Do you suffer from this “toxic combination?”

I have often questioned whether individuals need a financial adviser. While most people are intimidated by investing in the stock market, for most of us, the process is rather straightforward. However, researchers at the University of Missouri and the Texas Tech University suggest that as we age, the need for assistance increases.

For many of us, investing could be as simple as putting all of your money into two or three index funds and possibly adjusting our asset allocation periodically. There’s more to it than that, but that’s the foundation. Warren Buffett believes that this approach is appropriate for his wife as well. He has stipulated as much in his will. Buffett has instructed his attorneys that upon his demise his personal assets — which will be inherited by his wife — should be switched over to a simplistic portfolio consisting of 90 percent stocks and 10 percent bonds. Buffett wants the stock portion of her portfolio to be in an S&P 500 index fund, something like the Vanguard 500 Index Fund Investor Shares (ticker symbol: VFINX) and the bond portion of the portfolio should be in an short-term government bond fund, like the Vanguard Short-Term Treasury Fund Investor Shares (ticker symbol: VFISX). That’s an overly simplistic portfolio. If it’s good enough for Buffett, it should be something which we all consider for our retirement investment. However, people tend to get in their own way, consciously or otherwise.

A study published by the University of Missouri on May 9, 2016, suggested that as we age, two things happen which works against us: our financial literacy starts to decline while our confidence level increases. These two working in concert creates “a toxic combination,” as the report suggests. Information and studies suggesting cognitive decline among older adults is nothing new, many studies suggest such decline is inevitable. Now, this recent study by researchers at both the University of Missouri and Texas Tech University confirms that this cognitive decline extends into financial literacy. Once you retire, theoretically the money that you have amassed — short of any subsequent gains along the way — is all the money that you are going to have. Your investments, your pension — if you are among the fortunate few to still be in line to receive a pension — and your Social Security benefits are all you have. You need to be able to live off of your investments for the rest of your life.

We humans are subject to emotional decision. We can act hastily and irrationally when presented with stimuli. If someone that we trust and admire buys a stock, we may feel the desire to buy that stock as well. It was disclosed this morning that Warren Buffett’s Berkshire Hathaway established a $1 billion position in Apple (ticker: AAPL) during the past quarter. The market responded favorably to this news driving Apple’s stock up 3.71% for the day. Does the mere fact that Buffett bought Apple mean that you should buy Apple? Perhaps it does. After all, he is the Oracle of Omaha; arguably the best investor in history. But what if everyone who bought Apple’s stock today was acting irrationally? What if it’s just herd mentality and everyone, collectively was acting irrationally today, driving the price of Apple’s stock up 4 percent merely because someone else bought the stock as well. We all need to make our own decisions. We need to determine what’s the best course of action for our portfolio. Our emotions get in the way. Having cognitive decline further impact our financial literacy could really alter our ability to make sound, rational financial decisions.

The University of Missouri and Texas Tech University study suggests that our portfolios, as with our health, deserve an annual checkup. John Howe, professor and chair of the Department of Finance in the Trulaske College of Business suggests that it is difficult to know when you might start showing signs of weakening mental abilities:

“…it’s tough to know when the cognitive declines will begin, so it’s a good idea to make a financial checkup a part of an annual doctor visit. During the medical visit, Howe recommends asking the doctor about any signs of cognitive declines. Following the doctor’s visit, it’s a good time to check in with a financial adviser and make sure every financial decision being made is clear…”

Professor Howe and his team studied a group of 3,850 adults, aged 60 and older, they found that this group experienced increasing declines in financial literacy, which is the ability to understand and make good decisions about personal finances. They also found that the participants’ self-confidence increased slightly, suggesting that even though they didn’t understand financial terms or policies well, they still believed they could make good decisions about their personal finances furthering the suggestion that as we get older, we should seek profession financial advice.

While I understand and appreciate the desire to make sure that you are still capable of making sound, rational, logical decisions, I am a bit skeptical about seeking the advise and guidance of a financial adviser. While I am not going to suggest that they are all, collectively unscrupulous, they don’t necessarily have your best interest at heart. Broadly speaking, there are two types of advisers: fee-based and asset-based. The latter charges a percent based on how much of your money they are managing. An adviser at a large investment firm typically charges a fee of about 1 percent of the assets he or she manages for you. So if you have $500,000 under management with an advisory firm, you could be paying $5,000 a year. Paying that much money just to ensure that you aren’t doing anything that could hurt your portfolio sounds expensive to me.

Maybe 3.5I am currently writing a short book which will highlight what I believe are the 15 things everyone needs to know in order to manage their own money. Investing and planning for your future need not be complicated. Financial advisers might try to make it seem complicated. It really isn’t as involved as they might make it sound. Short of any cognitive decline, I believe everyone can and should manage their own money. Warren Buffett has designed an incredibly simple portfolio for his wife’s money after his demise. This portfolio is so simple, it’s tough to believe that anyone couldn’t manage it themselves.

If you are interested in learning more about my new book and when the book will be released, here is a link to the webpage. If you want to be notified when the book becomes available, simply join our mailing list. Those on the mailing list will be the first to know. Here’s a link to learn more about this book.



Photo by Guy H 

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