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I’VE SEEN FINANCIAL advisors do great work and I’ve seen them do poor work. Which brings me to my late father’s experience.
Dad was a heck of a small businessman. Starting in 1956, he and his partner sold and serviced radios, televisions, appliances and furniture. Forty years later, he sold the business to four of my brothers.
By the mid-1960s, Dad had accumulated what was for him a small fortune. This was the time of the stock market’s so-called go-go years. Dad said the market seemed to go crazy for any stock that had “tronic”—as in electronic—at the end of its name. He signed on with a young broker—today, the broker would no doubt call himself a financial advisor—and it was off to the races.
Dad’s stocks just kept climbing and climbing. The broker was obviously a genius. Things seem to go up and up based on his wise recommendations. Dad told me that at that point, if his business had gone bust, he thought he’d just play the market for a living. All was right with the world. That is, until it wasn’t.
The Dow Jones Industrial Average peaked at 995 in 1966. Then the bottom fell out. It was so bad that it wasn’t until 1982 that it finally broke permanently above that 995 mark and headed higher. That’s a “long haul,” as we say here in rural Kentucky. Years later, Dad would laugh at the optimistic notion that he could make a living playing the market.
Dad told me, “I thought it hit the bottom several times. But it turned out to be a straw-bottom and everything just kept going down.” He took a beating like a bad boy and came to doubt his broker. He went looking for a new broker in the late 1960s.
He ended up finding a fellow named Lucien O. Hooper. His new broker was a kindly old man who started on Wall Street around 1919. I think he felt sorry for Dad when he took him on as a client. But apparently, Hooper was as smart as he was kind.
He told Dad to send him a list of his portfolio’s holdings, and Hooper promptly told him to sell most everything and take his losses. Dad couldn’t bring himself to do it at first. Mentally, it’s one thing to have paper losses. It’s another to confirm your bad decisions by realizing your losses.
Hooper then had to read Dad the riot act. He told Dad that, if he wanted him to be his broker, he had to do what he told him to do. Hooper informed my father that all he had in his portfolio was junk, and that he needed to clear it out and buy real stocks that had a real future. Hooper didn’t need Dad to make a living. I think he just wanted to help out this then-young businessman.
My father complied.
Hooper then guided Dad to the most profitable period of investing he ever had. It lasted until around the time of Hooper’s death in 1988. Dad never found another broker that he trusted or who was as profitable.
Afterward, I think Dad mistook Hooper’s financial ability for his own. He fell in and out of love with numerous financial advisors, but came to believe his own financial skills were superior. He died just a few years back, at age 92. I was the executor of his estate and the power of attorney for my mother. I talked with his broker about how odd his portfolio looked to even a novice like myself. The broker said it looked that way because, “It’s insane. It makes no sense at all. Your father listened to nobody.” It really was awful.
My dad was an incredible businessman. He started from nothing, worked like a dog and made a lot of money. I will never equal what he did on his own. But he was not a good investor. Dad was a great candidate for a financial advisor. But after losing Hooper, he never really trusted or respected anyone again, except himself.
Still, he ended his life in very good financial shape because of his ability to make and save money—and not because of his investment abilities. He was no genius in investing. Most of us aren’t.
What do you do when you don’t have a financial advisor you trust and respect, but you don’t trust your abilities, either? I think that’s what target-date mutual funds from low-cost financial institutions are made for. You can get a well-diversified portfolio, preferably filled with index funds, with an asset allocation that’s appropriate for your age.
I’m increasingly moving in that direction myself, and I tell my children to do the same with their retirement plans. It requires no thought or financial ability of your own. You could do a lot worse. I know I have.
Ken Begley has worked for the IRS and as an accountant, a college director of student financial aid and a newspaper columnist, and he also spent 42 years on active and reserve service with the U.S. Navy and Army. Now retired, Ken likes to spend his time with his family, especially his grandchildren, and as a volunteer with Kentucky’s Marion County Veterans Honor Guard performing last rites at military funerals, including more than 350 during the past three years. Check out Ken’s earlier articles.
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About “listening to nobody.” I’ve never had a financial advisor, and have become quite wealthy. I listen to nobody I know personally. But we live in a different time now and from watching Louis Rukeyser’s W$W on PBS with my dad (bless him) in the late 80s to the Forbes Magazine columns I read from subscriptions he sent me in the 90s-00s, to the Abnormal Returns mail list of Morgan House, I listen to everybody that matters, and make my decisions after taking in a ton of information from across the world. No local financial advisor can compete with this, and they all drink the Kool-Aid of Modern Portfolio Theory (MPT), so I know what they’ll say before they say it.
Lucien Hoper is a Wall Street legend. Born on a dairy farm in Biddeford, Maine in 1895–a Harvard graduate–a World War 1 veteran–and was on the floor of the NYSE in 1929 when the market crashed. I read his Forbes articles for years and his book The Best of Times where I benefited from some common sense investment advice.
(1) Discipline yourself to save $ each and every month–(2) Always reinvest dividends—(3) invest in quality securities rather than get rich schemes– (4) sell stocks that go down and keep stocks that go up, so you share the loss with Uncle Sam–(5) measure success by 5 or 10-year performance, not by what happens in a month or a year.
If you find yourself counting your money every day, week, or month you are on a slow ride to nowhere.
Hi Ken,
In my readings on Morningstar I have learned that one disadvantage of having all of your assets in a target date fund when you are withdrawing funds in retirement is that each share you sell you are selling each of the positions in that fund in their proportion in which they make up the fund regardless as to how they have performed. What they recommend, which I have followed, is to hold each position to the same allocation as the fund that you wish to follow. Then when you need to withdraw money you can sell any inflated position to rebalance to the correct proportions.
As an example I recently had to sell some of my funds to generate some cash and my international position was 4 percent above my target so I sold enough of that fund to get back to the correct allocation.
Just a thought
One easy counterpoint to the argument that “target date funds are too conservative” is that you don’t have to choose the target date that corresponds to your own age/retirement. We have one target date fund that’s set at 2060 even though we’ll likely retire in/close to 2025. So if you like the one-stop-shopping and rebalancing but don’t want to be too conservative (or too aggressive), you can simply move to a different target date.
I do get the tax issues, though. Our target date funds are all in deferred compensation retirement accounts. Once we have to start taking money out of those, I’m sure we’ll adjust.
Why would anyone not use CFP? I read 85% of so called “advisors” are just that with no real education and/or experience
Some people have what it takes to learn the basics of stock and portfolio analysis, but most people do not. Evaluating the prospects of companies and the future of the economy is very difficult.
I’m not an expert, but some feel that Target date funds become too conservative at too early a point from target and after.
Certainly index funds is the way to go IMO.
They have also not considered that when interest rates rise from 1% to 5%, or 6%, or 7%, both a stock portfolio and a bond portfolio are going to be hit very hard. Bonds for safety? Just ask Silicon Valley Bank!
I suppose one benefit of target funds is automatic rebalancing, but that means they’re not suitable for taxable accounts.
Target date funds are certainly better than a bad advisor or spending your time stock-picking, but I’m not a fan. It doesn’t take much effort or research to set your own asset allocation and buy appropriate index funds. The target date fund Vanguard says is appropriate for my age (born before 1948) is only 30% stock. I think that’s too low. It has 16% in foreign bonds, I think that is way too high. It holds Vanguard Total Bond, which I decided some time back to avoid. In a few more years I may decide to simplify my portfolio further, but it will be some version of the Boglehead three fund portfolio.
Well, Ken, a prominent personal finance academician, who also works as a consultant for a large mutual fund company, told me in a private email that he had informed his wife to invest in Vanguard target date funds after his death. He also wrote that he had to be careful about giving this advice publicly, because it would violate his consultant contract. So your advice is shared by a prominent personal finance academician who simply wasn’t able to “afford” to say it publicly.
Ken, interesting story and cautionary tale. Thanks for sharing that. The broker’s comment that your father “listened to nobody” was particularly telling. I’m thankful that I can “listen” to many great voices like yourself on Humble Dollar.