Need Perspective and Advise

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Storcher
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Need Perspective and Advise

Post by Storcher » Wed Jul 30, 2014 3:36 am

Need some help fact checking and deciding.
I have an IRA with Vanguard of about 850 K.
I am also retired and not drawing upon it.
Basically, being somewhat conservative, my portfolio is split between stock (40%) and bond (60%) index funds.
For another opinion, I visited a local financial adviser with a good reputation, and showed him my portfolio.
He said it was rather risky being so heavily weighted in bond funds (a beta above "1"). If interest rates were to begin to rise, I would be hurt.
As for the stock index fund, his opinion was that it does have a good upside potential ( works well in bull markets), but in a bear market it also has a large potential downside, being totally exposed. Instead, he believed that I would be better served by avoiding bonds altogether and concentrating on a basket of AAA equities (a collection of 18-20) paying good dividends. In doing so, I would lower my beta to about ".6",and get both dividends and growth. Furthermore, being that the accounts are actively managed, that during the 2008 meltdown, a portfolio such as this, suffered only a 10-12% decline.
The fee is 1% of the account managed.
All opinions gratefully welcome.

cherijoh
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Re: Need Perspective and Advise

Post by cherijoh » Wed Jul 30, 2014 6:23 am

Run away from this guy/gal!

1) A "safe" withdrawal rate of 4% is often recommended. A 1% fee means you are giving up 25% of that to this advisor each and EVERY YEAR. Do you really want to do that? With 850K, you are eligible for Vanguard admiral shares of index funds. Total stock market has an expense ratio of 0.05%; total bond index is 0.08%.
2) 18 - 20 stocks doesn't give you very good diversity so you are increasing your specific stock/industry risk. Just think of Enron.
3) Past performance is not a predictor of future performance. This advisor likely put together this basket of stocks AFTER the 2008-09 meltdown and cherry-picked the ones that lost the least money.

If this advisor's plan to invest in high dividend stocks appeals to you, take a look at Vanguard Wellesley - it has an expense ratio of 0.25%. From the vanguard website:
This 40 year-old, income-oriented balanced fund offers exposure to stocks and investment-grade bonds. Balanced funds typically offer a higher allocation to stocks; however, this fund is unique in allocating about one-third to stocks and two-thirds to bonds. The fund’s stock holdings are focused on companies that have historically paid a larger-than-average dividend or that have expectations of increasing dividends. This focus may provide a higher quarterly income distribution than non-income focused balanced funds. Investors with a medium- or long-term time horizon who have a goal of steady income and who are willing to accept modest movement in share price may wish to consider this fund as a core holding in their portfolio.

scone
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Re: Need Perspective and Advise

Post by scone » Wed Jul 30, 2014 6:31 am

I think this guy is full of it. A 40% stock, 60% bond indexed portfolio is an absolute classic that will serve you well. A tiny basket of stocks is a lot less diverse than the allocation you have-- it makes no sense. This guy is trying to frighten you into giving him money. One percent per year, compounded, is a lot of cash in his pocket, not yours! Stay away from this guy, he's playing you for a sucker.
"My bond allocation is the amount of money that I cannot afford to lose." -- Taylor Larimore

Johm221122
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Re: Need Perspective and Advise

Post by Johm221122 » Wed Jul 30, 2014 6:36 am

Not drawing from ira and retired? Are you using taxable investment or have other income

You are conservative? Then you need fixed income .Cd's, bond funds or individual bonds

1% commission as mentioned cuts into your money

Getting started
http://www.bogleheads.org/wiki/Getting_started

Welcome to forum
John

livesoft
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Re: Need Perspective and Advise

Post by livesoft » Wed Jul 30, 2014 6:39 am

Behavioral studies show that many people fear losses more than they appreciate gains and they will do stupid things to avoid minor losses.

The advisor has learned how to sell his services by playing on people's fears of losing money. He has learned to tell people how they are going to lose money with whatever they are doing. He has also learned not to tell people how he will lose them even more money with his ideas and his fees. He might even say something like, "You won't make as much money with me, but you will not lose as much money with your current portfolio."

I suggest that you read some books like "Why Smart People Make Big Money Mistakes" by Gilovich and Belsky, and books by each of these authors: Swedroe, Ferri, and Bernstein. These books are on the recommended reading list around here.
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BL
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Re: Need Perspective and Advise

Post by BL » Wed Jul 30, 2014 6:51 am

Smart move to check with someone else if you are even considering his proposal. You might want to list here the funds you are invested in and the % in each, if you want another opinion. See Asking Questions sticky at top of Help with Personal Investments to get all of your information together for the very best opinions and also to get things together in your own mind. Vanguard also has someone who will make recommendations either for free or for $250, IIRC, depending on you assets there. You could compare that to advice you get here. The Wiki has some suggested portfolios such as the 3-fund portfolio: http://www.bogleheads.org/wiki/3-fund_portfolio

It is understandable that the salesman doesn't recommend bonds as the yield is so low that you might be losing money every year after subtracting the share he gets and he knows you wouldn't like that! My guess is that you have a much better portfolio than this person is recommending because of Vanguard's low cost, and it doesn't reduce your portfolio an extra 1% each and every year to cover AUM . If you want another opinion, you could possibly find a fee-only (not fee-based) advisor who does not sell or manage funds; however they may not be easy to find as the money is in the AUMs, commissions, 12b-1 fees, etc.

p.s. If you really want dividends, Vanguard has that kind of fund also, at low cost.

livesoft
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Re: Need Perspective and Advise

Post by livesoft » Wed Jul 30, 2014 7:12 am

When I re-read what I wrote, I had this thought:

What if a potential client went to this advisor with a portfolio exactly like he described to you: 18-20 good dividend payers and no bonds that the client had been actively managing. Would the advisor change his tune and say, "That's too risky and you can lose money. Let's select an asset allocation of 40% index stock funds and 60% high quality bond funds. I would only charge a very tiny ongoing fee of 1% to help pick the funds and manage your assets."
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midareff
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Re: Need Perspective and Advise

Post by midareff » Wed Jul 30, 2014 7:34 am

livesoft wrote:When I re-read what I wrote, I had this thought:

What if a potential client went to this advisor with a portfolio exactly like he described to you: 18-20 good dividend payers and no bonds that the client had been actively managing. Would the advisor change his tune and say, "That's too risky and you can lose money. Let's select an asset allocation of 40% index stock funds and 60% high quality bond funds. I would only charge a very tiny ongoing fee of 1% to help pick the funds and manage your assets."



+1 .... and, why don't you look up a fistful of AAA equities in M* and see how they did in 2008. They were blasted...... but it makes no difference. What makes a difference is getting your 1%, which I'll guess is near $15K annually. He's looking at you like great big low hanging fruit and lickin' his chops.

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Sbashore
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Re: Need Perspective and Advise

Post by Sbashore » Wed Jul 30, 2014 10:07 am

Lot of good advice here. Basically it sounds like this guy is lying to you or is completely naive, stupid or all of the above. None of those attributes describe someone to whom I'd want to give money to manage.
Steve | Semper Fi

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Aptenodytes
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Re: Need Perspective and Advise

Post by Aptenodytes » Wed Jul 30, 2014 10:14 am

You are smarter than your adviser, or your adviser is a crook. Either way, your path is clear.

Storcher
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Re: Need Perspective and Advise

Post by Storcher » Thu Jul 31, 2014 9:44 am

Thanks......so far what I heard confirms my suspicions, I have much to learn and that is why I appreciate all this feedback.
Out of courtesy,as agreed, I probably will meet with this adviser to hear their proposal.
Received a lot of good talking points here which I might just use, please keep them coming.

As to why I am not drawing upon my IRA....I have a pension of about 55 K /year, a 400 K unannuitized annuity and full medical at no cost from my employer until Medicare kicks in....and my wife is still working.
Plan to put off SS until I am 66, then file and suspend and claim 1/2 my wife's SS award.

My portfolio:

VFIDX Vanguard Intermediate-Term Investment-Grade Fund Admiral Shares 0.10% 12,575.570 $124,498.14
VFSUX Vanguard Short-Term Investment-Grade Fund Admiral Shares 0.10% 7,075.857 $75,923.95
VBTLX Vanguard Total Bond Market Index Fund Admiral Shares 0.08% 18,627.483 $200,990.54
VTABX Vanguard Total International Bond Index Fund Admiral Shares 0.20% 5,385.898 $111,057.22
VTIAX Vanguard Total International Stock Index Fund Admiral Shares 0.14% 3,171.321 $92,348.87
VTSAX Vanguard Total Stock Market Index Fund Admiral Shares 0.05% 4,731.603 $234,450.93
Total $839,269.65

My wife also has a small IRA with Vanguard which I included to get to the 850 K figure.

Dandy
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Re: Need Perspective and Advise

Post by Dandy » Thu Jul 31, 2014 10:04 am

Run away is a good suggestion. Salespeople (who call themselves advisors) have to have some angle to get you to buy - fear of rising interest rates is a good lever to pry you away from a low cost, diversified program to one that will make him and his firm money.

I am farther along in retirement, relatively conservative and have close to 60% in fixed income. I think you choices and allocation seem fine.

For me I added some corporate, tips and CDs to the mix. I like a lot of stability and felt that some additional diversity on the fixed income side would help. CDs for stability, Corp for diversity, tips for inflation protection. I also decided to allocate about 1/3 of fixed income to intermediate duration, 1/3 to short term duration and 1/3 to no loss of investment products - mainly CDs.

gtmn
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Re: Need Perspective and Advise

Post by gtmn » Thu Jul 31, 2014 11:14 pm

As of 2000 there were only 15 companies with AAA ratings, and in 2011 there were only 4. During the financial crisis companies such as Pfizer, Berkshire Hathaway and General Electric lost their AAA ratings, which few could have foreseen. (Forbes) Bottom line, he can't build the stock portfolio that he's selling you because it doesn't exist.

IF you are convinced by your broker that investing in a basket of high quality stocks makes sense, then take a look at Vanguard's Dividend Appreciation Index Fund, which lost only 26% in 2008, compared with a 37% loss for the S&P 500 Index Fund. Its admiral shares will only cost you .10% and it's diversified, while 18-20 stocks would generally not be considered diversified. (I would recommend the S&P 500 Index Fund, as Warren Buffet instructed his trust, or the Vanguard Total Stock Market Fund instead of the Dividend Appreciation Index.)

I would rethink your broker's bond advice after reading some posts about bonds in a rising rate environment, or read the paper by Vanguard called "Risk of loss: Should the prospect of rising rates push investors from high-quality bonds?" What I've found from reading these sources is that a rise in rates may produce a moderate and temporary decline in principal, but by holding and reinvesting dividends you should soon recover your losses and continue to earn higher yields after a few years. Most important, Investment Grade and Treasury bonds reduce portfolio risk; they are not riskier than equities.

If you want to exceed the performance of most investors, build a balanced portfolio of index funds and save the 1% so it compounds in your favor, not in favor of a broker. I would start by looking at the "Three Fund Portfolio", posted by Taylor Larimore, and probably end there too. Or, you could look at the Vanguard LifeStrategy Funds or Target Retirement Funds that match your risk tolerance. They basically build an indexed portfolio for you and keep your costs rock bottom.

The best tactic that a salesperson has is to nurture the idea that you can do better than everyone else. Why would anyone want to match the market average? Because after 10-15 years of doing that you'll be well ahead of 90% of investors, and your lead will grow every year because your costs will stay low. In investing, being "average" gives you the best chance of coming out ahead.

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Dale_G
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Re: Need Perspective and Advise

Post by Dale_G » Fri Aug 01, 2014 12:26 am

Storcher wrote:Thanks......so far what I heard confirms my suspicions, I have much to learn and that is why I appreciate all this feedback.
Out of courtesy,as agreed, I probably will meet with this adviser to hear their proposal.
Received a lot of good talking points here which I might just use, please keep them coming.


When people here say "run away", they mean "run away". "Run away" is shorthand for calling the adviser, thanking him for his time, and cancelling the appointment. There is nothing discourteous about it. When he protests, simple tell him, "I have made up my mind". Repeat as necessary. After you have repeated it 10 times, say, "goodbye" and hang up.

You are dealing with a professional sales person. He will have a pat answer for each of your talking points. He has probably had this same conversation hundreds of times. His objective is to convert some percentage of these folks into paying customers. He will work hard at it.

Your portfolio is perfectly fine.

Dale
Volatility is my friend

LongerPrimer
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Re: Need Perspective and Advise

Post by LongerPrimer » Fri Aug 01, 2014 12:56 am

I basically agree with the FP.
The ML guy who wants my business is also saying the same.
My FP guy wants me to do some bonds MF or do some age based MF strategy.
Me, I don't trust people or cos that borrow money. I don't even trust me, in borrowing money.
Thus I don't own any bonds since Nov 2008. I own deferred all equity annuities, dividend payers, VTI and speculative companies. :annoyed

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pjstack
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Re: Need Perspective and Advise

Post by pjstack » Fri Aug 01, 2014 1:02 am

The OP said he had 850K invested.

One percent (what the advisor will charge) of 850K is $8,500. Per year. And no manual labor involved.

(I'll do it for half that!)
pjstack

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Watty
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Re: Need Perspective and Advise

Post by Watty » Fri Aug 01, 2014 3:51 am

The fee is 1% of the account managed.


That is only the tip of the iceberg. They are very good at getting additional fees out of people.

One thing that I have not seen mentioned is that it sounds very likely that you will never need the money so it is pretty likely most of it it will go to your estate some day. If that is true then you might want it invest it with an appropriate asset allocation for whoever is likely to inherit it after you and any spouse are gone. Without knowing the details a 40/60 asset allocation would seem to be very reasonable and conservative asset allocation it it will be inherited, hopefully decades from now, by someone in a younger generation or a charity.

hexagon
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Re: Need Perspective and Advise

Post by hexagon » Fri Aug 01, 2014 7:15 am

Storcher wrote:Thanks......so far what I heard confirms my suspicions, I have much to learn and that is why I appreciate all this feedback.
Out of courtesy,as agreed, I probably will meet with this adviser to hear their proposal.
Received a lot of good talking points here which I might just use, please keep them coming.



A few comments:
First, I would not meet with this adviser out of courtesy. Ok, I have to admit that I have done this, wasting both my and the adviser's time.

Your Vanguard portfolio seems very appropriate both in asset allocation and low-cost index funds. With the exception of a little complexity in the bond allocation, you seem very close to a 3-fund portfolio. I second BL's suggestion to look at the wiki, or at Taylor's most excellent thread:
viewtopic.php?f=10&t=88005
Whether you decide to simplify or not the bond portion is an order of magnitude less important than (a) choosing a reasonable equity/bond allocation and (b) choosing low cost funds to implement your plan.

Talking points if you do plan to meet with the adviser:

The adviser's suggestion that he can pick a portfolio of 18-20 equities that is less risky than your 40/60 portfolio is just nonsense.

Your bond portfolio is somewhat tilted somewhat toward short duration making it less sensitive to interest rate increases and less risky (at least in the short run) by most measures of risk, and, let me say this again, his suggestion that his portfolio of 18-20 equities is less risky than your 40/60 portfolio is just nonsense (especially with your short duration tilt).

--Doug

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BL
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Re: Need Perspective and Advise

Post by BL » Fri Aug 01, 2014 10:07 am

Plan to put off SS until I am 66, then file and suspend and claim 1/2 my wife's SS award.


You have the right idea. Not sure about the method. If wife is drawing her ss, you can claim just spousal at your FRA and then claim yours at 70 or whenever you choose. I believe the file and suspend would be to allow her to file as spouse and delay your own until later.

Grt2bOutdoors
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Re: Need Perspective and Advise

Post by Grt2bOutdoors » Fri Aug 01, 2014 1:42 pm

Storcher wrote:Need some help fact checking and deciding.
I have an IRA with Vanguard of about 850 K.
I am also retired and not drawing upon it.
Basically, being somewhat conservative, my portfolio is split between stock (40%) and bond (60%) index funds.
For another opinion, I visited a local financial adviser with a good reputation, and showed him my portfolio.
He said it was rather risky being so heavily weighted in bond funds (a beta above "1"). If interest rates were to begin to rise, I would be hurt.
As for the stock index fund, his opinion was that it does have a good upside potential ( works well in bull markets), but in a bear market it also has a large potential downside, being totally exposed. Instead, he believed that I would be better served by avoiding bonds altogether and concentrating on a basket of AAA equities (a collection of 18-20) paying good dividends. In doing so, I would lower my beta to about ".6",and get both dividends and growth. Furthermore, being that the accounts are actively managed, that during the 2008 meltdown, a portfolio such as this, suffered only a 10-12% decline.
The fee is 1% of the account managed.
All opinions gratefully welcome.


After yesterday's decline in the market, how would you have fared using advisors proposed strategy?
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

Doom&Gloom
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Re: Need Perspective and Advise

Post by Doom&Gloom » Fri Aug 01, 2014 4:53 pm

Dale_G wrote:
Storcher wrote:Thanks......so far what I heard confirms my suspicions, I have much to learn and that is why I appreciate all this feedback.
Out of courtesy,as agreed, I probably will meet with this adviser to hear their proposal.
Received a lot of good talking points here which I might just use, please keep them coming.


When people here say "run away", they mean "run away". "Run away" is shorthand for calling the adviser, thanking him for his time, and cancelling the appointment. There is nothing discourteous about it. When he protests, simple tell him, "I have made up my mind". Repeat as necessary. After you have repeated it 10 times, say, "goodbye" and hang up.

You are dealing with a professional sales person. He will have a pat answer for each of your talking points. He has probably had this same conversation hundreds of times. His objective is to convert some percentage of these folks into paying customers. He will work hard at it.

Your portfolio is perfectly fine.

Dale


I agree with Dale. Taking up his time, letting him buy you lunch, etc. when you have no intention to do business with him is being discourteous. If you are going to do business, keep your appointment. If not, cancel it. If you are still on the fence, postpone your meeting until you have made a firm decision one way or another.

If I weren't persuaded to run away and manage my own funds by the numerous posts in this thread, I'd certainly be persuaded to shop for a better bargain in hiring someone to do that for me.

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nedsaid
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Re: Need Perspective and Advise

Post by nedsaid » Sat Aug 02, 2014 4:20 pm

You have a great portfolio, you don't need a financial advisor. Keep doing what you are doing and you will be just fine.
A fool and his money are good for business.

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