AAR41 - Listener Q&A: DIY Investing vs. Wealth Managers?

0:00Andrew Sather:So this could be wealth managers like Joey is talking about. This could be fund managers, people that run some funds to try and outperform the market. And with their research, which they've been doing this since I believe it was 2002, but in their most recent publication last year, they said after 15 years, there were quote unquote no categories in which the majority of active managers outperformed. and that's added to many many other studies from a lot of other outlets that show a ballpark figure of around 90 % saying that 90 % of active investors fail to outperform the overall market. When I first started my business I remember how lonely and intimidating it was.

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4:11Andrew Sather:Good day, everyone, and welcome back to At Any Rate. My name is Evan Rate, and we are here to help you make sustainable financial changes without breaking a sweat. And as is consistent at this point, I'd like to welcome back my investing expert, personal investing expert, Andrew Sather. How are you doing? I'm okay. How are you enjoying being up earlier today? Not great. Deadlight savings is kicking my butt, and I think if anybody's watching the video, they can probably tell by my freaking face, but it's not treating me very kindly. How about you? I saw a survey that 90 % of people hate daylight savings.

4:50Andrew Sather:How is it? Do you know the reason behind how it's still around at this point? Who's on the side of daylight savings? The farmers, maybe? I don't know. It's not about the farmers. They're up whenever the sun rises and whenever the sun sets. They don't give a crap what time of day it is. I actually don't mind it. So just to piss you off right out of the gate. I don't like change. What can I say? You don't like change, but you're fine with it changing back and forth twice a year? Good point.

5:24All right.

5:25Andrew Sather:After that good inconsistency has been established in the lore of Andrew Sather, today's episode is actually going to be based on a fantastic listener question I received in that. But it's a good question on the surface and of itself. And I also think it makes a few very interesting telling, I guess, assumptions, you could say, because we all have assumptions about how the financial industry works. And we just want to discuss some of the topics that are brought up in this question. And again, some of the assumptions that are made to lead to kind of the conclusion of their question. Today's listener question is from Joey.

6:00Andrew Sather:And it says, hello, love your podcast as a beginner. I'm just curious. DIY investing is getting emphasized a lot by you guys, even suggesting ETFs to beginners if stock picking is too complex, veering them away from fund slash finance managers. My question is if the market ETFs move 10 % a year, but a wealth manager can get me returns of 16%, even at a 1 % fee, would it not be worth it to just find someone to invest for me if they can on average create better returns than the S &P? and I kind of want to sum that question or a lot of what we'll discuss with that question to one core point which is the assumption that fund managers make more so why invest myself I think that's kind of a good short one sentence summary of all that and before I even let Andrew you know kind of give his two cents on that or maybe he's going to have some uh disagreeing opinion with himself is uh there's something called the speva out there which is a a an official report that is it's based on the s &p indices versus active so it's it's just an organization that's dedicated to doing nothing but comparing the performance of s &p so overall market essentially indices which if you're not aware of what an indice is that's basically a fund an overall group of stocks that's grouped into a fund or grouped into an index with the goal of tracking something.

7:25Andrew Sather:It could be with the goal of indexing a certain commodity or a certain sector, or in this case with the S &P, it's just meant to index the overall market. And they're comparing that to the performance of active investors. So this could be wealth managers, like Joey is talking about. This could be fund managers, people that run some funds to try and outperform the market. And with their research, which they've been doing this since I believe it was 2002, but in their most recent publication last year, they said after 15 years, there were quote unquote, no categories in which the majority of active managers outperformed.

7:58Andrew Sather:And that's added to many, many other studies from a lot of other outlets that show a ballpark figure of around 90 % saying that 90 % of active investors fail to outperform the overall market. And for me, those statistics kind of speak for themselves saying that, sure, there are always going to be outliers. There are always going to be people that do manage to outperform the market, at least for some length of time in some sector and that, you know, with some level of luck or whatever it is, but that the vast majority of the time, if you go with a wealth manager or fund manager or something like that, they just, the consistency with which they're going to get you something above the market is very, very low.

8:39But how do you feel about that kind of assumption and core of the question, Andrew? I mean, you're going to have to rein me in because I could go down this rabbit hole. There is, there are factors to this. To get back to Joey's question, which is a fantastic question, I think DIY versus going with somebody, letting somebody else handle it is a very personal question. And I think it comes down to your goals, really. What are you trying to achieve and what's a good result for you? And I think that plays a lot. And our conversation probably will tend to veer away from active management, especially because the odds are not great.

9:26But there's also other things that an active manager can do that provide you more value than just returns. So the reassurance quarter to quarter that, hey, this is what we're doing with the strategy. This is why we're sticking through it, even though there's underperformance. That kind of value can be really reassuring versus DIY. You really have that all on yourself. And so if you're the type of person who can behave in the way that's going to help your finances, then DIY is good for you. But not everybody is wired like that. And so the one point I would like to start with really is the 16%. man that's fantastic if you can find a a fund manager who can do that consistently and not just like one or two years but like over 10 years and do it decade after decade like send them my way kind of an idea you know that would be that would be fantastic but that's so rare not to say it can't happen but it is hard to find

10:35Andrew Sather:yeah yeah percentage jump like that I mean it even will happen I guarantee you there are many many people this year for example just to pull a time range out of my hat are going to hit you know that 16 or even better figure but the fact is that those number of people are very very very very small and the number of people that manage to do that next year is only going to be maybe a handful and then the people that manage to do it the year after that is going to be next to zero and then it's going to be basically zero the next year that's just that's how the stock market really works everything overall averages out and tries to kind of the efficiency of the market tries to drag everything to the performance of the overall market and just kind of bring everything along and that can mean bringing lower things up because they were a better deal or bringing higher things down because they were they were overpriced or overperforming or whatever it is but um but yeah and when that 16 isn't a number that you can count on or use your math for so to speak then that one percent charge starts to feel much, much more significant.

11:41Andrew Sather:You know, if somebody, somebody outperforming the market by maybe a percent or two is far more within reason than something like 16%, which at that point, a 1 % could be taking all or maybe half of the, of the extra returns you're getting anyways. Or again, even more likely with, with all the studies that I've seen online is that somebody isn't going to manage to outperform the market. And so that 1 % is going to take your 9 % to 8 % or 7 % to 6 % or something like that. It's just going to get you even further away from the overall market than you would have been otherwise. But something that I want to kind of touch on is also defining the underlying terms that we're using here.

12:22Andrew Sather:So since Andrew is much more versed on the depths of the market itself, would you mind defining what a fund manager is? I know that Joey asked about wealth managers, but fund managers are kind of play a similar role. Yeah. Fund managers, somebody like people are doing it now through ETFs as well, but traditionally it's always been through a mutual fund. You might see in your 401k options, there might be like a mutual fund option and somebody's managing it, which means they're picking the stocks that go in it. And what makes a mutual fund interesting is, both interesting and challenging, is when if I have a mutual fund and I'm collecting money for, like basically you collect money from customers and then you are investing that.

13:13And so if you're a successful mutual fund, you're getting more and more money, which means you have to make more and more investments. and that creates a really challenging thing, especially for certain types of stock pickers, like value stock pickers are going to be value. They're looking for the value. That value might not always be there at the same time your cash is there because you're looking for these special deals. So that can make it really, really challenging. Did I answer the question?

13:45Andrew Sather:Yeah, definitely. I just want to add also that a fund manager, when they set up that mutual fund, that's accessible to anybody, or at least, correct me if I'm wrong, maybe there's special kinds of mutual funds, but for the most part, they're accessible to anybody to invest through the overall market, and you're going to pay an additional fee, basically, for being able to hold that fund, because the managers have to be paid, essentially. Whoever's doing the work to try and get that mutual fund to outperform something has to get paid for doing that work. And something like a wealth manager like Joey brought up is a similar idea, but just teared down to individuals.

14:21Andrew Sather:So instead of giving some huge hedge fund who manages massive stores of wealth and invests it as they see fit, instead of that, you're just an individual or maybe you and your spouse or something are going to a person who handles maybe a dozen or a couple dozen at most different people's investments and advising them on where you want to head, what your financial goals are, what you currently have, how much you're going to be able to add to it over time, just kind of those baseline ideas. And they just take that money. And again, similar to a fund manager, they just run with it and go invest it as they see fit to try and achieve your end goals.

14:59Andrew Sather:And as Joey mentioned, that 1 % charge when it comes to wealth managers is pretty standard. I even myself have mentioned this in the past, but I had a wealth manager for a while myself. I had somebody, they were with Edward Jones and they were somebody that I had money with initially and then continued to add money to that pot over time. And we would have maybe quarterly or so discussions of, you know, what are you interested in? What would you like to invest in? You know, that you, that would align with your, your personality or personal goals, you know, even just your view of the world, essentially what would you want to invest in and what are you hoping to get from this are you expecting to you know get rich in five years or are you expecting to be able to comfortably retire with no concern whatsoever and basically guarantee that retirement or something just discussing uh what the real long-term goals of the investments were as well as she did give me quite a lot of good i will say financial advice in general just basics of kind of what is a budget what should i be saving?

16:02Andrew Sather:How much should I be putting, you know, in this pot for you to invest? All those sorts of questions, you know, when you don't want to just Google it and trust some random on a blog as to what you should do with that. It was good to kind of hear a more insightful, in-tuned idea of how I should handle things since she was aware of my overall financial situation. But what really eventually led me to stop working with her and instead manage stuff myself was first off seeing some mentions of that and then doing research myself to verify that it seemed to be true of how low of a percentage of wealth managers managed to outperform the overall market and then learning how incredibly easy it was to invest in the overall market myself.

16:47Andrew Sather:I know that something that Joey mentions in this question or kind of implies is that investing in ETFs can be overwhelming for people. And I 100 % agree with that. If I just walk up to somebody at work and I have mentioned it to people at work, somebody who isn't currently into investing and hasn't believed in or wanted to put the effort in, if I just walk up to them and tell them to invest in an ETF in the stock market, that just sounds like a headache and a lot of stuff to learn. And you probably have to apply for something and you have to wait for it to go through. You kind of think that there's this whole process to get there.

17:22Andrew Sather:And later in this episode, we'll detail exactly the steps you could take to invest in an ETF. but I just want to reiterate that that that is a very very very simple process even easier honestly than having a wealth manager and staying in contact with them making sure the account is up to date kind of checking what they've been doing and everything I honestly put in even less effort than that at this point just to have you know ETFs purchased over time and continue being invested in the market yeah um how long do you think it took you that kind of do you remember how long you were with your wealth manager?

17:58Andrew Sather:I was with the wealth manager probably for a total of two and a half years or something like that. And I also want to kind of reiterate with that time period that I didn't leave her because, oh, well, she's not earning me crazy returns, so this isn't worth it. Because even at that point, I knew that the stock market was at least to some degree a long game, and I wasn't expecting her to get me rich within two years. But it was those other factors that kind of fed into it. I don't want to belabor it, but do you think part of the reason why DIY index ETFs is attractive to you is because you can see, based on your income now, how much you're able to save and invest, and then what those numbers would be in the compound interest calculator.

18:48Those are pretty appealing to you.

18:52Andrew Sather:Yeah, they definitely would be. I know that the compound interest calculator was also a kind of a big shift for you being able to do that math and see what would happen over time. But I would absolutely say so. And I think that's at least partially because both you and I are kind of numbers people. And maybe if you're not as much of a numbers person, it might not have as big of an impact. But, you know, with Joey asking specifically about 16 % and stuff, there's a good chance that Joey is a numbers person wanting to earn the good numbers here. and yeah I would I would definitely encourage you that when it's in your control and you can go do that math yourself you can go straight from a budget knowing okay I can save 250 a month or invest 250 a month and being able to put that straight in an account and see that automatically purchased by a stock and now you're invested in that stock and it's going to continue growing in the long term going forwards that's a really powerful thing to be able to see instead of at least when I had a wealth manager I'm sure they all handle it very very differently but when I I had a wealth manager, the visibility to what was happening with my money was there.

19:54Andrew Sather:Of course, nothing was being hidden, but it was this whole, okay, I have to read reports that she's put out and try and decipher it because she's buying a bunch of different things. Sometimes at very low percentages, you know, cause she's trying to balance, balance risk and performance and everything. So she was investing in a ton of different individual funds and stocks. And so it was trying to keep up with those. And that was even another thing that I just, just kind of recalled is that she was at times investing in funds herself, which again, not putting that decision at all, but it was kind of looking at it and seeing, okay, she's investing me in this fund, which I'm paying a fee for, but I'm also paying a fee for her to have chosen to invest in that fund.

20:33Andrew Sather:And it just started, and there was multiple funds she was investing in. It was just kind of stacking up even more fees that I was seeing being paid out over time instead of just, if I go invest in VOO, for example, in an overall market stock right now and I earn$10, I pretty much get those entire$10. But with something like a wealth manager, if you go earn$10, then you're having to take off fees for paying her. And then you're having to take off fees for the funds that might've been invested in. It's a much more complex process. That's not going to give you a very straightforward return or math to be able to do.

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23:54Andrew Sather:So, Andrew, let's say somebody is wanting to get into investing. They feel like it's the right thing to do, but they feel like doing it themselves is just overwhelming or maybe not worth it or something like that. How would you say, or maybe how did you get over the hump of just feeling overwhelmed by the idea of DIY investing? That's a scary term. Yeah, if I look back, I honestly didn't really know what I was getting myself into. And I think that's an advantage in a lot of ways. And so you can kind of take a similar mindset approach if you just maybe just frame it differently. So you frame it as this idea of, I'm going to take baby steps.

24:42I'm going to dip my toe in the water without having it all figured out on day one. understanding that this is a temporary situation and eventually you're going to learn enough to feel really confident about your overall situation like what you're what you end up doing so this idea of like i need to figure out exactly what i'm going to do and my plan is going to be set and i'm going to have i'm going to do all the right things and it's going to be done by day two is just very unrealistic because I read this thing, I think yesterday, that was really good. And it speaks to me, again, to being a numbers person and coming from an engineering background.

25:24I study engineering at school. I wish I remember who said this, but basically in engineering land, everything's logical and there's always a right answer. The math is the math and everything's logical. With investing, even if you do the ETF route, which is what we could talk about, you're still investing in companies. And the thing with companies and business is there's not always a right answer. There's more uncertainty. There's more just uncertainty. So because there's not always a right answer and there are factors outside of your control, when you're getting into the market, when you're leaving the market, all of these things play a role.

26:13And then especially the biggest one is how do you behave and do you do all the right things? and by right things I mean just the simple basic things that are actually can be hard to do for people like save and invest consistently that's actually pretty hard which is what our podcast is here to help you especially at any rate because we have tactics for you but yeah to do it consistently to also stay invested for the long term to not dip into it at the worst times which is usually during recessions. And the time you're most likely to dip into it is the time that's worse to do it because that's when the market's down.