Don’t be afraid to manage your own money. It’s simple, safe, and will help you retire in style. My returns beat most of the professionals, and yours can too.

If you plan on living for ten years or more, here’s the best way to invest:

1. Move your money to a discount brokerage firm (some actually pay you to do that – just ask)
2. Invest in low-cost exchange-traded stock and bond funds (index funds)
3. Relax with a half-price happy hour margarita and leave your money alone

Important: Consult with the discount brokerage first, as strategies differ for tax-deferred vs taxable fund transfers.

“Both large and small investors should stick with low-cost index funds.”

–Warren Buffett, 2016 shareholder letter

Warren Buffett is arguably one of the smartest money managers ever. In 2005 he wagered a $500,000 charity donation stating that a low-cost S&P 500 index fund would outperform a set of five or more actively managed hedge funds over the span of a decade. Only one fund manager took the bait and at the end of the 10 years Buffett won by a landslide. The S&P index fund achieved a 7.1% annualized return while the basket of funds gained just 2.2%.

To be clear, he doesn’t care if you play the market if that’s your thing. He’s just adamant about avoiding high fees. Funds, fund managers, and advisors charge fees – lots of them. You need to avoid all that nonsense.

DO sweat the little stuff – keep your $275,000!

Investment organizations make their money by taking yours. Every dollar they take is a dollar of yours that won’t deliver compound earnings to you over the span of your life.

Suppose you start saving $100 a month at age 20 and keep it up until you retire at age 67. At 7% interest you’ll have about $440,000 for retirement. Good for you!

If you do the same but pay fees of 3% of your assets each year, you end up with $165,000 instead of $440,000 – a shortfall of $275,000!

Investment fees sucked $275,000
directly out of your retirement!

Exposing hidden fees

Stocks and bonds (securities) and funds (collections of securities) are publicly traded on global exchanges. Few people can directly trade on exchanges, so we pay intermediary brokers to trade on our behalf. Brokers come in many flavors, but the traditional investment model involves two roles:

1. A fund manager creates a fund from a selection of securities he thinks will be the very best performers. Typical funds charge 2% of the assets plus 20% of the profits.
2. The broker/advisor uses her expertise to pick only the very best funds and securities for your money. She and her company charge you an annual fee plus 1% to 3% of your assets.

Notice that both parties take a chunk of your money. In fact, they take as much as 3% to 5% of your money every year!

In theory, these two layers of expertise will result in the very best mix of the very best funds and securities to deliver returns far better than mere mortals like us could achieve ourselves.

But they don’t. Turns out picking stocks is a lot harder than picking apples. When they take 3% to 5% of your money off the top, even the most brilliant stock-pickers rarely dig themselves out.

Fallacy of expertise: Fund managers

It’s logical to assume that the best fund managers are like professional athletes and would beat their peers consistently over time. But no. In fact, they’re incredibly inconsistent.

Here’s what happens when we follow the top 25% of all actively-managed American equity mutual funds over time:

• First Year: We pick the top 25%
• Second Year: Only 4.1% were in the top 25% both years
• Third and Fourth Years: Less than .5% show up all the years

According to The Economist these results are WORSE than throwing a dart at a random list of funds.

Further, more than 9 out of 10 large-, mid-, and small-cap funds failed to meet their benchmarks over the last 15-year span.

Distraction games: Financial advisors

Advisors wave their education, reputation, clientele, and organizational stature in your face as proof of their worth. They hypnotize you with dividends, taxes, alpha/beta values, diversification, retirement planning, and estates.

“Don’t worry your pretty little head.” They’ll tell you. “We’re a full service firm.”

If you need estate-planning, tax-planning, and other types of advice, pay for it like you pay for medical and legal help: By the hour, not with perpetual fees that suck the yolk out of your nest egg.

We want strong growth, modest risk,
and no froufrou

We don’t need confusion and misdirection. We need investment growth – our retirement depends on it. To meet that simple requirement, a financial advisor would have to consistently deliver 3% to 5% higher returns than you can get on your own.

From the Motley Fool:
“Research from Goethe University’s business school dean Andreas Hackethal suggests that returns from advisor-assisted accounts badly lag the results from customers who handle their accounts on their own. …Hackethal and his co-authors found that investors in their dataset who used advisors earned annual returns that were 5 percentage points less than investors doing it on their own. Even when adjusting for the riskiness of portfolios — that is, a lower-risk portfolio should be expected to produce lower returns — the advisor-led accounts still notably underperformed self-managed accounts.”

Fear not – An ETF is your BFF

If you toss a dart at any random 10-year span of the S&P 500 Index, you have a 90% chance of hitting one that delivered better than a 7% annualized return. The chart below shows that there have been only four 10-year spans with negative returns and the absolute worst was only -1.3%.

So, with a 90% chance of being wildly successful and a modest downside, why not just invest in the S&P 500?

Well, you can!

Exchange Traded Funds (ETFs) are plentiful and inexpensive. They are groups of securities virtually identical to an index such as the S&P 500 or a government bonds market. A quick online search returns scores of them, most with expenses from .03% to .15% (compared to 2% or more in traditional funds).

I have several ETFs in my portfolio. They’re diversified, easy to understand, and inexpensive. Best of all, I don’t have to spend my days carefully researching and trading stocks. I buy and hold them.

A 90% chance of a 7% return if I can resist the urge to mess around with them is a pretty safe gamble, I’d say.

To hedge or not to hedge

Some years you will lose money. It’s virtually guaranteed. 7% returns over 10-year spans are historically accurate, but I must repeat the famous axiom: “Past performance is no guarantee of future results”

The chart below shows a distribution of S&P 500 returns over time, with most falling between -20 and +30. That’s a pretty big range, and if you can’t leave your money alone for 10 or more years, a couple of bad years in a row can be devastating, particularly to new retirees.

The obvious answer is to leave your money alone for 10 years. If you can’t do that, then the strategy outlined here may not be your best choice. Regardless, consider these strategies to mitigate the volatility:

• Buy a mixture of stock and bond ETFs. Generally, bonds will reduce your upside in a good market, and minimize losses in a down market.
• Invest 5 to 10 years of living expenses in a conservative portfolio, while putting the longer-term funds to work in equity (stock) ETF funds. Live off the conservative one and keep your hands off the other.
• Create your own stop-loss. Pick a fund level as your floor, keep an eye on it, and sell out if the market drops below that level. I use this approach – and plan to liquidate if the market drops more than 12%.

Get started now

1. Pick up the phone and call eTrade, TD Ameritrade, Charles Schwab, and Fidelity. Ask them how much they’ll pay you to move your money to their platform (yes – some will pay you!). Ask them how it works, what sets them apart, and what tax implications you should consider. Talk to them all – it’s free.
2. Consider which strategies you’ll want to consider to hedge against a market drop. Talk to them about that too.
3. Pick the platform that suits you the best and start the process. They’ll even call your broker and do most of the paperwork for you.
4. Pay attention to the index but resist the urge to trade unless it’s in line with your hedge strategy. Call them at least twice a year.
5. Comment and share this post. I can use the exposure. Thanks.

Remember that margarita? Now is the time…

NOTE: I’m not a certified investment professional, so consider this well-researched article to be a helpful tool to guide you through the challenging process of investment planning. Investing carries risk and no person, company, or strategy can eliminate the risk of loss.