Help me talk my friend into an index portfolio

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
jacoavlu
Posts: 466
Joined: Sun Jan 06, 2013 12:06 pm

Help me talk my friend into an index portfolio

Post by jacoavlu » Tue Jan 28, 2014 10:03 pm

Hi Bogleheads

I have a partner at work who's going to be sending away about $150,000 per year somewhere to be invested, and he's leaning towards a relatively small firm where he has some other monies. I've been trying to convince him of the benefits of a simple, index fund based portfolio, particularly with regards to expenses. I'm hoping you can help me provide some data to him. I'm not savvy with regards to the (multiple I'm sure) tools available for backtesting, but I'm looking to test a simple 3 fund Vanguard portfolio with a 40 TSM, 20 TISM, 40 TBM allocation, versus LKBLX (Lawson & Kroeker Balanced Fund), expenses included, $150,000 initial investment, $150,000 added yearly (divided each month ideally), for say 10 or 15 years.

Thanks in advance for any help, even if someone can just point me in the right direction where I can do this myself.

DougS
Posts: 42
Joined: Mon Dec 23, 2013 7:49 pm

Re: Help me talk my friend into an index portfolio

Post by DougS » Wed Jan 29, 2014 5:44 am

Give him a copy of John Bogle's Common Sense on Mutual Funds. It's much more convincing than any graphs you could print out.

barnaclebob
Posts: 2795
Joined: Thu Aug 09, 2012 10:54 am

Re: Help me talk my friend into an index portfolio

Post by barnaclebob » Wed Jan 29, 2014 9:02 am

Is he trying to pay someone to beat the market or does he just want to pay someone to manage his money or both? Each of these issues has different tactics to convince someone.

If he thinks he can pick the guy who picks the stock pickers it may be harder to convince him and not worth your time because these people generally have the belief that they are smarter and better than the average person.

If he just wants someone to manage his money and is fine with being a lowly average Joe like us then show him a graph of how much 1% a year and fees eats up in 30 years or whatever his time period is.

Morningstar.com has the ability to create the graphs you need.
http://quote.morningstar.com/fund/char ... %2C0%22%7D

It looks like LKBLX had 5 years of great performance starting around 2003-2004 then what appears to be average performance in the past 5 years.

User avatar
Taylor Larimore
Advisory Board
Posts: 27212
Joined: Tue Feb 27, 2007 8:09 pm
Location: Miami FL

Past performance ?

Post by Taylor Larimore » Wed Jan 29, 2014 9:19 am

BarnicleBob:

Thank you for the link to a very revealing graph. Notice how Total Bond Market was the BEST performer during the first five years and the WORST performer during the last five years.

Using Past Performance to pick mutual funds is dangerous.

Show your partner this link:

The Three Fund Portfolio

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

livesoft
Posts: 61944
Joined: Thu Mar 01, 2007 8:00 pm

Re: Help me talk my friend into an index portfolio

Post by livesoft » Wed Jan 29, 2014 9:27 am

I have a long-time (almost 40 years) friend who only just this year switched to index funds. Every year, we would have a conversation about our investments and every year I would say, "That's great that your AAPL (or whatever) did well. I just use index funds." This year he called me up before our annual conversation and asked for books to read. One I mentioned was Bernstein's "Investor's Manifesto". Then a few months later, he was telling me all about his index funds.

OK, it took decades, but don't give up.
Wiki This signature message sponsored by sscritic: Learn to fish.

lazyday
Posts: 3297
Joined: Wed Mar 14, 2007 10:27 pm

Re: Help me talk my friend into an index portfolio

Post by lazyday » Wed Jan 29, 2014 12:29 pm

Depending on his personality, get him to post his plans here so he can dialog with the group, and/or try a book you think he would actually read, like those suggested or Ellis - Winning the Loser's Game, or Malkiel - Random Walk Down Wall Street.

John3754
Posts: 1289
Joined: Tue Mar 19, 2013 8:56 pm

Re: Help me talk my friend into an index portfolio

Post by John3754 » Wed Jan 29, 2014 1:00 pm

Telling other people what to do with their money is a losing proposition. If he switches to index funds and the market tanks then his losses will be your fault.
Last edited by John3754 on Wed Jan 29, 2014 9:51 pm, edited 1 time in total.

User avatar
nisiprius
Advisory Board
Posts: 36212
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Help me talk my friend into an index portfolio

Post by nisiprius » Wed Jan 29, 2014 1:14 pm

Settle for opening his mind, and don't underestimate the power of simply letting someone know that something exists, and is liked and used by people who aren't crazy.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

jacoavlu
Posts: 466
Joined: Sun Jan 06, 2013 12:06 pm

Re: Help me talk my friend into an index portfolio

Post by jacoavlu » Wed Jan 29, 2014 9:22 pm

Thanks all for your help, I appreciate everyone's input.

I like the idea of giving him a book or two. He's very tech un-savvy, he might be the only adult I know that doesn't have an email address, and I don't think he really uses the internet besides the bare minimum needed at work.

He has certainly come around some in the past 3 years I've known him, I think over time he's become more aware that the managers/brokers he's paying certainly aren't beating the market on a consistent basis, and when I show him the fees I pay at Vanguard compared to what he's paying, it certainly is an eye opener.

PB
Posts: 191
Joined: Sat Oct 30, 2010 1:59 pm

Re: Help me talk my friend into an index portfolio

Post by PB » Wed Jan 29, 2014 11:00 pm

Maybe focus on 3 things, using LifeStrategy Moderate Growth Fund (LS) as a comparison. I chose this because it's matches your basic 60/40 allocation, including Intl, and would automatically rebalance for him, as I presume Kroeker does.

There are links to data below, and:

First, the X-ray's show better all-around diversification with LS. This could pay off in small ways, as the YTD returns suggest.

Second, the fees are much lower with LS: 0.16% vs 1.02% for Kroeker. This would be an enormous factor over the years. In addition, the yield is better too: 1.92% for LS vs. 0.88% for Kroeker. The yield also would compound in his favor over the years.

Finally, a 5 year backtest shows that the two funds will likely track pretty closely, which makes sense given their fundamentally balanced allocation. (And unfortunately, you can't go back any further with validity, because LS changed pretty significantly a few years back, whereby now it very simply combines Vanguard's core Domestic and Intl index funds - the very funds you were thinking of). And if he wanted TIPs, he could simply use a Target Date Fund instead.

I hope you gently stick with him, because it could gain him tens of thousands of dollars over the years, depending on how large his portfolio is.

Kroeker Xray (note fund at bottom)
http://webgallery.ws/forum2/LKBLX.png

LS Xray (note fund at bottom)
http://webgallery.ws/forum2/VSMGX.png

Kroeker Cost Projection
1.02% ER, presuming a $100,000 investment, 6% average annual gain, for 20 years
http://webgallery.ws/forum2/LKBLXCosts.png

LS Cost Projection
0.16% ER, presuming a $100,000 investment, 6% average annual gain, for 20 years
http://webgallery.ws/forum2/VSMGXCosts.png

5-Year Back Test (growth of $10,000)
http://webgallery.ws/forum2/5year.png

lazyday
Posts: 3297
Joined: Wed Mar 14, 2007 10:27 pm

Re: Help me talk my friend into an index portfolio

Post by lazyday » Thu Jan 30, 2014 2:30 pm

jacoavlu wrote:I like the idea of giving him a book or two.
Another good book, super cheap used last time I looked: David Swensen Unconventional Success.
Note that he's changed the sample portfolio since, moving 5% from REITS to Emerging Markets.

Myopic squirrel
Posts: 192
Joined: Wed Apr 24, 2013 11:02 am

Re: Help me talk my friend into an index portfolio

Post by Myopic squirrel » Fri Jan 31, 2014 5:05 pm

Have him read the comments on pp.81 - 85 in "The Bogleheads' Guide to Investing". Literally a Who's Who of the investment community - names he should recognize. Then ask your partner "what does the company you're planning to invest with know that the professionals quoted don't know?" If he is a (reasonably) intelligent person, that should be a rhetorical question.

jacoavlu
Posts: 466
Joined: Sun Jan 06, 2013 12:06 pm

Re: Help me talk my friend into an index portfolio

Post by jacoavlu » Fri Jan 31, 2014 5:33 pm

Myopic squirrel wrote:Have him read the comments on pp.81 - 85 in "The Bogleheads' Guide to Investing". Literally a Who's Who of the investment community - names he should recognize. Then ask your partner "what does the company you're planning to invest with know that the professionals quoted don't know?" If he is a (reasonably) intelligent person, that should be a rhetorical question.
Thanks, I already own this so that's a good reason to revisit it

User avatar
DonCamillo
Posts: 1014
Joined: Tue Nov 26, 2013 10:27 pm
Location: Northern New Jersey

Re: Help me talk my friend into an index portfolio

Post by DonCamillo » Fri Jan 31, 2014 6:01 pm

My best argument is this.

When you retire, the safe withdrawal rate is about 4%. If you pay 1% investment expenses during retirement, your expenses will equal 1/4 of what you are living on. You are not only giving that to your broker to buy fuel for his yacht when you retire, you plan to do it every year until you retire? Why?

It should be much cheaper to light your cigars with $100 bills.
Les vieillards aiment à donner de bons préceptes, pour se consoler de n'être plus en état de donner de mauvais exemples. | (François, duc de La Rochefoucauld, maxim 93)

investor
Posts: 1010
Joined: Mon Feb 19, 2007 10:50 pm

Re: Help me talk my friend into an index portfolio

Post by investor » Fri Jan 31, 2014 7:49 pm

John3754 wrote:Telling other people what to do with their money is a losing proposition. If he switches to index funds and the market tanks then his losses will be your fault.

+1+1+1

investor

investor
Posts: 1010
Joined: Mon Feb 19, 2007 10:50 pm

Re: Help me talk my friend into an index portfolio

Post by investor » Fri Jan 31, 2014 7:57 pm

DonCamillo wrote:My best argument is this.

When you retire, the safe withdrawal rate is about 4%. If you pay 1% investment expenses during retirement, your expenses will equal 1/4 of what you are living on. You are not only giving that to your broker to buy fuel for his yacht when you retire, you plan to do it every year until you retire? Why?

It should be much cheaper to light your cigars with $100 bills.
_____________________________________________________

Your argument is for low cost funds. Just remember that Wellington and Wellesley are also very low cost funds. The concern might be if the investment is tax differed or not. Not all active managed funds are bad.... this forum seems to forget that.

investor

pradador
Posts: 156
Joined: Thu Jun 14, 2012 9:20 pm
Contact:

Re: Help me talk my friend into an index portfolio

Post by pradador » Fri Jan 31, 2014 8:17 pm

lazyday wrote:Depending on his personality, get him to post his plans here so he can dialog with the group, and/or try a book you think he would actually read, like those suggested or Ellis - Winning the Loser's Game, or Malkiel - Random Walk Down Wall Street.
+1 for both of these.

JW-Retired
Posts: 6820
Joined: Sun Dec 16, 2007 12:25 pm

Re: Help me talk my friend into an index portfolio

Post by JW-Retired » Sat Feb 01, 2014 10:32 am

jacoavlu wrote: Hi Bogleheads

I have a partner at work who's going to be sending away about $150,000 per year somewhere to be invested, and he's leaning towards a relatively small firm where he has some other monies. I've been trying to convince him of the benefits of a simple, index fund based portfolio, particularly with regards to expenses. I'm hoping you can help me provide some data to him. I'm not savvy with regards to the (multiple I'm sure) tools available for backtesting, but I'm looking to test a simple 3 fund Vanguard portfolio with a 40 TSM, 20 TISM, 40 TBM allocation, versus LKBLX (Lawson & Kroeker Balanced Fund), expenses included, $150,000 initial investment, $150,000 added yearly (divided each month ideally), for say 10 or 15 years.
Is this LKBLX going to be his main investment? It's a tiny fly speck of a fund with only $24M in net assets. He is going to be a high roller at this very small table.

Sounds like a high risk bet.
JW
Retired at Last

Post Reply