@bwelbo also made a great point examining costs, but what I’m suggesting is financial advisors have a wide range of experience. How do you tell if the one you have is any good? What makes his advice worth paying for?I have a plethora of mutual fund options in my 401k in which to invest. I don’t know how to pick the best one for me. Sure, I can try research them, but at the end of the day I’m basically stuck looking at historical returns because I don’t know how to weigh the relative importance of any other information I learn. Whether one fund is inherently a better fund or not for my financial goals I cannot say with any confidence. A financial advisor can advise on that because he’s got a career of experience with them.
For example, if I can return slightly greater than 9% historically slapping my money in an S&P low cost index any advisor of mine better be able to beat that otherwise he’s costing me money listening to him rather than just mindlessly loading my index fund. If I can generate a hair better than 14% with a small number low risk growth stocks, well he best be able to best that as well. Now these are my benchmarks & every individual is different.
#2 is an absolute. On #3, again I’d ask: are they making you as much money as they should based on how much you’re paying them? The day I fired mine was the day I realized how much he cost compared to what his return was based on what it should have been. If you don’t have the time to do it yourself, it may afford peace of mind.Yep. I have pretty basic criteria for my certified financial planners. (1). They enable me to meet my goals. (2). They don't get paid unless they make money for me. (3). They make me a lot of money.
I disagree with your lead in statement that you can’t beat an index fund for example. You most certainly can, but it comes some with additional risk you need to manage.Its extremely hard for anybody to beat index funds. The management fee is so low, that 0.2% versus 1.0%+ can add up tremendously over time.
For example, if you put $100,000 into 2 different funds that both earned a 6% return over 15 years. The one with the 0.2% management fee would be worth $225,000 after those 15 years versus $196,000 for the other. You can view that as a $29,000 difference in cost...or said another way, the difference in return equaled 29% of the original investment!
The S&P 500 is comprised of 500 of the largest market cap companies on the NYSE and NASDAQ and index funds try to mimic the composition of those companies in order to provide a high correlation between the performance of those funds and the weighted S&P index itself. How do you beat it? Individually invest more in overperforming stocks & eliminate/reduce exposure to underperforming stocks.
Yes, you can get burned however if you abide by sound investing principles you can cut short losses where the index cannot & you can overweight while the index cannot. If this isn’t what you or your financial advisor is doing, you either need to fire yourself or fire him, but somebody definitely needs to be fired.