This post is the second in a series of five posts that lay out the PFG Investment Philosophy. This describes why dentists should hire an investment advisor. Through these posts, we try and lay the foundation of knowledge around investments that clients should know, and answer the most commonly asked questions.
Hiring an investment advisor is like a golfer hiring a caddie. Have you ever seen a pro golfer without one? No, and you never will. Why? What does the caddie do to earn their compensation? Like an investment advisor, they provide three key services:
- Administrative support (carry your bags). Your advisor should handle paperwork, trading, rebalancing, tax notices, etc. You should help make high-level decisions and do nothing else.
- Technical Expertise (they know the course). Your job is to make money as a dentist. Let your advisor be the expert on investing. It’s your advisor’s job to know the difference between mutual funds and ETFs, active versus passive funds, which fund family has the lowest expense ratios, and why avoiding 12b-1 fees is important. You time is better spent becoming a better dentist than learning that miscellany.
- Behavioral support (make sure you don’t blow it). This is the most important thing a good advisor will do for you! The key to winning in golf is not to hit the most birdies, but to hit the fewest bogies. This is also true with investing; a good advisor can help you stay the course when it gets tough to do so…and the going will get tough!
Sadly, people’s investments perform very poorly when they don’t have an advisor. Consider the following data, prepared by DALBAR, that tracks how the markets perform, and how the actual investors in that market perform.
Using our golf analogy, the dark colored bars show the average investment returns (e.g. 9.9% for the S&P 500, we’ll call this “par”) compared to the actual returns earned by real people (5.2%, call this a “bogie”). What this chart is telling us is that to earn a 9.9% return, all an investor would have had to do was invest, then go to sleep for 20 years. Rip Van Winkle would have made a killing! Unfortunately, it also tells us that, after inflation investors’ mistakes and lack of experience in stocks barely made 3% on their money. And those poor bond investors actually LOST money after inflation!
Why then did these investors underperform their actual investments? They bought at the wrong times, sold at the wrong times, chased last year’s winners, dumped last year’s losers, etc. Your advisor has to stand in the way of you and yourself! When you pull out the driver and want to go for a hole in one, a good advisor will talk you off that ledge and suggest instead the much safer par option. The same advisor will also not let you use your putter on the fairway!