I propose we draft a FAQ for the new FAQ board that would be more or less a capsule summary of the received wisdom of FIRE types. There could be arguments pro or con for some of the assertions, book or web cites, etc.
Here is a proposed draft:
1. Most people, even financial professionals (stock pickers, newsletters, brokers, etc.) can't beat the market. By extension, neither can anyone trying to follow their systems or by using their own, for that matter.
Overall, the best you are likely to do, is to get average market returns. For most people, these returns are best found in very low cost index funds (that model their target market index) or their first cousin, the ETF.
2. Winning performance is usually only claimed in retrospect. Most, if not all, apparent investment success can be adequately explained by simple statistics: out of any very large group (e.g. stocks, mutual funds, or advisors) there will be some with spectacularly successful records. There is ample evidence [insert cites] that picking today's or recent winners offers little to no assurance of future successes.
The above also holds true for the so-called master investors of legend -- such as a Buffet or a Lynch. To a large degree, their success is "right time, right place." Luck, pure and simple.
It's OK to play with your money, but use common sense. Avoid some of the more glaring errors. Diversify your bets. Avoid trading too much. Don't put all your money into just one strategy. For example, you might own at any one time, 10 to 20 stocks. If they're from diverse industries, you are probably well diversified, no matter whether you picked the stocks via careful research, a stock screen on MSN, or with an Ouija Board. Long term, your portfolio will probably do -- average. Sorry, but that's how it works.
3. Financial services (newsletters, web sites, brokers, advisors, etc.) AS A GROUP or ON THE AVERAGE add no net value to investing decisions. In fact, they impose a small loss on the expected (average) return of a market, simply due to trading, advising, other costs, as well as commissions.
The cost of the middlemen varies widely (mutual funds, investment advisors, etc.) but 2-3% (including hidden fees) is probably about the minimum for most people.
Cynic: If these guys are so successful, then why are they pitching their system to me via junk mail, infomercial, or writing a book, when they should be sipping champagne with their blonde supermodel girlfriend, in their Yacht off the coast of France? In other words, if you had a system that could reliably beat the markets, you would become as rich as you wanted. The only logical conclusion is that these people make more money selling a book or other item, than they have true investment success.
These issues are well covered in the following books:
Edesess, Michael. The Big Investment Lie.
Edelman, Rick. The Lies About Money.
Contrary views: Money management has a legitimate place for many people. For example, to manage the accont for a minor, an incompetent, or simply for a person who doesn't want to be bothered with the details. In those cases, a few percent of assets may be an acceptable price to pay for the service -- but it's a losing bet to think Advisor X will give you outsized results, long term.
Contrary View: It is, of course, true that you or anyone COULD beat the market, using System X or Advisor Y, or what-have-you. But this is the same thing as saying that someone will eventually hit the Lotto. Of course they will -- plain old boring statistics, probability, chance, again! Most people will lose, though. Your luck might be exceptional, but odds are your outcome will be just average. Sorry, but that's how it works!
4. There is much disinformation in the financial industry. Most money is made on selling advice or commissions for money managed or product sold. The average "salesman" has nothing to gain from telling a prospective customer the awful truth: "You're unlikely to get anything but average results from me, and you're paying a commission to get that; cheaper options exist."
Corollary to (4): The average individual deceives himself in many ways. These are well studied in fields such as behavioral finance. The main problem is the human ego. I love to think that I'm above average, that my ideas are sounder, my plans more likely to succeed than the average sucker. Ah, if only it were true! The truth is that a little humility here will likely lead to better overall gains, long term.
5. If you accept the wisdom of the Cheap Index Fund, you can manage your own money with just a few hours a year and little effort. That's a pretty good pay-off if you can fire the middlemen who are costing you 1-3% of your assets per year, otherwise.
Not surprisingly, you may have trouble finding a "professional" to help you do it ... why should he, since he won't be making any money off you
But plenty of resources exist; books and on the web.
The Retire Early Home Page.
Here is a proposed draft:
1. Most people, even financial professionals (stock pickers, newsletters, brokers, etc.) can't beat the market. By extension, neither can anyone trying to follow their systems or by using their own, for that matter.
Overall, the best you are likely to do, is to get average market returns. For most people, these returns are best found in very low cost index funds (that model their target market index) or their first cousin, the ETF.
2. Winning performance is usually only claimed in retrospect. Most, if not all, apparent investment success can be adequately explained by simple statistics: out of any very large group (e.g. stocks, mutual funds, or advisors) there will be some with spectacularly successful records. There is ample evidence [insert cites] that picking today's or recent winners offers little to no assurance of future successes.
The above also holds true for the so-called master investors of legend -- such as a Buffet or a Lynch. To a large degree, their success is "right time, right place." Luck, pure and simple.
It's OK to play with your money, but use common sense. Avoid some of the more glaring errors. Diversify your bets. Avoid trading too much. Don't put all your money into just one strategy. For example, you might own at any one time, 10 to 20 stocks. If they're from diverse industries, you are probably well diversified, no matter whether you picked the stocks via careful research, a stock screen on MSN, or with an Ouija Board. Long term, your portfolio will probably do -- average. Sorry, but that's how it works.
3. Financial services (newsletters, web sites, brokers, advisors, etc.) AS A GROUP or ON THE AVERAGE add no net value to investing decisions. In fact, they impose a small loss on the expected (average) return of a market, simply due to trading, advising, other costs, as well as commissions.
The cost of the middlemen varies widely (mutual funds, investment advisors, etc.) but 2-3% (including hidden fees) is probably about the minimum for most people.
Cynic: If these guys are so successful, then why are they pitching their system to me via junk mail, infomercial, or writing a book, when they should be sipping champagne with their blonde supermodel girlfriend, in their Yacht off the coast of France? In other words, if you had a system that could reliably beat the markets, you would become as rich as you wanted. The only logical conclusion is that these people make more money selling a book or other item, than they have true investment success.
These issues are well covered in the following books:
Edesess, Michael. The Big Investment Lie.
Edelman, Rick. The Lies About Money.
Contrary views: Money management has a legitimate place for many people. For example, to manage the accont for a minor, an incompetent, or simply for a person who doesn't want to be bothered with the details. In those cases, a few percent of assets may be an acceptable price to pay for the service -- but it's a losing bet to think Advisor X will give you outsized results, long term.
Contrary View: It is, of course, true that you or anyone COULD beat the market, using System X or Advisor Y, or what-have-you. But this is the same thing as saying that someone will eventually hit the Lotto. Of course they will -- plain old boring statistics, probability, chance, again! Most people will lose, though. Your luck might be exceptional, but odds are your outcome will be just average. Sorry, but that's how it works!
4. There is much disinformation in the financial industry. Most money is made on selling advice or commissions for money managed or product sold. The average "salesman" has nothing to gain from telling a prospective customer the awful truth: "You're unlikely to get anything but average results from me, and you're paying a commission to get that; cheaper options exist."
Corollary to (4): The average individual deceives himself in many ways. These are well studied in fields such as behavioral finance. The main problem is the human ego. I love to think that I'm above average, that my ideas are sounder, my plans more likely to succeed than the average sucker. Ah, if only it were true! The truth is that a little humility here will likely lead to better overall gains, long term.
5. If you accept the wisdom of the Cheap Index Fund, you can manage your own money with just a few hours a year and little effort. That's a pretty good pay-off if you can fire the middlemen who are costing you 1-3% of your assets per year, otherwise.
Not surprisingly, you may have trouble finding a "professional" to help you do it ... why should he, since he won't be making any money off you
But plenty of resources exist; books and on the web.The Retire Early Home Page.
