3. Investor types and advisers
Before getting into the details of mindful investing, we need to clarify who exactly is making the investing decisions. That is, who is the “investor”? At the most basic level we are talking about the small retail investor (the individual investor) as opposed to institutional or professional investors. This website addresses two major types of individual investors:
- Investors who are saving and investing for the future. These folks are saving for a retirement that is many years away. This might also include people who are saving for something else, like starting a business. But for our purposes, this type of investor is younger, and they are saving to retire at a set time or within some flexible time range in the future.
- Investors who are very near or in retirement. These folks are usually, but not always, older and are either living off their savings now or plan to retire very soon (within a few years). Again, this could include people drawing upon investment savings for other purposes, but for simplicity’s sake, we can think of this as the retired investor.
This distinction is important because the amount of time you have to invest is a critical factor for some investment decisions. In other articles here I talk more about investing over time and how a mindful investing approach diverges for these two types of investors.
There is actually a third type of investor we need to consider. This type is making investments on behalf of someone else, and they are typically called investment advisers. I will discuss what a mindful approach tells us about using investment advisers in the next section below. Other than that, the rest of this website pretty much operates assuming the do-it-yourself model. That is, I assume that you have a primary role in your own investment decisions regardless of whether you invest directly or have someone help you in the process.
Finally, there are folks who invest for a living, such as “day traders”, although that term probably does not really capture the wide array of investment methods people use to make a regular living through investing. For the most part, this website is not about these folks. My investment experience is all about saving for the future and retirement, so I can’t really offer any informed advice on how to make a daily living through investing. However, I may occasionally make some observations about mindful investing as it applies to the so called “day trader”.
The main question about investment advisers is whether to use them or not. After all, if you give control of your investment decisions to an adviser, you probably don’t have to read the any of the other articles here. There is also a middle ground. Does it make sense to use an adviser in some situations but not others? What does mindfulness tell us about using investment advisers?
First, we need to recognize that advisers have to make a living too. They make their money somehow, usually by taking some percent of your investment returns or through fees and commissions. Either way, they take a chunk out of your investment returns. Usually this seems like a very small sliver of your investments, like a few percent to less than 1 percent, depending on the situation. However, this sliver can become significant as your investments grow or compound over time. For example, here is a chart from Vanguard, a reputable investing and fund company.
This chart assumes you invest a $100,000 in savings, and your investments increase by 6% in value each year for 30 years. The right side of the chart shows the final investment value if your investing costs are 0.25% versus 0.9% annually. These costs could be from many things, but the important part is: the higher your costs, the less money you have in the end. In this case, an apparently tiny 0.65% difference in annual costs means you have almost $100,000 less in 30 years. And there are certainly other scenarios where investment adviser and other costs could be higher than this example, which means you would have even less money at the end of this period.
What is an adviser worth? – But what if your adviser invests and grows your savings better than you can? Couldn’t that adviser more than offset the cost of this advice through better investment performance? This is where we need to use that mindful, empirical approach I talked about in Article 2. What hard data do we have that investment advisers perform significantly better than we can on our own?
One way to answer this question is to consider the simplest possible stock investment, which is to put your money in something that tracks or mimics some representative portion of the stock market. This is typically called a stock index, like the S&P 500, and there are very low fee investment vehicles (funds) that track the performance of these indices. We can then compare investment advisers performance to the simple index fund investment.
Mark Hulbert is a financial analyst and journalist who has examined the performance of stock advice newsletters for 36 years, although he recently ended this research. These newsletters provide stock and investment advice for a subscription fee, and many of them claim that they have investment methods that are superior to your local main street investment adviser. So, following the advice of these newsletters should theoretically provide better investment performance than your average investment adviser. In fact Hulbert found that only a very few of the many newsletters he tracked were able to deliver a paltry 1% more than their most comparable index. Put another way, that means that the vast majority these newsletters did no better than, or even under-performed the most comparable index. Further, you would expect a few newsletters to outperform the index just based on luck alone. For example, if you track 300 newsletters, statistically there will be a few outliers that would be expected to outperform the index just based on a very long streak of good luck. And there is no good reason for that lucky streak to continue into the future for any given newsletter.
The “best” advisers – Hulbert expanded upon the tepid performance of investment advice over the last 36 years. “Hardly anyone has beaten the market over that period of time, and it’s not just true of newsletters; it’s true of hedge funds, it’s true of mutual funds, money managers and so forth.”
That quote is notable because hedge funds are often mentioned as the superior investment vehicle for the very rich. It’s often assumed that, if we just had enough money to play in the big leagues of the hedge funds, we would not have to worry about all these investment decisions. Well it’s not hard to find evidence that backs up Hulbert’s view on hedge funds too. The Credit Suisse Hedge Fund Index allows us to compare hedge fund performance to the standard stock indices. As the chart below shows, over a 20 year period, the hedge fund index yielded nearly the same overall performance as the S&P 500 index, each with 8.6% annual returns.
Some might challenge that this 20 year comparison is misleading, because it does not necessarily represent the most recent and refined strategies of the hedge funds. Hedge funds attempt to make money in any kind of market (up, down, or sideways) by using hedges that pay when the market goes down and by exploiting market volatility (market ups and downs). In 2015 and early 2016 the stock market had essentially no trend and was pretty volatile. So, this should have been a good year for hedge funds. However, over that period the same hedge fund index lost 6.9% while the S&P 500 index lost 6.2% (trailing 12 months through February 2016).
It’s also worth noting that hedge funds have some of the highest fees, and so attract the some of the smartest talent. Clearly, paying more for your investment advice does not guarantee better investment advice or performance.
Take home message – All these data suggest that you are better off making very simple investing decisions than paying someone else to try to outperform those simple decisions. Most of the rest of this website assumes your following the do-it-yourself model of investing. However, I want to stress that there is nothing wrong or underhanded with investment advisers as a business. In some instances, using an investment adviser may still be your best choice. For example, investment advice from a real human being who can listen to and understand your specific situation may be exactly what some investors need. Generic advice from a book or a website, even this website, may be difficult to effectively translate to your specific and often complex situation.
This is particularly true for people who view managing their money as a chore or distraction from other more enjoyable activities. I have this view about gardening. I’d definitely rather pay someone to pull weeds, but some people just love spending time getting dirty in the garden. So, if you hate the time you spend thinking about investments, it’s probably a good idea for you to use an investment adviser or at least periodically consult with one.
Even when consulting with an adviser, there is great value in bringing a mindful approach to the table. Using mindfulness and some of the concepts in this website will allow you to pick a better investment adviser, just like mindfulness will help you make better investment decisions on your own. Mindfulness will also help you better understand the advice you receive, identify and ask critical questions, and perhaps challenge some of the assumptions behind that advice.