Financial Advice to Friends

[AdamA]

A lot of my friends ask me how they should invest their money.  Most of them are not interested in actually understanding how an investment strategy works, and also don't want to be bothered with things like bond windows, Treasury Direct, gold dealers, or opening multiple brokerage accounts.

What are opinions on the best advice to give to these people?

Recommend a 25% x 4 ETF PP? 

Recommend PRPFX?

Both of these make me uncomfortable b/c they're not things that I do, and if anything went wrong with an ETF or with PRPFX, I'd feel pretty guilty.

I tried to have a more detailed discussion about different strategies with one of my friends outlining the various risks of each plan, but I think that it actually discouraged him because it go too confusing (in spite of my attempts to keep the explanations as simple as possible).  I think his wife also got weirded out by the recommendation to buy gold coins, and our entire discussion about safe deposit boxes etc just made me seem like a paranoid gold bug to her). 

Maybe it's better to just tell them I don't give financial advice?  (The thing about this is that most of them really want my input, and they are my friends, so I want to help).

[MediumTex]

If they can't grasp the PP and aren't interested in PRPFX, Vanguard Wellesley is hard to beat.

[AdamA]

If they can't grasp the PP and aren't interested in PRPFX, Vanguard Wellesley is hard to beat.

They can't grasp the PP, but they would probably invest in anything I told them to.

More simply put, my question is just would others on this site feel comfortable saying, "Just buy PRPFX," or "Just buy these 4 ETF's?"

[MediumTex]

If they can't grasp the PP and aren't interested in PRPFX, Vanguard Wellesley is hard to beat.

They can't grasp the PP, but they would probably invest in anything I told them to.

More simply put, my question is just would others on this site feel comfortable saying, "Just buy PRPFX," or "Just buy these 4 ETF's?"

I would start them off with a PRPFX position built over three months.  This keeps them from buying in and feeling traumatized a week or two later when it drops 1%.

Obviously, getting them to do the 10% side dish of EDV would be ideal, but some people are not going to be ready for that.

If doing PRPFX, I would set it up directly with the fund company and set up an automatic contribution each month of at least $100.  It's easier to set all that up from the very beginning.

[melveyr]

Whenever I tell people about the PP I get a "Huh. Interesting." type response. Even if they genuinely think it is a good idea while I telling them about it, I get the feeling that it will be forgotten in a month.

Also, Americans are bombarded with financial advice. It is hard to separate the good from the bad. Someone told to put 25% of their money in gold is likely going to just put it into the "bad" bucket and move on. Understanding the PP takes time and humility (with respect to the market at least); not everyone has the luxury of this pair.

I would just give them the pitch, and the resources to learn more if they would like. Just don't get emotionally invested in convincing them. It can be exhausting (I know from personal experience).

[AdamA]

I would just give them the pitch, and the resources to learn more if they would like. Just don't get emotionally invested in convincing them. It can be exhausting (I know from personal experience).

I'm not approaching these people and trying to get them to invest in the PP.  They are asking me for advice.  I don't think they're interested in buying bonds from Treasury Direct of physical gold. 

Would you fell comfortable advising someone to use only PRPFX or 4 ETF's x 25%? 

They will probably do whatever I tell them in this regard, but I'm just a little nervous about recommending someone use just one mutual fund or rely solely on ETF's, especially since they don't seem to understand the risks of doing so. 

[melveyr]

In my mind, the four-way ETF split is likely going to be safer than any alternative that they choose to go with. It is still a damn good portfolio.

Why not advise this, and then perhaps in a year revisit the portfolio and introduce the notion of counter-party risk. If the PP has had a normal year, they will likely have some gains under their belt and be more open to the "real" PP. Steering them towards Fidelity now would be great because Fidelity has a good bond desk for when they are ready.

[Tortoise]

In this situation, it may be worthwhile considering HB's Financial Safety Rule #9, "Do Only What You Understand" (in this case, "you" meaning your friends):

Don't ever undertake an investment, a speculation, or an investment program that you don't understand.
[...]
It doesn’t matter whether your favorite investment advisor, your best friend, or your brother-in-law understands the investment perfectly. It isn’t his money. He may be able to handle risks you can’t, or he may know how to exit the investment at the right time. Because he isn’t you, his understanding and judgment won’t protect you.

Source: Fail-Safe Investing, 2003, p. 24.

One might apply this principle to your situation by noting that if your friends are unwilling or unable to understand the PP, it may not be the best idea to advise them to do it. If their investment decision is based solely on their trust in your advice rather than their own understanding, then they won't understand the risks (there are always risks), and they may blame you if anything goes wrong.

Although the philosophy behind the PP has some subtle layers, the basic idea underlying the PP is not brain surgery. I do not consider Fail-Safe Investing difficult reading for anyone with at least a high-school education. If someone is truly motivated to keep their money safe, then their motivation should be sufficient to set aside an afternoon to read Fail-Safe Investing and at least make an attempt to understand what the PP is.

You can lead a horse to water, but you can't make it drink.

[MediumTex]

You can lead a horse to water, but you can't make it drink.

You can lead a man to knowledge, but you can't make him think.

[Tyler]

I'd lean towards Melveyr's advice.

In general, I think you can rank the investment concepts to roll in as:

1) Save as much as possible, and max out your tax deferred savings.

2) Diversify your money across stocks, bonds, gold and cash.  Even in ETFs, this is light years safer than continuing whatever active management you've been doing so far.  Do that today and you won't regret it.

3) Diversify your PP for counter-party risk.  Sell some of those ETFs and get direct bonds and physical gold.  Open a few accounts just to be safe, and when you do have ETFs make sure they're not all with the same company.  This makes your money even safer, and you'll also save some fees in the process.

4) Optimize your assets across your various accounts to minimize taxes.  This doesn't improve your risk, but does maximize your investment return.

Piling all of that on at once can be overwhelming.  But introducing it one step at a time breaks it into digestible chunks while still helping your friends at each step.  Personally, I'm on step 3.  

[stone]

Before I started thinking about what to do with savings, I had taken on board that piece of wisdom. We had our savings all as cash in a bank account at the time so I thought I ought to try and understand what that amounted to- BIG can of worms .
Might sound advice be - don't have debts, max out Ibonds (I guess those are the US equivalent of our ILSC), look into the PP and think about following it but be VERY wary of slipping into holding a tinkered with, PP-inspired, novel/fluid set up.

Perhaps the most useful advice would be to undo some of the most popular bamboozlements and explain the fallacy of  "more risk, more reward" and "take lots of risk if you have a long time horizon".

I am constantly staggered at how unpopular the PP is. The second I saw it described it was like a bolt from the blue to me. It's curious how most people see it as just another schucksters ploy. I hadn't seen any of the other (somewhat) similar rebalancing set ups at the time.  

The only person I have tried to tell about the PP has been my better half and that has had very limited success. I think she sort of still thinks the PP is "money due to be lost" and our cash is the only thing we can rely on. It is not as though either of us have previously tried investing and lost money. I guess she just can see that plenty of other people have done and has zero interest in thinking about the subject. I guess it is easy to underestimate just how tedious many people find the entire subject. I think eyes glazing over with disinterest is the sort of snake charmer magic that nets the finance industry so much money.

In this situation, it may be worthwhile considering HB's Financial Safety Rule #9, "Do Only What You Understand" (in this case, "you" meaning your friends):

Don't ever undertake an investment, a speculation, or an investment program that you don't understand.
[...]
It doesn’t matter whether your favorite investment advisor, your best friend, or your brother-in-law understands the investment perfectly. It isn’t his money. He may be able to handle risks you can’t, or he may know how to exit the investment at the right time. Because he isn’t you, his understanding and judgment won’t protect you.

Source: Fail-Safe Investing, 2003, p. 24.

One might apply this principle to your situation by noting that if your friends are unwilling or unable to understand the PP, it may not be the best idea to advise them to do it. If their investment decision is based solely on their trust in your advice rather than their own understanding, then they won't understand the risks (there are always risks), and they may blame you if anything goes wrong.

Although the philosophy behind the PP has some subtle layers, the basic idea underlying the PP is not brain surgery. I do not consider Fail-Safe Investing difficult reading for anyone with at least a high-school education. If someone is truly motivated to keep their money safe, then their motivation should be sufficient to set aside an afternoon to read Fail-Safe Investing and at least make an attempt to understand what the PP is.

You can lead a horse to water, but you can't make it drink.

[cowboyhat]

I second Tortoise's comment, which I believe is, "Don't give your friends financial advice." It falls into roughly the same bucket as, "Don't lend your friends money."  In my opinion the best thing you can do is buy friends who consult you about investing their own copy of Fail Safe Investing. I have given away three copies to people who have opened conversations about investing. When someone I know starts the conversation I tell them that I know of a book that might interest them. When the conversation comes up post gift I switch subjects to literary criticism. What do they think of FSI versus a Larry Swedroe book? The only people I know that I am willing to give specific investment advice to are my mother and my sister. I am also prepared to make them whole if they suffer losses after following my advice.

[stone]

Do other people on here find that investing is a topic of conversation that often crops up? I haven't ever been faced with the decision as to how to describe the PP etc to someone (other than my better half) because investing has never cropped up as a conversation topic.

[Storm]

I second Tortoise's comment, which I believe is, "Don't give your friends financial advice." It falls into roughly the same bucket as, "Don't lend your friends money."  In my opinion the best thing you can do is buy friends who consult you about investing their own copy of Fail Safe Investing. I have given away three copies to people who have opened conversations about investing. When someone I know starts the conversation I tell them that I know of a book that might interest them. When the conversation comes up post gift I switch subjects to literary criticism. What do they think of FSI versus a Larry Swedroe book? The only people I know that I am willing to give specific investment advice to are my mother and my sister. I am also prepared to make them whole if they suffer losses after following my advice.

I've actually had good success with this.  I loaned a friend my Kindle version of FSI and let him read about it.  It took him a couple months to finish the book but after reading it he finally was interested in how to implement it.  This was a little awkward because a lot of the funds and concepts in the book are outdated (keeping money in a foreign bank, etc), however, I steered him towards the great stock, bond, and gold FAQs that Craig has written on crawlingroad.com.  Also, the historical returns threads and annual returns threads are great for exciting the "greedy" portion of our investor brain.  Everyone loves seeing those historic returns.

[Alanw]

I am semi-retired and live in a retirement community in a resort area.  I work out at our local gym 4 to 5 times a week and see the same guys on a regular basis.  They are all either retired or semi-retired and live off of their investments.  Often times the conversation turns to the "stock market" or various investments.  Since discovering the PP, I try to explain this investment concept with little success.

When explaining the PP, I try to introduce it slowly and let it sink in.  The conversation goes something like this.

Invest all of the money you cannot afford to lose in allocations of 25% each in the following:

25% in the total stock market (they smile and nod affirmatively)
25% in cash for living expenses (smile and no nod)
25% in long term treasuries (quizical uncomprehending look - of course rates can't go any lower)
25% in gold (mouth drops, dumbfounded look comes over them like I have lost my mind.

They  tell me that they will run it by their financial adviser. And we all know where that will go.

So now when asked what I do with my investments  I just tell them to Google Harry Browne Permanent Portfolio or the crawling road web site and look at historical returns.  One guy even said that he would let me be the guinea pig to see how it worked out as if the historical returns didn't matter.

Maybe it's best just to put investing in the same category as politics and religion.  Sometimes it's best not to discuss any of them.

[MediumTex]

I am semi-retired and live in a retirement community in a resort area.  I work out at our local gym 4 to 5 times a week and see the same guys on a regular basis.  They are all either retired or semi-retired and live off of their investments.  Often times the conversation turns to the "stock market" or various investments.  Since discovering the PP, I try to explain this investment concept with little success.

When explaining the PP, I try to introduce it slowly and let it sink in.  The conversation goes something like this.

Invest all of the money you cannot afford to lose in allocations of 25% each in the following:

25% in the total stock market (they smile and nod affirmatively)
25% in cash for living expenses (smile and no nod)
25% in long term treasuries (quizical uncomprehending look - of course rates can't go any lower)
25% in gold (mouth drops, dumbfounded look comes over them like I have lost my mind.

They  tell me that they will run it by their financial adviser. And we all know where that will go.

So now when asked what I do with my investments  I just tell them to Google Harry Browne Permanent Portfolio or the crawling road web site and look at historical returns.  One guy even said that he would let me be the guinea pig to see how it worked out as if the historical returns didn't matter.

Maybe it's best just to put investing in the same category as politics and religion.  Sometimes it's best not to discuss any of them.

I have traveled many roads when it comes to this conversation, and I have experienced all of the looks and the responses. 

The conclusion that I have come to is that by the time you get to most people they have already heard so many ideas that sounded good at the time and turned out not to work that they have a hard time comprehending how an idea that doesn't even sound good when you tell them about it (i.e., the PP) could ever possibly work.

What they don't realize, of course, is that it's precisely because it doesn't sound like a good idea at the time that it might actually be a good idea.

There is no way to buy assets at good prices if you wait until it sounds like a good idea, and at any point in time it's hard to tell when assets are cheap and when they are expensive.  Long term bonds look expensive now, but they looked expensive to people when yields were at 4% too.  Gold looks expensive now, but I think it might have actually looked more expensive to a lot of people back at $1,000 an ounce.

One thing that is interesting is when I revisit the PP idea with someone I shared it with months or years before.  They will ask "So MT, you still following that wacky investment strategy that you told me about?  You were really out there on that one.  I wanted to tell you how crazy it sounded, but I didn't want to hurt your feelings."  My reply is always something to the effect of: "Oh yeah, I'm still following it.  It did about 11% last year, which is a little above its 40 year average.  Nothing too exciting really.  Just nice and steady."

[Alanw]

If the stock market went on a big run in 2012 and gold and LTT lagged,  the PP returns would fall short of stock market returns.  This would only validate the detractors assumption about this wacky investment concept.  Volatility would not even enter the conversation and the PP's historical returns would look too low.  How quickly some of us forget.

Some of my friends have had the same financial advisor for many years and will stick with his advice through thick and thin.  Come to think of it, if they are still with their planner after 2008, what would move them away now.  Most of the conversations include the phrase "when the market comes back" like the Dow high of 2008 and the NASDAQ high of 2000 were the norm and not an aberation.

I believe it will take many years for "the market" to reach previous highs but to explain the reasoning behind this belief falls on deaf ears.

[stone]

I guess perhaps they don't grasp that it takes a 100% gain to recover from a 50% loss.

[MediumTex]

Some of my friends have had the same financial advisor for many years and will stick with his advice through thick and thin.  Come to think of it, if they are still with their planner after 2008, what would move them away now.  Most of the conversations include the phrase "when the market comes back" like the Dow high of 2008 and the NASDAQ high of 2000 were the norm and not an aberation.

I believe it will take many years for "the market" to reach previous highs but to explain the reasoning behind this belief falls on deaf ears.

A Japanese investor who bought Japanese stocks in 1989 would have seen the value of his account decline by 75% over the last 23 years (not adjusted for dividends).

I can't even imagine how traumatic that must be for Japanese stock bugs.

[MediumTex]

A US investor who bought a US PP in 1981 would have seen the value of his account relatively lag a 40-60 TSM/Total Bond blend by 50% over the subsequent 23 years (adjusted for dividends). I can't even imagine how traumatic that must have been (Sorry MT, couldn't resist - especially as I know you have some close family members who have taken your PP advice. I hope that I'm proven wrong).

I can deal with tracking error a lot better than I can deal with actual losses.

If you turn your logic on its head you might say that the PP hasn't had nearly enough gold exposure over the last 10 years, as a 100% gold investor would have done far better than a PP investor during this period.

[Alanw]

A US investor who bought a US PP in 1981 would have seen the value of his account relatively lag a 40-60 TSM/Total Bond blend by 50% over the subsequent 23 years (adjusted for dividends). I can't even imagine how traumatic that must have been (Sorry MT, couldn't resist - especially as I know you have some close family members who have taken your PP advice. I hope that I'm proven wrong).

I can deal with tracking error a lot better than I can deal with actual losses.

If you turn your logic on its head you might say that the PP hasn't had nearly enough gold exposure over the last 10 years, as a 100% gold investor would have done far better than a PP investor during this period.

Selecting those 23 years would have given you an average return of 8.28% in the PP with low volatility.  Not too bad looking back on the last 30 years of investing history.


However, if you were to extend that time period out another 5 years with the rise in gold and the 2008 crash of the stock market, a different story would emerge.

[Alanw]

Clive,

I greatly appreciate the information you provide to this forum.  It is always food for thought and opens the mind for other investment angles/opportunities.

I would not want to present this information to any of my friends who seek investment advice and cannot or will not even fathom the PP as an investment vehicle.

Imagine trying to explain your last post.  They would probably try and have me institutionalized.

Thanks again.

[edsanville]

The average yearly return for the 4x25% PP from 2000-2011 was actually about the same as the average from 1972-2011.  Doesn't this mean that the PP hasn't been a fluke for the past 10 years just because of the gold bull market?

I wish this chart was updated to 2011, so I could share the link with people:

https://web.archive.org/web/20160324133 ... l-returns/

[stone]

Clive, I sort of accept that the PP might be described as a way to track gold but with much of the volatility edge taken off. To me that is great. Gold has been far and away the most robust store of value for the previous 5000 years. Consider that person who buried gold coins in a garden in London in 1938 when escaping the Nazis and they got back to his family in 2007 with all the value preserved. Nothing else could have done that. http://www.bbc.co.uk/news/uk-england-london-13128903

It is totally impossible long term to have some broad investment gush up huge real returns indefinately as you seem to believe we should expect. Where is that wealth being transfered from? You seem to make out that merely tracking the purchasing power of the richest segment of the world's population  constitutes a failure. IMO if the PP continues to manage to do that then I will continue to be very glad of it.

[stone]

Clive, personally I suspect that the strongly and persistently above inflation treasury interest rates for the 1980s and 1990s are not something that will come back whilst we still have as much government debt as we do now. Your 20%SCV:15%Gold:65%treasuries portfolio relies on those high real interest rates and your warnings about the HB PP also revolve around high real interest rates.

It is also possible that at the moment it is large cap stocks that are better value than small caps.