Answers to

Practical Questions

Let me illustrate with an example:

Alice, Betty, and Cathy are triplet 25-year-old sisters. Their dad obviously had grey hair, but I digress. Their late Great Granny never had a lot of money and scrimped her whole life. Granny left each of the three girls $10,000, but with one catch: the money had to be invested until they turned 65. While that seems like an eternity, remember life expectancy is now about 85 and climbing. Great Granny wanted to help her grandchildren have a better retirement than she had.

Alice knows nothing about investing and doesn’t want to know anything about investing. She also once lost $100 in five minutes at a casino, and is now totally risk adverse. Alice loved Great Granny deeply and she really doesn’t want to make a mistake with her $10K inheritance. Alice’s boyfriend’s dad is a financial advisor with a major mutual fund company and he has agreed to take Alice on as a client and invest her $10K. Even better, Alice got a “sweetheart deal” on the advisor/mutual fund fees. Alice’s boyfriend’s dad only charged Alice 2% per year with no additional fees of any kind, whereas the average mutual fund fee alone is 2.2% per year.

Betty is a biz knob, having graduated with a Masters of Business Administration (MBA). Betty learned about the high cost of mutual funds versus ETFs in her investing class, but Betty was with Alice that night in the casino, and was up $200 in winnings before losing it all at the blackjack table. Betty remembers the sting she felt from that loss, and has vowed to herself not to risk everything again. Betty thinks the lower volatility and smoother returns of balanced portfolio are best for her.

Cathy is an artist, her work is her love, but she goes from gig to gig and the pay is sporadic at best. Recently, Cathy visited for about an hour, read the Six Pieces of the Investment Puzzle and took the Ready to Invest quiz. Cathy is courageous regarding her investments as well as her career. She is going to invest her $10K in equity ETFs; no balanced portfolio or bond ETFs for her.

Morals of the story

  1. Beware of your daughter’s boyfriends.

  2. Volatility (i.e., big drops in the stock market and the value of your portfolio) is the price of long term performance. Accepting the higher volatility and risk of equities can have a significantly positive impact on your long-term portfolio.

  3. When you are young, seeking the safety of a balanced portfolio of 50% equity and 50% bonds can cost you big time.

  4. Financial advisor/mutual fund fees of only 2% per year are a major drag on your long-term portfolio performance.

  5. helped Cathy the artist, and it can help you too, if you take 60 minutes to read the Six Pieces of the Investment Puzzle, and take the Ready to Invest Quiz.

Final Thoughts

Cathy accepted the higher volatility and risk of an all-equity ETF portfolio for 40 years. The higher average returns on equities versus bonds, or a balanced portfolio, yielded Cathy a significant advantage over her sisters. Some people may not be comfortable with the higher equity risk and volatility as their portfolios grow. As people get older, they tend to switch from seeking growth to seeking stability.

If Cathy decided to keep 100% equity ETFs for the first 30 years, earning an average of 8% per year, and then for the last 10 years flipped to a balanced portfolio of 50% equity and 50% bond ETFs, earning 6% per year, Cathy would have $180,206! That is still $77,349 more than Betty made over 40 years of with a balanced portfolio of ETFs, and a staggering $132,196 more than Alice made with her financial advisor and balanced portfolio of mutual funds.