According to the Modern Portfolio Theory, it’s hard to beat the market. If MPT is right, then it shouldn’t be surprising to see headlines like, “New report finds almost 80% of active fund managers are falling behind the major indexes.” This naturally begs the question, “Why would you pay a financial advisor to manage your assets when you could easily buy index funds and manage your portfolio from your phone?” Sure, back in the 70s, 80s, and 90s, if you wanted to invest in the market, you had to work through a financial professional. However, times have changed.
These days, you can manage your portfolio from your phone. If you buy index mutual funds or ETFs, it’s possible your money could perform similarly to or possibly better than those money managers who use the various indexes as their benchmark. That doesn’t mean you won’t experience market volatility or that you can’t lose money. It means you have a reasonable opportunity to earn similar results without paying unnecessary advisory fees.
If it is so easy to manage your investment, then are financial advisors obsolete? It depends. When it comes to financial planning, many people experience an interesting psychological phenomenon called the Dunning-Kruger effect, which occurs when a person’s lack of knowledge and skills in a certain area causes them to overestimate their own competence. Basically, they don’t know what they don’t know, and they don’t know how to learn what they don’t know.
Investing may not be the problem. However, how to financially get from where you are to where you want to be may have a few blind spots. Take retirement as an example. On the surface, it seems simple enough. If you invest and your portfolio averages, say, 5% or more each year, then you should be able to take 4% out of your portfolio, maintain your principal, and enjoy retirement, right? It’s not that simple.
According to Stanford’s research, pulling income from a stock/bond portfolio could come at a “high price.” There’s a retirement blindspot called sequence of returns risk. Basically, it’s not about averages. It is about the sequence of the return, year over year. If you have too many down years and you keep pulling income, it could compromise your ability to stay retired.