MONEY Ask the Expert

When You Do—and Don’t—Need a Pro to Manage Your Money

Investing illustration
Robert A. Di Ieso Jr.

Q: “At what net worth should I consider getting a money manager?”

A: There is no magic number for when you need help. Similarly, you don’t have to wait for your net worth to hit a certain mark to seek out the services of a pro.

“As soon as you have enough money that it’s keeping you up at night wondering what to do, then that may be when you need to find some help,” says Deena Katz, a certified financial adviser and associate professor of personal financial planning at Texas Tech University. “But that number will be different for everyone. Some people will feel it at $100,000, others at a million.”

Determining whether you need a money manager basically boils down to the questions you have about your money and whether you’re able to find the answers yourself and then follow through.

If your financial situation is complex—say you also manage your small business—or if you simply don’t have the time to dedicate to understanding and managing your own investments, paying an adviser to help you look after your funds could be worthwhile, says Christine Benz, director of personal finance at Morningstar.

You may also want to get investment help if you’re paralyzed by fear or know you’re prone to chasing hot funds, panic selling, or overreacting to market swings. A pro can act as a coach and help you keep your emotions in check, says Benz.

On-going money management can be costly, though. You’ll typically pay an annual fee equal to 1% to 1.5% of your total assets under management. And many wealth advisers won’t take on you as a client unless you have a minimum amount of money to invest, typically a quarter to half a million dollars.

Help just when you need it

Luckily, you probably don’t need investment guidance on a continual basis. Most of us are fine DIY-ing it the majority of the time—using simple online asset allocation tools such as Bankrate’s and sticking with broadly diversified stock and bond index funds—and getting an expert second opinion only when we’re getting started or making a big change.

In that case, you can find a financial planner who charges by the hour or per project. “If you do need more long-term help than these advisers are likely to be able to provide, in my experience they’ve always been quick to refer clients to money managers who can,” says Benz. “It’s a good first step to getting a read on how much help you may need.”

For help finding an adviser who charges an hourly or project-based rate, search the Financial Planning Association website or the Garrett Planning Network’s website.

Help that won’t cost you much

If you don’t want to go it alone but want some investment guidance, you have several options, even if you don’t have a big portfolio. One is to keep your money in a low-cost target-date retirement fund, where the manager will adjust your investment mix based on the retirement date you select.

For a more tailored approach, another low-cost route is a “robo-adviser,” says Sheryl Garrett, a certified financial planner and founder of the Garrett Planning Network. Companies like Wealthfront and Betterment offer portfolio advice that’s somewhat personalized via the web and apps. The firms use software to come up with a stock and bond mix based on your investing goal and time horizon. They then put you into low-cost ETFs and rebalance regularly. Annual fees typically run from 0.15% to 0.35% of assets, on top of ETF charges.

Finally, Vanguard has a pilot program called Personal Advisor Services, which charges 0.3% of assets a year for investment management. You must have $100,000 in Vanguard accounts to qualify; the fund company plans to drop that minimum to $50,000 in the near future.

MONEY portfolio strategy

Why Rats, Cats, and Monkeys are Smarter than Investors

Ms. Kleinworth goes short in the Treasury Bond market.
Ms. Kleinworth goes short in the Treasury Bond market. Nora Friedel—RatTraders.com

A performance artist in Austria piles on to the case against "active management" by finding yet another animal that seems to invest better than humans.

An Austrian performance artist claims to be breeding and training rats to be able to beat the investment returns of highly educated and paid professional investors.

The artist, Michael Marcovici, says he trained the rodents to trade in foreign exchange and commodities. He did so by converting market information into sounds and rewarded the rats with food when they predicted price movements correctly and inflicted a small electric shock when they didn’t. (If only hedge fund managers could be compensated in similar fashion.) The rats are placed in a Skinner Box with a speaker, red and green lights, a food dispenser and an electrical floor to deliver the shock.

Marcovici says rats can be trained in three months, are able to learn any segment of the market and “outperform most human traders.” This may seem like an outlandish claim, but this kind of thing isn’t altogether new.

UK’s The Observer held a challenge in 2012 between a “a ginger feline called Orlando,” a pack of schoolchildren and a few wealth and fund managers to see which could produce the biggest returns over the course of the year.

The cat won.

Long before Orlando’s victory, Princeton economist Burton Malkiel wrote that “a blindfolded monkey throwing darts at a newspaper’s financial pages could select a portfolio that would do just as well as one carefully selected by experts,” in his book “A Random Walk Down Wall Street.”

Add this to the overwhelming evidence that largely unmanaged index funds — that simply buy and hold all the securities in a market — often outperform professional stock pickers.

Just this month S&P Dow Jones Indices Versus Active funds scorecard for the first six months of the year, which showed that 60% of actively managed domestic large cap funds underperformed their benchmarks.

That’s in addition to 58% of domestic mid-cap and 73% of small cap funds losing out. If you extend the record out five years, more than “70% of domestic equity managers across all capitalization and style categories failed to deliver higher returns than their respective benchmarks.”

What does this mean for your portfolio? As Morningstar.com’s John Rekenthaler noted in a recent article, active funds may not have much of a future.

Passively managed mutual funds and exchange-traded funds, Rekenthaler points out, enjoyed 68% of the net sales for U.S. ETFs and mutual funds over the past year. That leaves 32% for active funds. Meanwhile, target-date funds account for $30 billion of the $134 billion in inflows for active funds over the past 12 months. Even on this front, passive target date funds sales are growing.

In fact, the only real growth area for actively managed funds are in so-called alternatives that invest in things like currencies and that charge annual fees of close to 2% of assets. That’s a lot of cheese.

You’re generally better off staying clear of professional security pickers.

No, this doesn’t mean you should find a rat, cat, or monkey to manage your 401(k). Instead, go the passive index route and select three basic building block funds from our MONEY 50 selection (like say Vanguard Total Bond Market Index, Schwab Total Stock Market Index and Vanguard Total International Stock Index) and you can achieve basic diversification at a price that won’t make you as poor as a church mouse.

MONEY Investing

Why We Feel So Good About the Markets—and So Bad—at the Same Time

Investor and retirement optimism is at a seven-year high. Yet most people believe their personal income has topped out. What gives?

Investors are feeling better about the markets than at any time since the financial crisis, a new poll shows. But most also believe they have topped out in terms of earning power, and that the Great Recession continues to weigh on their finances.

Buoyed by stronger GDP growth, record high stock prices, and a falling unemployment rate, investors in the third quarter pushed the Wells Fargo/Gallup Investor and Retirement Optimism index to its highest mark since December 2007. Yet 56% of workers expect only inflation-rate pay raises the rest of their career, and half believe they are destined to end up living on Social Security benefits.

“At the macro level, people are feeling pretty good,” says Karen Wimbish, director of Retail Retirement at Wells Fargo. “But at the personal level, the Great Recession left a deeper wound than a lot of us realize.” The average worker believes that wage growth, which has been stagnant for decades, won’t rebound before they retire. This feeling is especially acute among the upper middle class, those making more than $100,000 a year.

The gloom is partly attributable to the national discussion about wage inequality and some evidence that only the top 1% is getting ahead. It may also reflect a sense that the U.S. is losing ground to the faster growing developing world and experiencing an inevitable relative decline in standard of living.

The Federal Reserve has been battling anemic growth for seven years through an aggressive stimulus program that includes rock-bottom short-term interest rates. This week, the two Fed governors most outspoken and critical of this policy confirmed that they would retire next year, essentially putting the Fed all-in on a growth and jobs agenda with diminishing concern over inflation and underscoring the sense of stagnation so many feel.

Most investors polled (58%) said they are doing about as well or worse than five years ago. Similarly, 63% said they are saving about the same or less than five years ago. These figures are essentially unchanged from two years ago, suggesting that investors have not made much financial headway in the recovery. Roughly half said they are still feeling the effects of the recession.

“Is it real?” Wimbish says. “Or is it emotional?” If our prospects are really so dire, how do you explain record high stock prices, strong quarterly growth, a pickup in consumer borrowing, and an improving jobs picture?

Whatever is causing the gloom, one result is that nearly a third of investors continue to shun the stock market. Those with less than $100,000 in assets avoid stocks at twice the rate as those with more than that level of savings. Arguably, those with fewer assets are precisely the ones who need to be in stocks to take advantage of their superior long-run gains and build a nest egg.

They may be worried that they have missed the rally and that it is too late to get in. But the overriding concern—expressed by 60%—is that stocks are just too risky. So as the average stock has more than doubled from the bottom and recovered all its losses, and as those who remained true to their 401(k) contribution plan through thick and thin have become flush with gains, the truly risk averse have lost valuable time. Seeing this now may be part of what makes them so glum.

MONEY financial advice

Why Won’t Advisers Disclose Their Investment Performance?

Prospective clients want to know how good a financial adviser is at investing, but information about returns can be incomplete and misleading.

Some financial advisers don’t mind sharing information about the performance returns they have pulled in for clients. Those numbers, nonetheless, may come with a caveat.

Clients of Jim Winkelmann, an adviser in St. Louis, Mo., can request a free performance report through his website. It lists details about six model portfolios including their ten-year annual returns, and year-to-date returns.

But a warning in bold, red letters reminds clients that little to nothing can be learned from past performance. “Do not base decisions on this information,” it says.

Winkelmann, who oversees $130 million in assets, is among a minority of advisers who share their investment track records. Yet some financial services professionals believe the practice should be more common because it can help prospective clients determine if an adviser will do a good job.

Some advisers, nonetheless, say they are skittish because of a maze of rules and guidance from the Securities and Exchange Commission and state regulators that make advertising tricky. The Financial Industry Regulatory Authority, Wall Street’s industry-funded watchdog, also warns on its website against advisers boasting “above-average account performance.”

Regulators typically prefer, but do not require, that advisers who advertise returns follow the Global Investment Performance Standards, the king of performance guidelines, say securities industry experts. This set of principles helps advisers calculate and report results. The group that developed the GIPS standards also recommends that advisers hire a reputable, independent firm to verify those figures.

While using GIPS is optional, advisers who do not use it may soon be at a disadvantage because it will be harder to distinguish themselves from competitors, said Michael Kitces, an adviser in Washington and industry blogger.

But the steep price tag — roughly $5,000 to $10,000 to put a system in place and hire staff — is keeping some advisers away, Kitces said.

Instead some advisers use their own calculations. But those can mislead investors or land advisers in hot water with regulators. Some advisers, for example, may showcase only the years of their best results.

Clashing Viewpoints

Many advisers avoid performance advertising, but not because of the rules or GIPS expenses. Rather, they do not believe the figures are an accurate reflection of their client portfolios. That is especially true of advisers who offer financial planning services and who must often work with some assets clients already have, said John Clair, an adviser in Midlothian, Va.

Some types of assets that advisers can get stuck with include retirement plans that offer poor fund choices or mediocre employer stock the client wants to keep, Clair said. Those investments can skew returns, which would make them of little value to potential clients, Clair said.

Other factors that can also sway performance returns include the wide range of investment goals and risk tolerances among advisers’ clients, said Dave O’Brien, another adviser in Midlothian.

What’s more, overall performance numbers alone do not explain two important strategies that may be boosting returns: an adviser’s ability to reduce tax and transactions costs, O’Brien said.

Clair and O’Brien both have software that lets clients track real-time performance of their individual portfolios. But advertising historical track records is more suited to hawking a product, such as a mutual fund, instead of comprehensive advice, said O’Brien.

“We’re providing a service that’s unique to each client,” O’Brien said. To the layman they may seem the same, but they’re not.”

MONEY stocks

Fossil-Free Investing Heats Up

As concerns about climate change grow, some colleges, foundations, and investors are moving their money out of coal and oil stocks.

MONEY financial advisers

Help! How Do I Break Up With My Financial Adviser?

Here's your chance to give your financial advice in the pages of MONEY magazine.

Did you ever want to be a personal-finance advice columnist? Well, here’s your chance.

In MONEY’s “Readers to the Rescue” department, we publish questions from readers seeking help with sticky financial situations, along with advice from other readers on how to solve those problems. Here’s our latest reader question:

We feel guilty about it, but we’d like to replace the financial adviser we’ve had for 30 years. How do we tell him and do this with the least anguish?

What advice would you give? Fill out the form below and tell us about it. We’ll publish selected reader advice in an upcoming issue. (Your answer may be edited for length and clarity.)

Please include your contact information so we can get in touch; if we use your advice in the magazine, we’d like to check with you first, and possibly run your picture as well.

Thank you!

To submit your own question for “Readers to the Rescue,” send an email to social@moneymail.com.

To be notified of future “Readers to the Rescue” questions and answers, find MONEY on Facebook or follow MONEY on Twitter.

TIME Investing

The Triumph of Index Funds

CalPERS’ move is a vote for passive investing

It would be reasonable to assume that the professionals running CalPERS, the California pension fund with $300 billion in assets, would be good at picking stocks. Or at least reasonably good at picking other smart people to pick stocks for them. But in the past year, CalPERS has made two decisions that are telling for all investors when it comes to trying to outperform the market.

Late last year, the pension fund signaled its intention to move more assets from active management into passively managed index funds. These are funds in which you buy a market, such as the S&P 500 or the Russell 2000, unlike mutual funds that try to select winners within a given class of equities. More recently, CalPERS said it would also pull out the $4 billion it has invested in hedge funds. Although hedge-fund honchos make headlines with their personal wealth, the industry has significantly lagged the market in the past three years. “Call it capitulation or sobriety: it’s saying that we can’t beat the market and we can’t find managers who can beat the market, and even if they can, their fee structures are overwhelming,” says Mitch Tuchman, CEO of Rebalance IRA, an investment adviser focused on index-fund-only portfolios.

The CalPERS move is a nod to University of Chicago economist Eugene Fama, who won a Nobel for his lifelong work on “efficient markets.” That theory says that because stock prices reflect all available information at any moment–they are informationally “efficient”–future prices are unpredictable, so trying to beat the market is useless. According to the SPIVA (S&P Indices Versus Active) Scorecard, the return on the S&P 500 beat 87% of active managers in domestic large-cap equity funds over the past five years.

Why can’t expert money managers succeed? Researchers from the University of Chicago say there are so many smart managers that they offset one another, gaining or losing at others’ expense and winding up near the market average, before expenses. “Unless you have some really special information about a manager, there’s really no good reason to put your money in actively managed mutual funds,” says Juhani Linnainmaa, associate professor of finance at Chicago’s Booth School of Business. He says the median managed fund produces an average –1% alpha–that is, below the expected return. Some funds do beat their index–what’s not clear is why. “What is the luck factor?” he asks. “Given the noise in the market, it’s kind of hopeless to try to figure anything out of this.” Linnainmaa’s colleague, finance professor Lubos Pastor, also found that mutual funds have decreasing returns to scale. Size hurts a manager’s ability to trade.

Yet even if managers match the market, they’ve got expense ratios that then eat into returns. Index-fund proponents like John Bogle at Vanguard have long preached that fees dilute performance. A 1% difference can be huge. “It’s not 1% of all your money,” says Tuchman, “it’s 1% of expected returns: that’s 16% to 20%.” The average balance in Fidelity 401(k) plans was $89,300 in 2013. While 1% of that is $893, if you earned 8% compounded over 10 years, your balance would be $192,792; at 7% it’s $175,667, a difference of $17,125. Real money, in other words.

Investors are getting the message, pouring some $345 billion into passive mutual and exchange-traded funds over the past 12 months vs. $126 billion in active funds, says Morningstar. “At the end of the day,” says Tuchman, “an index fund is run by a computer, a robot. We don’t want to believe that a robot can beat Ivy League M.B.A.s–and I’m one of them.” What CalPERS seems to be saying is that the game is over. The robot wins.

MONEY 401(k)s

How Do I Choose Investments for My 401(k)?

What's the the right mix of stocks and bonds for your retirement account? Financial planners explain.

MONEY stocks

What’s Going on With the Boom in Profitless Stocks?

Man looking at bubble
Katrina Wittkamp—Getty Images

For the first time since the dotcom era, 83% of this year's IPOs have negative earnings. Does that mean we're in a new tech bubble?

For investors looking to place bets on newly public companies, 2014 has been an amazing year. Through the month of August, 204 businesses have held initial pubic offerings for their stock, for a combined value of $46.4 billion. According to the Wall Street Journal, both of those numbers are the highest the IPO world has seen since 2000.

But 2014 is close to setting another millenium record: The percentage of IPOs where the company has negative earnings–that is, is losing money–is nearing a 14-year peak. A report from Asset Allocation Advisers, using data from SentimenTrader, shows the proportion of in-the-red IPOs recently hit 83%, just one point lower than their previous high in 2000. That year seems to be coming up a lot–remind me what happened around then?

ycharts_chart (1)

Oh, right.

The last time such a large share of IPOs were profitless was at the top of the dotcom bubble, and when that bubble burst, the S&P 500 lost almost half of its value. Gregory Schultz, co-owner of Asset Allocation Advisers, and co-author of the report, thinks more earnings-free IPOs are one indication the tech bubble is back.

“It might come in the same box with a different color bow, but like Yogi Berra said, it’s deja vu all over again,” Schultz told MONEY. “The impression I get is if you have a mobile app and a website, you can gather money.”

Why is the market so willing to support the latest web startup, never mind profits? Schultz thinks low interest rates and the Fed’s policy of “quantitative easing” have made investors are more willing to put their cash in risky ventures in hopes of capturing a higher return.

But while some think the new IPO boom could mean the market is overvalued, others see a different explanation. Rich Peterson, an analyst at S&P Capital IQ, says a surge in profitless IPOs is actually driven by the kind of companies seeking public investment. And it’s not just tech stocks. “One of the more popular or active sectors for IPOs has come in the biotech field,” says Peterson. His numbers shows this type of firms taking up about 22% of year’s IPO market so far. “By their nature, biotechnology companies don’t make money [early on], they burn through a lot of cash, so it’s not surprising.”

Early indicators suggest most of 2014’s IPO class is actually doing quite well. Of the 134 companies that did IPOs this year and reported second quarter earnings, 72 beat analyst expectations, and only 54 missed their mark. Peterson cautions that an IPO’s early success does not guarantee good results in the long run, but says the high share of zero-profit IPOs does not concern him.

Of course, the simplest explanation for more earnings-negative IPOs is that stocks are currently in high demand. The S&P 500’s price-to-earnings ratio, based on ten years of average earnings, is a little above 25. That’s higher than historical norms, meaning the public is willing to pay a lot for equities in general. When investors are especially eager to buy stock, it makes sense for companies to obtain capital (or for founders to cash out) by selling shares. In short, the rise of the no-profit IPOs is a predictable side effect of the market boom. Less predictable is when the boom ends.

MONEY Investing

5 Simple Steps to the Perfect Portfolio

Pie chart made out of candies
Paper Boat Creative—Getty Images

These 5 simple rules will help you build the right asset mix and avoid a hodgepodge that won't achieve your retirement goals.

Despite what many Wall Street firms and advisers may suggest, you don’t need to stock your portfolio with an ever-expanding array of funds and ETFs to navigate today’s global financial markets. In fact, such a portfolio may do more harm than good. Here’s how to tell whether you’re diversifying or di-worse-ifying.

It doesn’t take a lot to reap the benefits of diversification. Over the 20 years to the end of June, for example, a simple mix of 55% U.S. stocks, 10% foreign developed-country shares, 5% emerging markets stocks and 30% U.S. bonds gained an annualized 8.7%, and lost roughly 27% in the crash year of 2008, according to Morningstar. Had you broadened that portfolio to include international bonds, REITs, commodities and hedge funds, it would have returned 8.6% and lost about 25% in 2008. Basically a wash.

The results could be different over other periods. But the point is that once you own a diversified blend of low-cost funds or ETFs that include U.S. stocks and bonds and foreign shares, you should think long and hard before taking on more investments.

Unfortunately, many investors can’t seem to resist loading up on every Next Big Thing investment that comes along. How can you tell whether your portfolio is an example of prudent diversification or imprudent di-worse-ification? Answer these five questions:

1. Do you need the fingers of both hands to count your investments? There’s no official “correct” number of investments you should own. But once you get beyond five or six, chances are you’ve got a lot of overlap or you’re venturing into arcane investments you don’t need. Truth is, you can get pretty much all the domestic and foreign diversification you need with just three index funds: a total U.S. stock market fund, a total U.S. bond market fund and a total international stock fund. You can see whether you suffer from “investment overlap”—i.e., you own the same securities multiple times in different investments—by going to the Portfolio Manager tool in RealDealRetirement’s Retirement Toolbox.

2. Do you own investments you don’t really understand? I don’t mean having a vague understanding, as in “Oh yes, it’s a leveraged ETF that gives you twice the return of the S&P 500,” or “I own a variable annuity that returns a guaranteed 7% a year.” I’m talking about really knowing how that leveraged return is calculated (which has big implications for what it will return) and what that 7% guarantee is actually being applied to. If you don’t know how an investment actually works, then you can’t know whether you truly need it.

3. Can you explain exactly why you bought each investment you own? Because it was mentioned on a cable TV investment program or appeared on some publication’s Top 10 list isn’t an acceptable answer. In addition to knowing how an investment works, you need to understand what specific role it plays in your portfolio and how, precisely, it improves your portfolio’s performance. Ideally, you should also be able to quantify the benefit you receive from owning it by citing research or pointing to performance figures that demonstrate how it enhances the tradeoff between risk and return.

4. Do you own investments that you’ve never touched after buying? If you’re following a long-term investing strategy, then the mix of assets in your portfolio—50% in large-company stocks, 10% in small, 40% in bonds, whatever—should reflect your investment goals and risk tolerance. As different investments earn different returns, you must periodically rebalance your portfolio to restore it to its proper proportions. To do that, you sell some shares of the winners and plow the proceeds into laggards and/or put new cash into investments that earned lower returns. But if you have investments you’ve never pulled money from or added money to, that suggests they’re not part of this rebalancing process, and thus not really an integral part of your investing strategy.

5. Do you regularly add new investments to your portfolio? If you do, you’re probably di-worse-ifying. Once you’ve created a well-balanced portfolio, your investing work is pretty much finished. Sure, there’s monitoring and rebalancing, and maybe jettisoning the occasional dud and replacing it with a new version of the same investment (a situation you can largely avoid if you stick to index funds). But you don’t need to constantly add new asset classes or investments just because investment firms keep bringing them out. In fact, if you do, you’re more likely to end up with an unwieldy hodgepodge of investments that’s difficult to manage rather than a simpler portfolio that more efficiently balances risk and return.

Walter Updegrave is the editor of RealDealRetirement.com. He previously wrote the Ask the Expert column for MONEY and CNNMoney. You can reach him at walter@realdealretirement.com.

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