Dear Dollar Bits:
I have had an investment with a full service brokers for the past 4 years. During that time, I’ve accumulated less than $2000 and my investments have actually lost about $300 of the money I’ve invested. I was hoping that using a full service broker would mean that I would have a better chance of making money, but at this rate, I don’t know when I’ll be making a profit, if ever. To make matter even worse, my investment advisor is a 22 year old kid that doesn’t seem to know what he’s doing. When I met with the broker, I was hoping for an aggressive portfolio. He put my money in a mutual fund that I never heard of and isn’t earning me anything. My question to you is: should I keep my money there or should I cut my losses. Also, I have about $20K in credit card debt. – Frustrated
Full service brokers have their place. As their name indicates, they offer complete service. Do you remember in Back to the Future when a group of gas station attendants all came out, like a pit crew, and they all started servicing the car. A lot gets done, but you pay extra for it. The same thing applies here. A lot will get done, and you will pay for the privilege of having work done for you, but do you really need all that work done? Moreover, it’s not as complicated as your financial advisor might make it seem.
The fact that you haven’t heard of the mutual fund that your money is in isn’t the important aspect. There are likely many mutual funds out there that you haven’t heard of. Some may do quite well, others might not. The fact that 80% of mutual funds under-perform their associated indices suggests that there’s a 4 out of 5 chance that your full service broker put you into a fund which hasn’t and likely won’t out-perform the market. Furthermore, you are probably paying a sizable fee for this under-performance. This is the part that is often troublesome for me. Full service brokers end up having you invest in products which cost more and result in lesser returns.
The fact that you have lost money over the past four years is disturbing. Here is a chart of the NASDAQ 100 (ticker symbol QQQ). This fund comprises the top 100 stocks in the NASDAQ. There are many big names in this fund, including Apple, Microsoft, Intel, Amazon, Facebook, Alphabet (that’s Google to you and me), just to name a few.
The chart shows the performance of the Q’s (as they’re sometimes called) over the past five years. Since this time back in 2011, an investment in this fund would have more than doubled, having gained roughly 110% over the past half-decade. The QQQ fund is not the only fund to perform well over the past five years. An investment in the S&P 500 over the same time frame would have returned about 80%
An investment in the Dow — 30 of the largest USA-based companies also gained about 66% over that time.
If you had your money in a broad-based stock market index fund, you likely would have made money. Unfortunately, your investments lost money. Again, that’s disturbing. But since four-out-of-five money managers loses money compared to the indices, it’s not all that surprising that your investment didn’t do as well as the indices did. What is surprising is that not only did your investment under-perform the market, it actually lost money. Well, you did ask your advisor to put your money in an aggressive investment. Usually those types of investments have much wider swings (bigger gains and bigger losses) than the index funds have.
Index funds are the way to go
Here’s a list of the average returns for various classes of stock market mutual funds:
|Fund or Fund Type||
|NASDAQ 100 (ticker: QQQ)||
|S&P 500 Index Fund (ticker: SPY)||
|Dow 30 (ticker: DIA)||
As you can see. the average of nearly every mutual fund category under-performed the three main indices. The QQQ and SPY indices performed much better over this time frame than any of the fund categories.
I understand that managing your own money can seem scary and intimidating, but it doesn’t have to be. A simple solution is to just put some of your money in an S&P 500 index fund and the rest of your money in government bonds or cash. Or perhaps some of your stock portfolio could be in the QQQ fund and the rest in the SPY fund. Just be aware that there is considerable redundancy between these funds. The 100 stocks in the NASDAQ 100 fund are all members of the S&P 500 index fund, so in some sense, you would be “double-dipping” those holdings. But the stock portion of a portfolio which is comprised of either all SPY or all QQQ can be considered a reasonable portfolio. Or you could go 50/50 between these two funds or 25/75, you get the idea. The takeaway here is to note that these index funds have performed better than most mutual funds. You could just invest in these funds, provided that you also kept a portion of your money in cash or in a cash/bond equivalent.
You Don’t Need a Financial Advisor
Most financial advisors will suggest that most people with a moderate appetite for risk should use the following formula to determine how much of your money should be in the stock market: invest 110 – your age. If you are 30, then 80% (110-30=80) should be in the stock market. If you are 45, then you would have 65% (110-45=65) in the stock market. As you age, you would continually decrease the amount of money you have in the stock market. By the time you reach your 65th birthday, you would lower your stock allocation to just 45% of your money.
You had indicated that you were interested in being more aggressive. Many financial advisors would point you to that same “110 – your age” formula, but make a small change. An aggressive person would increase their stock market allocation by 10%, so you would us “120 – your age” to determine how much you would put in the stock market. If you were a more conservative investor, you would use: “100 – your age.”
Every year, or perhaps every five years — whatever time-frame you pick for yourself, you would adjust your asset allocation and either buy or sell more stock to bring your money into its then proper allocation. We have a free asset allocation tool in the “Spreadsheet” tab on DollarBits.com to help you determine your adjustments. It really doesn’t have to be difficult to manage your own investment. If you are like most of us, You Don’t Need a Financial Advisor.
Credit Card Debt
The bigger issue for you is the credit card debt. You need to get yourself out of credit card debt. Sure, those stock market returns are nice, but you are paying double-digit interest on your debt.
If you just paid the minimum amount that is due every money on a $20,000 credit card balance, it could take you over 16 years to pay off that debt and you would have spent almost $33,000 in total — that’s nearly $13,000 in interest charges. And that assumes that you would incur absolutely no additional credit card debt; you would have to pay for everything with cash during that 16 year period to avoid incurring additional debt.
Further, the minimum payment here assumes $800 per month. Since the average American earns about $4,500 gross (or about $3,300 net), it’s likely that making that $800 a month payment is going to be a struggle. Assuming $1,500 in rent, $300 in monthly car payments, $150 for auto insurance, $100 for TV, $100 for mobile phone, and $200 for transportation. That only leaves about $1,000 available… and we haven’t address food costs yet.
You need to eliminate you debt. It is debilitating in so many ways. Reign in your expenses, pay off your debt. Assuming you have multiple credit cards, pay as much as you can to the credit card which has the highest interest rate. Pay the minimum on the rest of the credit cards. Once the first one is paid off, move on to the next highest interest rate. Keep doing this until they are all paid off.
Investing is great. It allows you to plan for your future, but debt can more than offset those gains. My suggestion would be to take the money out of the hands of the full service broker and use that cash to pay down your debt. Continue paying down your debt until it is all paid off. Then you can start investing. And you probably don’t need a full service broker. You can do it yourself.
Best of luck.
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