Tuesday, September 23, 2014

The Empowered Investor

If you look back at your investing efforts to date and wonder where you went wrong, portfolio manager Keith Matthews’s book The Empowered Investor will explain it to you in such clear terms that you’ll wonder why you couldn’t figure it out on your own. I wish I’d read this book before I made my share of investing mistakes.

Matthews begins with the common investing pitfalls that trip up so many of us, and then explains the conflicts of interest in financial services before moving onto describing the “empowered” way to invest that involves diversification and indexing. This may seem like familiar territory, but Matthews make his case convincingly in an easy-to-read style.

The final sections of the book cover the approach to indexing used by Dimensional Fund Advisors. You can’t buy these funds directly but have to work through a financial advisor to invest in them. For those who wish to work with an advisor, this can be a cheaper option that usually gives you better advice than you’d get from the typical mutual fund salesperson. Those who prefer to build their own portfolios can use low-cost index ETFs. The first 7 chapters of the book are directly relevant to both groups, and the final few chapters are still food for thought for do-it-yourselfers.

The author’s portfolio management firm makes no secret of the fact that exposure of this book benefits their client business. However, I believe this book will benefit readers whether they become clients or not. I am not receiving any kind of payment for this review. As usual, I write what I really think.

The remainder of this review covers a few details of the book that I found interesting for one reason or another.

The author says that safe withdrawal rates are age-dependent: “For 60-, 65-, and 70-year-olds, ... conservative amounts to withdraw each year are 3%, 4%, and 5%, respectively.” Too often I hear early retirement enthusiasts refer to the “4% rule.” This is not a safe enough starting withdrawal rate for someone expecting a very long remaining life.

“The financial industry wants you to believe that it can successfully predict future market outcomes. ... The truth is that no one can predict future asset prices. Making major portfolio bets on these predictions is one of the most dangerous things an investor can do.” Well said.

“The investment industry actively markets performance when selling its products. Investors are unfortunately all too willing to buy into this devil’s dance.” Even huge pensions funds can’t predict which investment managers will outperform in the future.

Matthews discusses some new research into the “Direct Profitability Premium,” which is a proposed new factor of investment returns like value stocks and small-cap stocks. If this factor catches on, I wonder if companies will try to game their accounting to show higher direct profitability to attract more investors.

“A qualified, independent, fee-based advisor does not depend on commissions or sales fees and is able to offer unbiased advice and recommend the best tools in the marketplace.” I agree that this is a better model than commissions from mutual funds, but the size of the fee matters. Even a 1% per year fee will consume more than one-quarter of your investment after 30 years.

Overall, I highly recommend this book.


  1. Hi Admin,

    Nice Post. Thanks for sharing information.

  2. A fee based on a percentage of assets under management is really a scam perpetrated by the financial industry because most investors don't understand how much is it really costing them. If I go to lawyer for an estate plan, he/she charges me for the work done, not how much money I have. It should not be any different for investment fees. There are companies in the U.S. that charge a flat fee for portfolio management, the same fee no matter what the size of the portfolio. The fee is based on how much work they do, based on an hourly rate. After all, there's much the same work involved with a portfolio of $500,000 or $5,000,000. One such company charges $4500 per year, regardless of portfolio size. That is reasonable. I don't know if such companies exist in Canada.

    1. @Grant: I agree with you. No doubt larger portfolios do cost somewhat more to manage, on average. However, as you say, much of the work is exactly the same.