“History repeats itself, first as tragedy, second as farce.”
Look up the phrase “this time it’s different” on Google, and you can find a panoply of situations where the headline writer has pounded his keyboard, imprecating that the situation about which he writes is truly different.
Just in the first two pages of results, I found the following situations:
Syria as different from Iraq or Afghanistan
The debt ceiling
Sometimes, there truly is a seismic shift in the circumstances surrounding the situation about which the prognosticators utter their claims.
Those who handed their money over to an “investment advisor?”
Yes, people who paid assets under management fees underperformed by 17.5%, and that’s before paying a 1-2% assets under management fee!
By the way, just to compare, a 73% VFINX/27% VBMFX (to reflect the median age in the U.S.) portfolio would have had a 22.88% return. Not that I’m making any recommendations, since I’m not, but it also goes to show that we think far too highly of our own investing skills. It’s just that “investment advisors” who charge you 1-2% of your total investable assets think even more highly, unjustifiably so, according to the statistics, of their own skills.
I wanted to see just how much this underperformance would cost someone. I extrapolated (I know, dangerous, but probably reasonable) advisor underperformance to see how someone who, earning a median salary at age 25 would be hurt by the reduction in returns. I assumed that this person saved 16.62%, or SAFEMIN, and his earnings increased or decreased with inflation. I simulated stock market and U.S. Treasury returns, and at age 66, assumed that this person took Social Security, which covered half of his expenses. Expenses continued to increase by inflation after age 66, when the person retired.
How did having an advisor affect the probability of running out of money at age 95?
I conducted 10,000 simulations, and the results were stark.
First, let’s look at the person who managed his own money.
He still had money at the end of his life (assuming he lived 95 years) 91.25% of the time. His median net worth was $11.9 million dollars.
If he had handed his money over to an advisor who had the average underperformance and then charged 1% of assets under management, he had money at the end of his life only 32.93% of the time, and his median net worth was $-1.39 million – a nonsensical number, since that assumes he’d just borrow and borrow to fund living, which would never happen.
Put another way, the advisor cost this person over $13.8 million dollars in net worth more than half of the time.
So, is paying someone to underperform the market worth that much? Is it worth it to not think just a little (say, once a year) about your investments? Would you want to take a chance that you’d run out of money 58.3% of the time so that someone else can “manage your money” for you?
Sure, these are simulations. Chances are that the future won’t look like any of these. But, it’s illustrative of what could happen if your advisor invests for you and underperforms like the average advisor did in 2013.
But this time, it’s REALLY different!
Maybe, but the numbers and history are against you.