"Investor, know thyself."
From the archives: way back in 2012, Vanguard interviewed legendary investor Charlie Ellis. The following is taken from the transcript of that interview. It deals with the key question of whether to hire an investment consultant to learn how to play the game at a higher level, or to fend for yourself.
Vanguard: Is it imperative to have a financial advisor? And if so, how do you ensure that you're getting someone who isn't just trying to sell you products and rack up fees?
Charles Ellis: "That's a tough one, but the question is framed the right way- "Is it essential?" And the answer is no. Is it a good idea? Yes, if. And the financial advisor that I'd recommend to most people is fee-based, or maybe even an expert that you happen to know. Since most of us don't know an expert, I'd be in favor of fee-based.
"Get the service for a day of consulting and advising, working with you to understand what your questions are, what your financial situation is, and what you're trying to do, and lay out a plan that would be sensible for you for the next decade. Pay the fee for that day's service, even if you think it is a high fee, and you'll have gotten a bargain."
Try to stay away from paying a percentage of your assets. Just pay for one day of consulting.
Charles Ellis: "If you pay a percentage of your assets invested, I'm afraid that you'll probably find that it's relatively expensive. It may be less expensive than doing it yourself, but I'd be inclined towards paying a very substantial fee for a day of counseling and advising, and then if you don't use the whole day, fine. But your purpose, at the end of the day, is to have it down on one side of one sheet of paper. What are you going to do? One of the great roles of the financial advisor-it sounds silly, but-is holding hands.
"All of us can use a little bit of help with somebody saying, in my case, "Your fly is open." Or "You didn't tie your tie quite right" or "You forgot to comb your hair this morning." Things like that do happen in a lifetime. And it's very helpful to have somebody who's your friend. But you want to be careful, because warm, friendly personalities sometimes are very good at something other than friendship. And they may not be your friend."
You get what you pay for.
When I was in my 40's I realized that it would be good for my career if I learned how to play golf, even though I wasn't very interested in the game. If I could hold my own on the course with people who were in positions that could help me become better at my job, I could turn golf into an educational endeavor. What did I do?
I hired a golf pro. At first I tried to go the cheap route, paying for a 1-hour lesson from my local pro at the local municipal course. After paying for 3 or 4 of these lessons, I had not made much progress. So I decided to bite the bullet and hire a top-notch pro from the best private country club in my area. I hired him for a full day of lessons. It was intense, to say the least.
I had blisters on my fingers.
That day started at 8 a.m. and continued until 6 p.m. I probably hit more than 1,000 golf balls, and at the end of the day I had blisters on my fingers. It was worth it, because my competence as a golfer increased by leaps and bounds.
This golf pro began by filming my swing, and analyzing what I was doing right, and where I needed adjustments. The most important thing I learned from that day was that I had to stay within my natural physical abilities, and not try to hit a drive like Tiger Woods or Phil Mickelson.
This was an eye-opening revelation for me. Rather than trying to do something that I was not physically capable of doing, I focused on taking maximum advantage of the natural skills and abilities that I had.
What this means for an investor.
Investing is easy. Find a stock you like and buy it. But investing skillfully is not easy. It takes lots of mental preparation, just like golf does. It takes practice, and mental toughness. And it takes self-awareness most of all. If you are not open to the possibility that what you're doing is not working, you will never get past the point where you began.
Consulting can be expensive. A full day of one-to-one consulting can cost $1,200 or more. That's a serious investment in yourself, and not everyone can afford it. But those who can, and are motivated to make big gains in their level of competence, it will be worth the price of admission. I call that a bargain.