actively managed international funds underperformed against the S&P500 over the past 5 years’.

Further, in Australia, ‘71% of active Australian fund managers underperformed against their index’. This means, financial advisors failed to match the return of the indexes (collection of stocks) they were trying to beat.

Those with a lower net worth and basic financial management needs might fund passive investing to be more effective than expensive financial advisors. More on passive investing here.

DIY investing isn’t as hard as you think and financial advisors aren’t stock picking wizards.

Further, financial advisors are not held responsible for their stock pickings and their performance is often representative of the stock-markets return anyway. That is, their returns are positive when the market is positive and negative when the market is negative.

What’s more, you must continue paying their fees despite receiving a negative return which is further decreasing your return.

Look, my intention isn’t to bash all financial advisors as some are reasonable, fair, well priced and come highly recommended. It’s merely a word of caution against the pushy and arrogant type.


Timing the market

Timing the market is essentially an attempted guess at what the market will be doing in the future and act accordingly (i.e sell or buy at particular times).

Consistently timing the market is catastrophically unlikely

This is impossible to maintain consistently. Impossible.

On first appearance it might seem as though finance experts have predicted the market but this is not all it seems. At one time there are so many ‘experts’ predicting market movements that eventually one of them will be right.

It just a numbers game, it doesn’t mean they can do it consistently or with any reliability.

Consequently, the likelihood of your financial advisor being able to consistently predict the market is extremely low.

A common phrase among investors is; time in the market is better than timing the market. Don’t try and beat it cuz’ ya wont be able to.

Market timing is extremely difficult to do and very very few people can do it, not even Warren Buffet.

Why people still use financial advisors

Despite all of this, many people prefer to keep their money with financial advisors and I can understand why.

It provides a feeling of safety and security. It’s like handing your car off to a mechanic to fix it rather than you doing it yourself. Their credentials and abilities provide you with confidence.

And you know what, sometimes, they do protect your money during a market crash and their performance is worth their fees.

Advisors are also useful to those with a high net worth, complex personal finance structures or those who simply don’t have any interest for self-managing.

Plus, a bunch of financial advisors out there are genuine and can be very helpful, the tricky part is finding the right one for you.

Your personal finance situation and eagerness to self-manage your money will dictate your decision to go solo or with a pro.

The problem is, it can be difficult to know their worth unless until you gain some knowledge yourself.

Read more from others here and here.

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