“For I don’t care too much for money, For money can’t buy me love.”  (John Lennon & Paul McCartney, 1964)

To my Good Friend,

You asked for a brief summary of my advice as you develop your plan for redeploying your liquid assets.  This is because you’re not comfortable doing it on your own and you haven’t yet engaged a for-pay financial advisor, investment consultant, or online service provider.

You’re not a large risk taker and, except for an old IRA, you’ve kept your savings in a money market fund and bank account.  As you’re well aware, for several years the yields on these accounts have been near zero, just a small fraction of what you grew accustomed to until late 2008.  So, you’re getting more comfortable with the concept of moving savings into assets with higher return potential such as equities and fixed income instruments.  These of course are more risky than cash, at least in the sense they could go down in  nominal value.  (Sidebar: Cash isn’t without risk in a bull market or inflationary environment).

Several of your friends have engaged professional financial advisors and I understand you’re considering that route.  If you were to engage such an advisor, he/she’d consider your age, health, income, resources, plans, risk tolerance, need for liquidity, tax situation, other assets, etc.  The goal would be to develop a good understanding of you and your situation.  With that knowledge, she would suggest feasible allocations for asset classes (cash, stocks, bonds, real estate, other real assets including gold, commodities, collectables, etc.).  It is likely she’d suggest the majority of your investable assets be allocated to a portfolio containing a mix of fixed income instruments (bonds) and stocks. Through a collaborative process with your advisor, you would in all likelihood choose a target allocation between the broad categories of stocks and bonds (such as 55% and 45%) and then to categories within each broad category (domestic large capitalization (“cap”) stocks, emerging market stocks, Treasury bonds, etc. etc.)  For a good discussion of this, see Vanguard’s framework for constructing diversified portfolios.

For the advice of a professional financial consultant or investment advisor, you’d be charged a fee.  For “fee only” advisors that you can meet with in person, that fee could be as much as 2%/year on the assets overseen (and, in any event, a meaningful portion of the earnings one could reasonably expect on the asset pool).  (Be aware, there are many variations on fees:  for example, for larger investors, Vanguard and Fidelity each has a menu of services which includes “free” advice; for another approach, one of several cloud-based advisors, Wealthfront, charges 0.25%/year.  There are many, many service providers each with its own menu of fees.)

However, on the concept of investment advisors and fees, keep in mind that many well respected investment professionals believe paying a third party advisory fees is mostly a waste of money.  See, for example,  “Are You Paying Too Much For Investment Help?”   It’s by Burton G. Malkiel, a former professor at Princeton and author of the popular and respected book on investing, “A Random Walk Down Wall Street,” now in its 12^th edition.

I could go on and on with details about various financial assets and the landscape of advisory services.  But you asked for a short note, so you could get started thinking.  To that point, based on what I know about you, please consider simplifying your choices by making the following assumptions:

1) You own your home, so you probably have enough real estate.

2) You don’t like volatility and seek to preserve capital, so no need to consider gold and commodities.

3) You like to minimize transaction and holding costs, so stay away from collectables.

In short, my advice:

1) Focus on stocks and bonds (through exchange-traded funds (ETFs), don’t be a stock or bond picker)*.

2) Diversify.

3) Minimize your costs including taxes.

Assuming you follow the advice as sketched out above, you’ll need to consider carefully and decide on the percentage allocation between stocks, bonds, and cash – this is a very key decision for you.  After that, achieving diversification of your stock and bond holdings is more-or-less straightforward with mutual funds and ETFs, some of which are low cost.

In a future note I’ll strive to write you about ETFs and, possibly, cloud based investment management services.

I hope you find this information helpful…let me know of any questions or comments.

Krist

*For example, see “What Stock to Buy?  Hey, Mom, Don’t Ask Me” by N. Gregory Mankiw (Professor of Economics at Harvard).