Well, this is it: the day has finally arrived! Today, we are going to take all of your planning from the previous steps, and put it into action. And we have come quite a long way! But if you’re anything like me, when I reached this stage, I was flat-out nervous. I had taken the time to build our investment plan, had the knowledge to back it up, and knew the steps to take, but all of that didn’t matter. I didn’t feel very confident setting out. After all, I was new to this. What if I’d missed something—overlooked some critical detail that, carried forward, would cost us hundreds of thousands of dollars? Would my wife and I sit there, decades from now, eating cat food and envisioning how different life would be had I been better prepared?
I didn’t feel very confident setting out. What if I’d missed something—overlooked some critical detail that, carried forward, would cost us hundreds of thousands of dollars? Would my wife and I sit there, decades from now, eating cat food and envisioning how different life would be had I been better prepared?
Rest assured, a Friskies Feast isn’t in our cards. I know that now. In fact, I look back now, and it seems silly that I ever had those thoughts. From this angle, I see how truly simple and effective investing can be, and the fact that it ever seemed beyond me seems laughable. But it may not to you…yet. So, if you’re feeling that way now, don’t worry—it’s normal. Every investor, at some point, has felt overwhelmed and out of their depth. The ones that take the time to create a solid plan (Past You), implement that plan (Present You), and know how to stay the course going forward (Future You), will succeed. But, to build a little confidence setting out, let’s briefly look back at all you’ve done so far. To this point, you have:
- Established an emergency fund of 3-6 months’ expenses (Part 1)
- Paid off all high-interest debt (Part 2)
- Have an understanding of stocks, bonds, mutual funds and ETFs (Parts 3, 4, 5, 6, and 8)
- Learned about the three asset classes that most investors should consider (Part 7)
- Established your asset allocation (Parts 9 and 10)
- Researched the best index fund options in each of your accounts (Part 11)
- Planned out the asset location of your portfolio (Part 12)
Pretty impressive, no? In taking those steps, you have all the foundations of a very solid investment plan. You’re goin’ places, kid. Before you make a single trade, though, there’s one decision to make: who’s at the wheel.
Decide Who’s at the Wheel
There are two main ways to implement the plan you’ve built:
- Self-managing (DIY). You pick the funds, place the trades, manage the accounts, and rebalance. Your cost is mostly the funds’ own expense ratios (the yearly fee every fund charges), plus your time.
- Hiring a professional. An adviser, planner, or managed account service runs the portfolio for you, usually for an ongoing fee. That fee is often a percentage of what they manage (called an asset-based or AUM fee, for “assets under management”), and sometimes a flat or hourly fee.
Here’s the deal: both are legitimate, and both can work. Before I started working as a financial planner, I spent years as a DIY investor, and this whole guide was written to show that a simple index portfolio is something a lot of investors can run on their own. I also now work for a firm that does comprehensive planning, and is paid to manage client assets; in doing so, I’ve learned there can be a tremendous value add to having a financial planner in your corner. Each path comes with trade-offs, and these are worth exploring fully before you make a decision. Exploring this decision fully is beyond the scope of this guide, but here are some things to consider.
When DIY Tends to Fit
- Your situation is fairly simple: a 457, maybe a Roth IRA, a simple mix of two or three index funds.
- You enjoy this stuff, or at least don’t mind it.
- You trust yourself to stick with the plan when the market drops off a cliff and the news is screaming.
When Professional Help Can Be Worth It
- You’d rather spend your days off on something else, and the work isn’t getting done.
- Your situation has gotten more complicated: DROP, pension options, deferred comp, estate planning, Social Security, taxes, a spouse’s accounts, or an inheritance.
- You know you’re likely to make an emotional move in a bad market, and you want someone in your corner to slow you down.
- You need comprehensive planning (e.g. insurance, taxes, estate planning, retirement income), not just the investments.
None of these mean you need an adviser. They’re simply the situations where people commonly decide the help is worth the cost.
Know What You’re Paying
Whichever way you go, it helps to know whether you’re already paying someone to manage your accounts. It happens more than you’d think with old workplace plans and accounts opened years ago. Logging in or calling each provider and asking these four questions usually clears it up:
- Is there a management or advisory fee on this account, on top of the fund expense ratios?
- How much is it, as a percentage and in dollars per year?
- What do I get for it: just investment management, or planning, tax help, and someone to call?
- How do I change it or turn it off?
Once you know, you can decide whether it’s worth it to you. Not every fee is bad. A fee you don’t know about, however—for a service you don’t use—is.
Questions to Ask Anyone Who Manages Money (Including Me)
Here are some questions regarding fees that you should ask any adviser you’re considering working with—including me:
- How exactly are you paid? What is your fee structure?
- Do you make commissions on products you sell?
- What’s the total yearly cost, including fund fees, in dollars?
- What would you do differently from the simple portfolio I already have, and why?
- What happens if I want to leave? Are there exit costs or surrender charges?
- Where can I read your Form CRS and Form ADV? (Form CRS is a short summary of how an adviser is paid and their conflicts; Form ADV is the longer brochure. Registered advisers have to make these available, and you can look up advisers and firms at [adviserinfo.sec.gov].)
A good adviser will welcome these questions. If someone pushes back, or tries to scare you into staying, that tells you something too.
Investing at “All-Time Highs”
Here’s another question I hear often: “Is it a good idea to invest now, when the market is at an all-time high? Should I wait for the market to drop before getting in?” This is a reasonable question. After all, if the market is at an “all-time high,” wouldn’t the likely trajectory from here be…downwards? The answer is no. Here’s why.
The first thing to note is that the market is far more likely to go up from here than it is to go down. Author JL Collins (who wrote the phenomenal book The Simple Path to Wealth) has noted that the market goes up 77% of the time, and consequently goes down 23% of the time. What this means is that when you select any random insertion point into the market (such as today), the market has a greater than 3 in 4 chance that it will go up from here (and only a 1 in 4 chance that it will go down). While it is by no means guaranteed to go up from here (spoiler alert: nothing in the market is a guarantee), the odds are with you.
The second point to note is this. While the term “all-time high” at first glance sounds like something that is hugely significant, it’s anything but. In reality, “all-time high” valuations don’t mean much—we hit them all the time on this ever-continuing, slow plod upwards. To illustrate this, consider any of the highlighted peaks here for the S&P 500 over the past 20 years.
At the time, each of these peaks (except #1) was considered an “all-time high.” At each of these peaks, someone, somewhere was worried about this exact thing—investing in the market at such a high valuation. But watch what happens next. Given time, that peak is replaced by another peak, and another…and another, and so on. The ceiling today will become the floor tomorrow. At times there are drops, sure, but those drops ultimately amount to short-term noise. Long-term, they mean little. Long-term, you are climbing a mountain; don’t pay much mind to each individual step, rocky or not.
Believing that the market is at an all-time high, and planning to wait until it drops before investing, is essentially trying to time the market. As we’ve discussed in previous posts, not only is this extremely difficult to do, it puts your emotions in play as a central factor, and as such, is unreliable as an investment strategy. You might (through sheer luck) be right—maybe today is a 2 or 5 on the chart, and the market is on the verge of a correction or a bear market. But it’s far more likely (77%, in fact, as we just discussed) that today is a 1, 3, or 6 on the chart, and that by waiting for the opportune moment, you will miss out on the gains that follow. After all, while you’re doing all that waiting, your money is on the sidelines, gaining you nothing (or even eroding away due to inflation).
Long-term, you are climbing a mountain; don’t pay much mind to each individual step, rocky or not. Only those actually walking the path gain the benefits from being on it.
So here’s my advice: put your money in the market, keep walking that path up the mountain, and don’t try to predict what the market will do next. No one can. Always remember: only those actually walking the path gain the benefits from being on it.
Tax Considerations
One last quick point. I’ve mentioned it before, but there are additional considerations if you will be investing inside a taxable brokerage account. It’s important to understand that certain moves inside these types of accounts (such as selling investments) can have tax consequences. If you’ll be making any big moves in one of these getting started, I strongly urge you to contact your tax professional, so that any moves you make will be done with full knowledge of the tax implications.
And…Go!
All that remains now is to take action and implement your plan. By now, you should have a clear understanding of the moves you need to make in your portfolio to bring it in line with your target asset allocation, so I’ll leave you to it.
After you are done implementing your plan—congratulations! All that is left from here is the small matter of maintaining your portfolio going forward. Outside of contributing consistently, this mainly takes the form of what is called periodic rebalancing, and we will spend the next post going through that in-depth. See you there, in Part 14!
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