If cauliflower can become pizza crust, you can do anything.-Unknown
By far one of the most common responses I hear when talking to other teachers about investments and retirement accounts is, “Oh, man. You do it all yourself?” Yes. And so should you. Here are 228,000 reasons why.
Say you invest $6,000 in your IRA every year for 30 years. You put your money in a low-cost total stock market index fund with Vanguard and let it ride. It earns 6% on average each year. After 30 years, these investments would cost you a total of $3,714.46. That includes the fees Vanguard charges and the earnings you miss out on by not being able to invest the money that paid those fees. Your portfolio would be worth $534,138.
Now let’s say you hire a financial advisor to invest that same amount of money for you. Let’s say you get reeeeeeaalllllyyy lucky and that financial advisor also earns you a 6% average return. Only your financial advisor and the more expensive funds he puts you in charge you 3% in fees (75x the fees at Vanguard). After 30 years, that investment would cost you a total of $208,794. Your portfolio would be worth $306,109.
That’s right. You can do it yourself and be $228,000 richer, or pay someone to do it for you, and be $228,000 poorer. We’re teachers. We don’t have $228,000 of wiggle room.
But wait. Doesn’t your super savvy financial advisor know so much more about all of this than you do? Isn’t he/she guaranteed to outperform your simple, entry-level attempt at investing? Nope. When you compare actively managed mutual funds (funds that pay people to pick their stocks, also the funds that many advisors use) to index funds (funds that use an algorithm to group stocks together), a whopping 0.6% of actively managed funds outperform the index funds–a result stated by researchers as “statistically indistinguishable from zero.”* And what are the chances that your advisor (who is charging you a fee in addition to the fees for the more expensive funds) is picking from the winning 0.6% and not the 99.4% that underperform the index funds?
The evidence to support index investing over actively managed funds is overwhelming. You absolutely do not need to know much more than I’m telling you in this blog to make it happen for yourself, but if you want an excellent explanation crafted for the individual, novice investor, read or listen to The Simple Path to Wealth. It is an entertaining, quick, and comprehensive education that includes all the reasons you’ll ever need to become a DIY investor. You can also listen to the ChooseFI Podcast, Episodes 3, 19, or 140R for more easy-to-understand info on the fees charged by financial advisors and planners.
Also consider that one of the richest men on Earth, Warren Buffet, has proven the value of index investing in an incredible 10 year bet with one of the biggest fancypants hedge fund investors on Wall Street (hilarious 20 minute podcast here). Mr. Buffet has also left directions that his estate is to be invested almost entirely in index funds once he passes away. I’m not sure about you, but if it’s good enough for Buffet’s wife, kids, and grandkids, it’s good enough for me.
I started investing for David and I in 2002. I read a couple of books by Tom and David Gardner of The Motley Fool, and I was hooked. I stuck with their strategies until I found the Choose FI podcast and read The Simple Path to Wealth, which prompted me to make my life even easier by simplifying my investing strategies even further. As of now our 10 year rate of return is 11.2%. I spend about 10 hours a year managing our five retirement accounts (two IRAs, individual 401k, HSA, and 457). We are looking forward to a healthy financial retirement, in large part because we haven’t lost half of our earning potential to high fees and funds that underperform the market.
The last one walks you through each step of opening an account at Vanguard and buying your first index fund shares. I’m also totally available to walk you through it. One of my passions is helping teachers access this information in an easy, affordable way, so feel free to give me a call or shoot me an email. Sometimes it helps to have someone to talk it all over with!
But what if you’ve already got a financial advisor and now you’re considering taking the reins? What could your next steps be? Start by asking your financial advisor much you’re paying for their services. Ask for any fees they charge, plus the expense ratios on the funds that you’re invested in. That total percentage is what you’re interested in. Keep in mind that many Vanguard funds have expense ratios between 0.04% and 0.11%, so if you’re paying much more than that, it’s worth continuing down the path to doing it yourself. Another step is to call Vanguard and ask them what you need to do to roll an account over to them. If you’ve got an IRA it will be super easy. If you’ve got a 403b or 457 with your district, you likely can’t roll it over. In that case, consider opening an IRA with Vanguard and maxing that account out first from now on. I’ve got a post in the works with more details about this issue so stay tuned, and in the meantime, gather all the information you need in order to know what’s best for you!
Know a teacher who needs to take control of his or her investment future? I’d love it if you’d share this article with them! Also, please join us in our Facebook group. The more the merrier!
*This study was conducted on 2,076 actively managed US stock funds from 1976 to 2006 and was originally published in the February 2010 issue of The Journal of Finance. It is referenced, among many other supporting studies, in The Simple Path to Wealth by J.L. Collins.