Financial Advice to Friends

[stone]

AlanW, I'm fascinated by you saying that your neighbours are always talking about the stock market and yet would be shocked by Clive's post. Are you saying that they have faith that 2009 type stock market gains can be sustained year on year? Have they ever tried to plug 1.3^100 into a calculator? It all must take such a heroic supression of any common sense .

[MediumTex]

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

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

You could just tell them that 2009, 2010 and 2011 were pretty much the same as 1972-2008.

[Alanw]

AlanW, I'm fascinated by you saying that your neighbours are always talking about the stock market and yet would be shocked by Clive's post. Are you saying that they have faith that 2009 type stock market gains can be sustained year on year? Have they ever tried to plug 1.3^100 into a calculator? It all must take such a heroic supression of any common sense .

All I'm saying is that most of the people where I live have spent their lives working and saving with someone else managing there money.  Their understanding of "the market" is what they see and hear on the news.  They would not be able to understand some on the posts on this forum and are satisfied letting the same financial people handle their retirement funds.  At this stage of their lives most do not care to educate themselves regarding investment decisions.

Again, their hope is that the market (meaning stocks in general) will return to their glory days  and their investment portfolios will recover and serve them well in retirement.  I'm not saying that this is a good philosophy, just that this is the way it is.

I'm sure others have encountered similar situations.

[MachineGhost]

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

Since 1972, the R^2 between PP and gold was only 51.93%.  That's only a moderate correlation.  Just to at least match or beat the CPI:

Large Cap Value     1.26%
Small Cap Value     1.47%
Tbills/Treasury Money Mkt     41.30%
TIPS     23.77%
ST Treasury     23.20%
Gold     8.99%

1972 6.40%
1973 9.12%
1974 12.34%
1975 6.94%
1976 4.86%
1977 6.97%
1978 10.02%
1979 20.92%
1980 13.36%
1981 8.92%
1982 8.80%
1983 8.89%
1984 8.94%
1985 9.42%
1986 12.62%
1987 7.65%
1988 8.03%
1989 7.22%
1990 6.11%
1991 8.49%
1992 4.74%
1993 8.47%
1994 1.89%
1995 6.11%
1996 4.19%
1997 4.34%
1998 4.37%
1999 4.38%
2000 5.41%
2001 5.31%
2002 8.20%
2003 5.47%
2004 3.56%
2005 3.95%
2006 5.39%
2007 9.15%
2008 1.20%
2009 5.97%
2010 5.26%
2011 4.49%

And the R^2 between this portfolio and CPI is only 51.30%.

MG

[stone]

AlanW, what you say does bring it back to me what a shock I found it when I realized that handing over your savings to be managed wasn't like going to a dentist or a car mechanic where you could trust the professional to do what was in your interests.

AlanW, I'm fascinated by you saying that your neighbours are always talking about the stock market and yet would be shocked by Clive's post. Are you saying that they have faith that 2009 type stock market gains can be sustained year on year? Have they ever tried to plug 1.3^100 into a calculator? It all must take such a heroic supression of any common sense .

All I'm saying is that most of the people where I live have spent their lives working and saving with someone else managing there money.  Their understanding of "the market" is what they see and hear on the news.  They would not be able to understand some on the posts on this forum and are satisfied letting the same financial people handle their retirement funds.  At this stage of their lives most do not care to educate themselves regarding investment decisions.

Again, their hope is that the market (meaning stocks in general) will return to their glory days  and their investment portfolios will recover and serve them well in retirement.  I'm not saying that this is a good philosophy, just that this is the way it is.

I'm sure others have encountered similar situations.

[AdamA]

AlanW, what you say does bring it back to me what a shock I found it when I realized that handing over your savings to be managed wasn't like going to a dentist or a car mechanic where you could trust the professional to do what was in your interests.

That depends on the dentist or mechanic...I wouldn't given anyone in any profession too much credit. 

[MediumTex]

AlanW, what you say does bring it back to me what a shock I found it when I realized that handing over your savings to be managed wasn't like going to a dentist or a car mechanic where you could trust the professional to do what was in your interests.

That depends on the dentist or mechanic...I wouldn't given anyone in any profession too much credit. 

To me, most financial "professionals" are roughly the equivalent of people selling casino gambling systems that are supposedly can't miss strategies.

When you realize that virtually all casino games have an inescapable house advantage you realize that almost everyone selling a gambling system is a fraud.

There is that occasional strategy for a game like blackjack that can win you money if you have the aptitude and discipline for it, and there is the occasional financial professional that really delivers value, but they are rare.

I think what you find with many financial advisor/stockbroker types is that they will get a piece of borderline inside information just often enough to maintain credibility with their clients, but if it weren't for the occasional piece of really good information they would have a hard time convincing people to pay them to manage their money, since accurately predicting the market's direction consistently is just a very hard thing to do.

[stone]

I think the difference between a car mechanic or dentist and a money manager is that money management is largely about one person winning at another person's expense. When you get your teeth fixed it doesn't entail someone else screwing up and loosing his teeth to provide you with yours.

[BearBones]

I am going to bring this one up again. Looks like the primary conclusion was to not give advice or to give the friend resources to do on their own. However, this is not always practical. What about the situation where:
1. The friend or relative is clearly lost, needing advice.
2. You care about the person.
3. The person does not feel comfortable or is not intellectually capable of managing that which we all take for granted (rebalancing bands, tax loss harvesting, etc). Many people (if not most) are in this category.

Please rank in order of what you would recommend (assume adequate cash reserve):
PPRFX +/- EDV
PERM
Vanguard Wellesley +/- gold
Just contact melevr or julian
Other

[Pointedstick]

I would (and usually do) try to help them non-investing money management problems first, since most people in that category are often burdened with substantial credit card debts, spend more than they earn, have half a dozen unused subscription services sucking away their cash, and so on and so forth. Once I help them through all that, they've usually gained a lot of confidence and can start thinking about investing without so much fear.

It's like Maslow's Hierarchy of Needs. You can't reach the next level until you've got a solid foundation on the level beneath it. I think investing money is pretty high up the pyramid for most people. When I talk about investing to my sister-in-law and her fiancee, who are in the hole to the tune of more than 150k, they just look at me like I'm from Mars. Their finances are so messed up, that they can't even think about making their money generate more money automatically. They're still trying to figure out how they can pay back a nice home mortgage-sized load of un-dischargeable student loan debt.

[dualstow]

I am going to bring this one up again. Looks like the primary conclusion was to not give advice or to give the friend resources to do on their own. However, this is not always practical.
...
Please rank in order of what you would recommend (assume adequate cash reserve):
PPRFX +/- EDV
PERM
Vanguard Wellesley +/- gold
Just contact melevr or julian
Other

Even if the person does not feel comfortable or capable, I lay out some basics. For example, I say that while I run a pp, I am pretty sure that the boglehead approach, like a 60/40 stock/bond AA with no gold or long bonds is currently more popular and considered conventional. One of those two choices might strike their fancy.
Failing that:
1. PRPFX sans EDV
2. Wellesley sans gold (or Vanguard Target Retirement if they're young)
PERM's too young and I haven't read the prospectus.

My friend is a money manager for the elderly so I would refer him to locals for things like debt, mortgage, taxes, and not buying a boat.

[Ad Orientem]

I am going to bring this one up again. Looks like the primary conclusion was to not give advice or to give the friend resources to do on their own. However, this is not always practical. What about the situation where:
1. The friend or relative is clearly lost, needing advice.
2. You care about the person.
3. The person does not feel comfortable or is not intellectually capable of managing that which we all take for granted (rebalancing bands, tax loss harvesting, etc). Many people (if not most) are in this category.

Please rank in order of what you would recommend (assume adequate cash reserve):
PPRFX +/- EDV
PERM
Vanguard Wellesley +/- gold
Just contact melevr or julian
Other

Assuming that the conditions listed in 1-3 are all present and we are talking about someone with little or no intellectual capacity or whose eyes glaze over at the mere mention of anything more complicated than a bank account, then the KISS (keep it simple s---head) rule I learned in the Navy applies. In this situation I would say just go with PRPFX. Wellesley would be my second choice. With the conditions you outlined I think we need to be looking for one stop shopping.

[MachineGhost]

I am going to bring this one up again. Looks like the primary conclusion was to not give advice or to give the friend resources to do on their own. However, this is not always practical. What about the situation where:
1. The friend or relative is clearly lost, needing advice.
2. You care about the person.
3. The person does not feel comfortable or is not intellectually capable of managing that which we all take for granted (rebalancing bands, tax loss harvesting, etc). Many people (if not most) are in this category.

Please rank in order of what you would recommend (assume adequate cash reserve):
PPRFX +/- EDV
PERM
Vanguard Wellesley +/- gold
Just contact melevr or julian
Other

I would do the PERM but keep a watchful eye on it for a year or so just in case it does not perform or gets closed and have to fall back on PRPFX + EDV.