OTAlexFA wrote:My concern lies when people throw around recommendations on here without knowing the depth of what the concerned is asking. People immediately shout "index funds!" when it isn't always the right answer.

Sure, all true.

My only nit is just to note that there's a bit of a straw man being built though, as indexing doesn't mean having some simplistic asset allocation where you only own one fund. For example, you could give a very simplistic answer to the hypothetical question you posed and answer that everyone should put 1/3 of their money (dollar cost averaging) in each of a US total stock market index fund, international total stock market (ex-US) index fund and a total bond fund (rebalancing annually) and that person would have a decent allocation mix that has a very good chance of accomplishing their goals with low fees and low hassle, while also protecting against some of the bear market risks you're mentioning. You can obviously create much more complex allocations than that (and there may be sub-components of an allocation where it's easier to generate alpha versus an applicable benchmark - small caps or emerging markets, for example, where an active fund is more appropriate), but a simple strategy like that can actually be just fine for many people.

So as to not continue quoting such long responses, I will say that we are on the same page, yes. Steeped investors like yourself who are passionate about doing it themselves would likely not need an advisor, unless there was some area you thought were lacking (planning aspect, insurance, estate, etc.). Everyone should be so knowledgeable. (Well, maybe not, because then I'd be out of a job.)

My concern lies when people throw around recommendations on here without knowing the depth of what the concerned is asking. People immediately shout "index funds!" when it isn't always the right answer.

OTAlexFA wrote:

Anonymous wrote:

OTAlexFA wrote:

Anonymous wrote:Why don't I just put my money in index funds rather than you? Will your fee + the returns outperform index funds + fees?

This one feels like a trap.

In a bull market? Maybe not. Index funds are outstanding when everyone is making money. However, are you going to tactically manage those passive funds? If not, you can guess what happens when the market "corrects" (a term I don't like). You'll get virtually 100% of the market growth now and then virtually 100% of the downcapture, as well. There's no hedge. As most of us know from math, if you lose 20%, it takes 25% of gains to get back to even.

Index funds are very popular, particularly on DCUM, I've seen. I like them. I use them. The question is, does it fit your strategy? What's your time horizon? What's your goal? Index funds are great; they just aren't a cure-all.

NP here. This answer is ridiculous.

Index funds get you market average returns for nominal fees. They do that in bull and bear markets.

Active management only guarantees higher fees. It's possible that active management will outperform or underperform in a bull market. It's also possible that active management will outperform or underperform in a bear market. There is nothing magical about a "hedge" that lessens the amount of your bear downcapture in a way that more than offsets the drag you feel during the bull run where you are underperforming due to holding that same hedge. There are plenty of active managers who have overweighted cash the last 5 years as a "tactical" strategy for a correction that never happened - active managers have no magic crystal ball to know when the next correction will occur. Your answer is just the marketing speak that active managers use to draw you away from the fact that active management, over the long run (i.e., multiple market cycles) is statistically likely to underperform the market as a whole, as it's very difficult to overcome the headwind of significant fees over the long run.

I personally use both active and passive strategies, but the simplistic notion that active management outperforms during bear cycles is disingenuous.

All fair points, although I think ridiculous may be a bit extreme. In short, index funds are designed to mimic the benchmark you're trying to achieve. When that index goes down, that fund goes down virtually 1:1. The fees, as a result of no active management, are in fact less. Sometimes, significantly so! However, in certain market environments and according to your client's level of risk, some products that have active management that are predicated on limiting downside capture are appropriate. To take the most advantage of those, is there market timing involved? Of course. Or, it could just be part of your long-term strategy which, in that case, the OP is spot on. You will lag behind and see higher management fees.

Again, I think the OP and I may be assuming concentrated positions in those index funds which may or may not be what the investor intends.

OK, "ridiculous" may have been extreme.

My point is that there are really two separate currents running through this discussion. One is active v. passive (i.e., index) strategies. The other is asset allocation.

What you are saying really is that there are some investing strategies that will lessen your downside risk at the expense of underperforming during a bull market. In fact, it's possible that these strategies MAY even produce better risk adjusted returns over the long run. However, those strategies can be pursued via both active or passive strategies (e.g., your index portfolio may tilt value v growth, small v mid v large, US v developed v emerging, REIT, momentum, etc.). My objection to your post is that you're advocating active management based on things that really have more to do with asset allocation than the active/passive distinction.

You've separately mentioned market timing, which really is a third point. Again, this can be accomplished whether you are using an active or passive strategy. For example, when I got serious about investing about 7 years ago, I set up my own asset allocation, which included a small chunk of cash. In early 2009, the fact that the stock market was a screaming buy seemed so obvious that I went all in and deviated from what I'd call my "base" allocation. In my case, that basically involved purchasing VTI. I'm now at a point where I'm in the process of moving back to my target allocation. Again though, this is totally separate from the active v passive debate.

For many people, an advisor may be worth the money, for a variety of reasons (lack of time, lack of knowledge, need for someone to act as a buffer from your own emotional decision making, etc.). For others, it's probably a wasted expense that adds nothing but costs.

However, answering the original question by trying to imply that indexing has some inherent flaw in bear markets is not accurate IMO.

Anonymous wrote:

OTAlexFA wrote:

Anonymous wrote:

OTAlexFA wrote:

Anonymous wrote:Why don't I just put my money in index funds rather than you? Will your fee + the returns outperform index funds + fees?

This one feels like a trap.

In a bull market? Maybe not. Index funds are outstanding when everyone is making money. However, are you going to tactically manage those passive funds? If not, you can guess what happens when the market "corrects" (a term I don't like). You'll get virtually 100% of the market growth now and then virtually 100% of the downcapture, as well. There's no hedge. As most of us know from math, if you lose 20%, it takes 25% of gains to get back to even.

Index funds are very popular, particularly on DCUM, I've seen. I like them. I use them. The question is, does it fit your strategy? What's your time horizon? What's your goal? Index funds are great; they just aren't a cure-all.

And I liked your answers up til this one.

I think an advisor can make sense as a coach-- avoiding mistakes like changing your asset allocation in the middle of a bear market. But you've gone from saying your purpose isn't to outperform the markets to saying your purpose is to get 100% of the gains and less than 100% of the losses of the market. Those sentences don't make sense together.

I think I see what you're saying and I will try to be clearer. Again, I like index funds and will use them as a portion of a portfolio. That sleeve will get all the gains and all the downcapture of a market. However, the entirety of the portfolio will likely neither outperform nor capture all of the draw downs. Like I said earlier, if you would like to go all index funds, I won't argue with you, unless there is a distinct reason to (age, needs, etc.).

Make a little more sense, maybe? Or was that more confusing?

No that is more confusing. I can't tell if you are distinguishing between stock index funds and some other equity investments in the portfolio, or between stock index funds and fixed income investments. Certainly I have no desire to be 100% invested in the stock market and get 100% of the gain and losses of the stock market, but how I allocate my investments among different asset classes has little to do with whether I used index funds for my investments.

Yup, I'm confused too. My original intent was to explain the index fund in comparison to the rest of the hypothetical portfolio assuming a diversified allocation across asset classes.

Anonymous wrote:

OTAlexFA wrote:

Anonymous wrote:Why don't I just put my money in index funds rather than you? Will your fee + the returns outperform index funds + fees?

This one feels like a trap.

In a bull market? Maybe not. Index funds are outstanding when everyone is making money. However, are you going to tactically manage those passive funds? If not, you can guess what happens when the market "corrects" (a term I don't like). You'll get virtually 100% of the market growth now and then virtually 100% of the downcapture, as well. There's no hedge. As most of us know from math, if you lose 20%, it takes 25% of gains to get back to even.

Index funds are very popular, particularly on DCUM, I've seen. I like them. I use them. The question is, does it fit your strategy? What's your time horizon? What's your goal? Index funds are great; they just aren't a cure-all.

NP here. This answer is ridiculous.

Index funds get you market average returns for nominal fees. They do that in bull and bear markets.

Active management only guarantees higher fees. It's possible that active management will outperform or underperform in a bull market. It's also possible that active management will outperform or underperform in a bear market. There is nothing magical about a "hedge" that lessens the amount of your bear downcapture in a way that more than offsets the drag you feel during the bull run where you are underperforming due to holding that same hedge. There are plenty of active managers who have overweighted cash the last 5 years as a "tactical" strategy for a correction that never happened - active managers have no magic crystal ball to know when the next correction will occur. Your answer is just the marketing speak that active managers use to draw you away from the fact that active management, over the long run (i.e., multiple market cycles) is statistically likely to underperform the market as a whole, as it's very difficult to overcome the headwind of significant fees over the long run.

I personally use both active and passive strategies, but the simplistic notion that active management outperforms during bear cycles is disingenuous.

All fair points, although I think ridiculous may be a bit extreme. In short, index funds are designed to mimic the benchmark you're trying to achieve. When that index goes down, that fund goes down virtually 1:1. The fees, as a result of no active management, are in fact less. Sometimes, significantly so! However, in certain market environments and according to your client's level of risk, some products that have active management that are predicated on limiting downside capture are appropriate. To take the most advantage of those, is there market timing involved? Of course. Or, it could just be part of your long-term strategy which, in that case, the OP is spot on. You will lag behind and see higher management fees.

Again, I think the OP and I may be assuming concentrated positions in those index funds which may or may not be what the investor intends.

OTAlexFA wrote:

Anonymous wrote:

OTAlexFA wrote:

Anonymous wrote:Why don't I just put my money in index funds rather than you? Will your fee + the returns outperform index funds + fees?

This one feels like a trap.

In a bull market? Maybe not. Index funds are outstanding when everyone is making money. However, are you going to tactically manage those passive funds? If not, you can guess what happens when the market "corrects" (a term I don't like). You'll get virtually 100% of the market growth now and then virtually 100% of the downcapture, as well. There's no hedge. As most of us know from math, if you lose 20%, it takes 25% of gains to get back to even.

Index funds are very popular, particularly on DCUM, I've seen. I like them. I use them. The question is, does it fit your strategy? What's your time horizon? What's your goal? Index funds are great; they just aren't a cure-all.

And I liked your answers up til this one.

I think an advisor can make sense as a coach-- avoiding mistakes like changing your asset allocation in the middle of a bear market. But you've gone from saying your purpose isn't to outperform the markets to saying your purpose is to get 100% of the gains and less than 100% of the losses of the market. Those sentences don't make sense together.

I think I see what you're saying and I will try to be clearer. Again, I like index funds and will use them as a portion of a portfolio. That sleeve will get all the gains and all the downcapture of a market. However, the entirety of the portfolio will likely neither outperform nor capture all of the draw downs. Like I said earlier, if you would like to go all index funds, I won't argue with you, unless there is a distinct reason to (age, needs, etc.).

Make a little more sense, maybe? Or was that more confusing?

No that is more confusing. I can't tell if you are distinguishing between stock index funds and some other equity investments in the portfolio, or between stock index funds and fixed income investments. Certainly I have no desire to be 100% invested in the stock market and get 100% of the gain and losses of the stock market, but how I allocate my investments among different asset classes has little to do with whether I used index funds for my investments.

OTAlexFA wrote:

Anonymous wrote:Why don't I just put my money in index funds rather than you? Will your fee + the returns outperform index funds + fees?

This one feels like a trap.

In a bull market? Maybe not. Index funds are outstanding when everyone is making money. However, are you going to tactically manage those passive funds? If not, you can guess what happens when the market "corrects" (a term I don't like). You'll get virtually 100% of the market growth now and then virtually 100% of the downcapture, as well. There's no hedge. As most of us know from math, if you lose 20%, it takes 25% of gains to get back to even.

Index funds are very popular, particularly on DCUM, I've seen. I like them. I use them. The question is, does it fit your strategy? What's your time horizon? What's your goal? Index funds are great; they just aren't a cure-all.

NP here. This answer is ridiculous.

Index funds get you market average returns for nominal fees. They do that in bull and bear markets.

Active management only guarantees higher fees. It's possible that active management will outperform or underperform in a bull market. It's also possible that active management will outperform or underperform in a bear market. There is nothing magical about a "hedge" that lessens the amount of your bear downcapture in a way that more than offsets the drag you feel during the bull run where you are underperforming due to holding that same hedge. There are plenty of active managers who have overweighted cash the last 5 years as a "tactical" strategy for a correction that never happened - active managers have no magic crystal ball to know when the next correction will occur. Your answer is just the marketing speak that active managers use to draw you away from the fact that active management, over the long run (i.e., multiple market cycles) is statistically likely to underperform the market as a whole, as it's very difficult to overcome the headwind of significant fees over the long run.

I personally use both active and passive strategies, but the simplistic notion that active management outperforms during bear cycles is disingenuous.

Anonymous wrote:

OTAlexFA wrote:

Anonymous wrote:Why don't I just put my money in index funds rather than you? Will your fee + the returns outperform index funds + fees?

This one feels like a trap.

In a bull market? Maybe not. Index funds are outstanding when everyone is making money. However, are you going to tactically manage those passive funds? If not, you can guess what happens when the market "corrects" (a term I don't like). You'll get virtually 100% of the market growth now and then virtually 100% of the downcapture, as well. There's no hedge. As most of us know from math, if you lose 20%, it takes 25% of gains to get back to even.

Index funds are very popular, particularly on DCUM, I've seen. I like them. I use them. The question is, does it fit your strategy? What's your time horizon? What's your goal? Index funds are great; they just aren't a cure-all.

And I liked your answers up til this one.

I think an advisor can make sense as a coach-- avoiding mistakes like changing your asset allocation in the middle of a bear market. But you've gone from saying your purpose isn't to outperform the markets to saying your purpose is to get 100% of the gains and less than 100% of the losses of the market. Those sentences don't make sense together.

I think I see what you're saying and I will try to be clearer. Again, I like index funds and will use them as a portion of a portfolio. That sleeve will get all the gains and all the downcapture of a market. However, the entirety of the portfolio will likely neither outperform nor capture all of the draw downs. Like I said earlier, if you would like to go all index funds, I won't argue with you, unless there is a distinct reason to (age, needs, etc.).

Make a little more sense, maybe? Or was that more confusing?

Thanks but my DH is a Wealth Manager and he's great, but good luck!

Anonymous wrote:What mistakes do you think individuals who manage their own money without an advisor make that using an advisor would prevent?

I'll need more specifics of that question but I'll give 3 brief generalizations...

1. Not evolving the portfolio as goals and time horizons change.
2. Making emotional and myopic decisions that may not coincide with the endgame.
3. The most important, I believe, which plays into the first 2 - Not having a targeted, personalized, and comprehensive financial plan in place.

Remember the commercial with the two neighbors, I think it was ING? One man is carrying his "number" and the other person says he is just throwing money at it? It seems far too many people just throw money at their retirement and go with cookie cutter advice without having a plan specifically tailored to their individual goals and objectives.

OTAlexFA wrote:

Anonymous wrote:Why don't I just put my money in index funds rather than you? Will your fee + the returns outperform index funds + fees?

This one feels like a trap.

In a bull market? Maybe not. Index funds are outstanding when everyone is making money. However, are you going to tactically manage those passive funds? If not, you can guess what happens when the market "corrects" (a term I don't like). You'll get virtually 100% of the market growth now and then virtually 100% of the downcapture, as well. There's no hedge. As most of us know from math, if you lose 20%, it takes 25% of gains to get back to even.

Index funds are very popular, particularly on DCUM, I've seen. I like them. I use them. The question is, does it fit your strategy? What's your time horizon? What's your goal? Index funds are great; they just aren't a cure-all.

And I liked your answers up til this one.

I think an advisor can make sense as a coach-- avoiding mistakes like changing your asset allocation in the middle of a bear market. But you've gone from saying your purpose isn't to outperform the markets to saying your purpose is to get 100% of the gains and less than 100% of the losses of the market. Those sentences don't make sense together.

Anonymous wrote:

OTAlexFA wrote:

Anonymous wrote:Why don't I just put my money in index funds rather than you? Will your fee + the returns outperform index funds + fees?

Index funds are great; they just aren't a cure-all.

i would disagree with you here. almost nobody can beat the market over a long timespan, so it makes little sense to do anything BUT invest in index funds. all this jazz about timing the market and "hedging" against downturns is a recipe for losing your ass.

I never try and time the market (except during earnings seasons for myself). I recommend building in hedges to your portfolio to where you're not 100% exposed to downcapture. If by "losing your ass" means you underperform a couple of percentage points, I'll offer that peace of mind everytime. See 2001 and 2008.

If you want to leave it all out there, by all means, that is your option and I won't argue with your comfort level.

Anonymous wrote:It means he/she charges a fee, but also takes a cut of assets under management. That's the only way a financial advisor can make any money.

Let me clarify this statement. There is no "but also". The fee is just the percentage. I'm not like an attorney where I charge hourly consultation or retainer fees. If we find a solution that utilizes me or my firm, then we charge based upon the platform used. If it is fee based, then that percentage of AUM is all encompassing.

Does that make sense or muddy the waters further?

Anonymous wrote:

OTAlexFA wrote:

Anonymous wrote:Why don't I just put my money in index funds rather than you? Will your fee + the returns outperform index funds + fees?

Index funds are great; they just aren't a cure-all.

i would disagree with you here. almost nobody can beat the market over a long timespan, so it makes little sense to do anything BUT invest in index funds. all this jazz about timing the market and "hedging" against downturns is a recipe for losing your ass.

An adviser is useful if you really have no interest in doing the basic research to figure out which target retirement index matches your age. There are people who are that hands off.

But they are not looking in the "money and finance" section of DCUM....

What mistakes do you think individuals who manage their own money without an advisor make that using an advisor would prevent?