There is no shortage of information about investing out there. There are dozens of websites, hundreds of bloggers, a full time television network, several major newspapers, and thousands of books, articles, and academic studies on the subject of how to invest your money – and much of it is free. So it’s a fair question to ask. Why should you pay for something that’s so widely available for free?
The question is not whether you would benefit from expert advice. (Independent, peer-reviewed studies show that investors who seek professional advice do significantly better than ‘Do-It-Yourself’ investors.) The question is, which expert should you listen to?
If you’ve done any research on this, I’m sure you’ve noticed that there’s a wide range of opinion out there about what’s the best way for you to invest your money. And many of these opinions are in direct conflict with each other. For example, should you go with the ‘buy and hold’ school of investing, or the ‘market timing’ one? Should you buy individual stocks, or use mutual funds? How much of your assets should you have in stocks, and how much in bonds? If you’ve searched the internet for answers to these kinds of questions, then you know that the answers being offered are all over the board.
Part of the deal that comes with taking advantage of all that free advice floating around in cyberspace, is the great difficulty in separating what’s real from what’s just marketing gimmicks. And making matters worse, once you pick the expert you are going to follow, you have to make a commitment to their particular approach to investing. Every time you get frustrated and change experts, you have to reset the clock back to zero. All experts agree that you have to stick with their program long enough to give it a chance to work.
So you know you can use the expert advice, but you don’t want to pay the fee because you think you can find it online for free. I’m going to argue that for most people, paying for expert advice is not only worth it, but that not paying for it could be one of the biggest mistakes you’ll ever make as an investor.
Let’s start with the amount of money we’re talking about. The ‘fee’ you pay for personal advice doesn’t have to be a lot of money. There are many ways to get basic, decent advice for a reasonable fee. Some of the best and least costly advice comes from fee-only experts who charge an hourly rate for the time they actually spend working with you. There’s no wasted effort there.
Let’s say you need 3 hours of expert help in setting up your IRA or 401k allocations. You can hire a fee-only adviser for $150/hr (on average, according to the latest industry surveys.) So, for a total, one-time cost of $450, you could accomplish what might otherwise have taken you weeks or months to do on your own.
In addition to the time saved by paying an expert, there’s also the issue of the soundness of the decision you make. An expert will ask you questions about your ‘big picture’ financial situation, and recommend an allocation that fits you well. His incentive for doing it correctly is that his reputation is at stake, and he probably gets most of his clients through referrals.
If, on the other hand, you decide to go it alone and figure out your asset allocations by yourself, here’s what is likely to happen. You will save yourself $450. You might get lucky and end up with an allocation that’s just as good as what the expert would have given you. But there’s a fair chance (at least 50%, in my experience) that you will end up with an allocation that’s good, but not optimal for your circumstances. And even a small miscalculation can end up costing you much more than the $450 you saved. Here’s how.
Let’s say that the allocation you chose from the books you read, or the websites you visited, turned out to be 70% stocks, 25% bonds, and 5% gold. If it turns out that – based on your age, savings rate, and risk profile – you should have allocated 75% to stocks instead of 70%, the impact on your wealth over the long run could be thousands of dollars. Are you willing to sacrifice thousands of dollars of your wealth in order to avoid a $450 fee?
Making a tradeoff like that is called being ‘penny wise and pound foolish.’ Some investors do have the ability to make their own decisions, but the vast majority would be better served to pay a professional for specific advice that’s based on their actual circumstances.