At the end of last year I decided that there is a need for my firm to offer ongoing investment management services. As I did my research and looked at the industry I felt that there were more advisors doing harm than good. I mentioned that it does not pay to be active in client portfolios and the proof is in the studies that illustrate this point. So if I believe that markets work efficiently why should you hire an advisor when you can buy index funds to replicate the market? Well here are 3 take a ways from my recent visit to Dimensional.
1. Emotions Are Damaging
Emotions cause us to do things that we may not normally do especially when we’re under a lot of stress. Try to remember how you felt in 2008 and early 2009. Everyday in the news everyone was literally freaking out that there was no end in sight. I’m the first to admit that it was very stressful and virtually impossible to hide under a rock. If you watch CNBC you’ve probably seen Jim Cramer’s show ‘Mad Money.’ This is where Jim tells his TV audience to buy/sell certain stocks. The show’s purpose is to entertain and rev up your emotions. Check out the creator of the show, Susan Krakower, who is the same person who managed ‘The Jerry Springer Show.’ There is a lot of noise and the right advisor can work with you to make the right decisions and avoid costly mistakes.
2. Liberating You from the Day to Day of Managing Your Assets
You have a full time job, a family, friends and hobbies. For many, there is little time and desire to sit down and figure out if you’re prepared for retirement or are achieving your financial goals. Advisors are here to manage your investments and keep it inline with your goals and tolerance for risk. They will help you devise a plan to be better prepared for retirement or help create retirement strategies when you’re at that point. Considering that most people are very concerned about outliving their savings, advisors can add peace of mind to your life.
3. Index Restrictions
So, here’s the value that Dimensional brings to the table. As I mention in my investment philosophy, our approach is built on sound academic principles. The research and conviction that Dimensional has is like no other mutual fund company. They believe that small cap stocks will out perform large cap and they also believe that value stocks will out perform growth stocks over a long period of time. So they have built their portfolios on these beliefs and never wavered. Don’t get me wrong index funds are a great way to build a diversified low cost portfolio but they do have their drawbacks. Typical index funds, like the S&P 500, typically have an equal blend of value and growth stocks. Dimension will tilt there portfolios to include a greater amount of value stocks. Not a huge deal but enough to add value over long periods of time.
Second, is the drag on index funds through a process called reconstitution. The objective of each index mutual fund is to track the index it is follow as closely as possible. You want to know that you’re buying a S&P 500 index fund and not find out later that the fund has drifted to a more mid cap level fund. So each fund manager want to get as close to a zero tracking error as possible. Here lies the issue of index funds. Usually, each year the index will release which stocks they will be adding/removing and re-rank the percentage of each holding. The index fund managers do not know in advance what the new index weightings will be and must make adjustments on the fly. This causes a drag on the index mutual funds because there is a lot of trading going on between active managers. Dimensional doesn’t have this issue because they follow their own benchmarks.
Partnering up with the right advisor can add a lot of value to not only your financial goals but also to your quality of life. Sometimes when we hire an advisor we want to know how much we’re paying them and how much they’ve made us. But I also think it is important to realize that peace of mind is all the value you need.
So, what do you think? Do you need help along the way?