Do financial advisors outperform investing in index funds yourself?Dec 2, 2018
In your experience has wealth managers or financial advisors outperformed the SP500 or any fund if you had just invested yourself?
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- Amazon / EngIAmJobTheres enough data out there already to support that financial managers, hedge funds and most mutual funds do not outperform the market.
- It's in the name: advice.
There are other investments besides the s&p500. People don't just by default end up with a suitable set of investments that will allow them to reach their goals.
Do you own bonds? Should you? Do you hold any commodities? Should you? Do you hold any real estate, international stocks, crypto?
There's far more to investing than just "buy an index or try to beat an index."
Is 80% of your net worth tied up in vested unexercised options from your current employer? Is there anything you can do to hedge the risk associated with that exposure?
What are the tax consequences of different investment strategies and how does that relate to the timing of when you'll need the money? Do you have significant unrealized capital gains?
Do you plan to spend every last penny in retirement, maximizing enjoyment and leaving nothing to your heirs? If so, how do you manage across the risk of either dying early with more money you could have used, or outliving your assets and being impoverished in old age?
Mutual funds or etfs? Maximize 401k or just optimize for matching? In plan conversion? What will your income and expenses look like later and how does that change the investment plan?
These are all things a financial advisor can help with.
At the extreme end, some people don't even know what an index is, and need an advisor to tell them both what it is and which to buy.
Also, though I agree that passive indexes usually beat active management after expenses, that's not the case for bonds. I'll never invest in a market cap weighted indexed bond fund.Dec 2, 20182
- Cebi00: bonds don't really appreciate besides when interest rates or credit spreads drop. There isn't nearly as much upside as in the stock market.
Weighting by market cap in equity markets weights by the market-determined size and value of the company. Market cap weighting in bond markets weights by how much money the company was willing to borrow from bond markets. If you take all the outstanding bonds in the world and weight by market cap, your largest position is going to be us treasury debt. If the deficit grows and the US borrows more, a market cap weighted index would be selling corporate bonds to take on greater positions in the deteriorating US debt market. Similarly, a company that's cash-flow negative will need to borrow more and more money from credit markets, increasing the market cap of their outstanding bonds and causing your index to increase your stake in their company. That's likely the opposite of what would be happening to your indexed positions in the same companies' equity, since excessive leverage should increase the risk associated with those companies.
The above is the reasoning behind what I've said, but more important is the empirical evidence. Whereas there is extensive research on the out-performance of stock indices vs active management, active bond management is an entirely different story.
I'm not aware of any evidence of out performance of market cap weighted bond indices vs actively managed ones. Retail investors have been so sold on the clear evidence of the benefits of equity indexing that they've extrapolated into an entirely different market where "market capitalization" implies something entirely different about the represented companies.
Would you dump money in commodity indices weighted by the total value of all of that commodity present on earth at the moment, and assume that's the best strategy for investing in commodities just because it worked in equity? Probably not right?Dec 8, 20182