Thursday, July 9, 2020

The Limits of Offering Investment Help

Family, friends, and blog readers often ask me for investment advice.  The challenge with helping these people is that even if the advice I give is good, the results they get can end up being disappointing.

Many times I’ve agreed to look at a person’s portfolio.  The most common problem I see is high mutual fund costs with little meaningful financial advice given in return for those costs.  Another problem that’s less common is a portfolio that is too concentrated in a small number of stocks.

In most cases, it’s obvious that the investor would be better off in the long run with a very simple portfolio holding nothing but one of Vanguard’s asset allocation ETFs (VEQT, VGRO, VBAL, VCNS, and VCIP).  This isn’t the only good way to invest, but it’s better than most people’s existing portfolios.

So, if I were to give one-time advice, in most cases it would be to sell everything and buy an asset allocation ETF.  I might add some advice on not timing the market and avoiding tinkering.  However, this would leave a big problem.  Dan Hallett explained the problem well on a recent Moneysaver podcast:

“I have long been convinced that I could lay out exactly what somebody needs to do, and the vast majority of them would get in their own way.”

If the people coming to me for advice are willing to change their entire portfolios to match my suggestions, what will happen the next time the stock market is down and they ask someone else for advice?  The answer is they’d make another big change in portfolio strategy.

Jumping around from one strategy to another is a bad idea, even if we’re jumping from good strategy to good strategy.  We tend to want to make changes after our current strategies have had a bad period.  We end up in a buy-high-sell-low cycle.

These problems place limits on who I’m willing to help with their investments.  Unless I’m confident I’ll be around to stop people from getting in their own way, my advice becomes part of the problem instead of a solution.  So, I’ve only helped a modest number of people very close to me.

Some financial advisors might applaud my choice saying that financial advice should be left to the professionals.  However, only a minority of financial advisors are part of the solution rather than part of the problem.


  1. There's also the question of the implication of "selling everything". I've looked at friends'/relatives' portfolios with some of the same flaws you describe, but have on reflection given only anodyne advice since

    1. While their request for a "second opinion" was provoked by recent short-term "paper" losses, they were actually sitting on a pile of unrealized taxable gains. They have been making money in their suboptimal portfolio, just less than they should have.

    2. In some cases, some investments would have actually carried exit fees (high trading commissions, DSCs, exit penalties).

    I am convinced a phased, gradual switch from inappropriate high-cost, overly concentrated investments to a simple ETF passive portfolio would pay off over only a couple of years. But the real and perceived pain of having to pay lump-sum capital gains taxes, execute financial transactions over several years to minimize those taxes, and -- in their minds -- "take a loss" on their portfolio just made it clear they would never follow through.

    1. Hi Martin,

      I agree that capital gains and DSCs add to the whole problem of helping people with their investments. They lead to resistance, as you say. It can be even worse if the investor takes your advice (with the short-term costs) and makes another huge change a couple of years later.

      I recall the father of my son's friend asking me questions about investing. He was with Investors Group. I explained the costs he was paying, and he made a surprising jump to a discount brokerage (not based on any advice I gave). Then he discovered that the discount brokerage wouldn't tell him what to buy. So he found a new "great guy" with Edward Jones. Some people are destined to get exploited.