Q. In a recent column, you wrote: "most people aren't willing to do the learning necessary to live comfortably with low-cost investing". Would you spell out what we need to learn, or how we might go about it? —J.K., Seattle, WA
A. Virtually every bit of major research over the last 50 years has shown that high cost managed portfolios can’t overcome the drag of their own costs. Once you become convinced of this you will no longer listen to the blather of the many advisers who claim to have the secret to beating the market. Some people need more convincing (and more data) than others. So here is a list of books in order of increasing depth and data:
For an education in tiny bites, visit my website archive (www.assetbuilder.com) and read the Couch Potato investing columns.
- An easy, fun-to-read starter book is a classic by Andrew Tobias, “The Only Investment Guide You’ll Ever Need.” Most people love his puckish, irreverent humor.
- The Prince of Brevity between book covers is Dan Solin. Start with “The Smartest Investment Book You’ll Ever Read,” then move on to “The Smartest Portfolio You’ll Ever Own.”
- For a well-written mother lode of data, read any edition of John Bogle’s, “Common Sense on Mutual Funds.”
- To have a foundation in basic ideas, read any edition of Burton Malkiel’s classic, “A Random Walk Down Wall Street.”
- And to put it all together, read William Bernstein’s “The Four Pillars of Investing.”
There is no formal reading requirement for becoming an index investor, so feel free to stop at any time. You need only to have read enough to be confident that the odds of successful investing increase as your costs go down. While the legacy financial firms (think Merrill Lynch, Morgan Stanley, USB, etc.) still work their business plans on the idea that they deserve a 2 percent (or more) yield on our money, the reality is that the world has changed. You and I can get superior results, easily and quickly, by managing our investments for less than 1/10th of one percent.
Today, the burden of proof is on the traditional money managers, the ones that charge the big fees. What they need to prove— and can’t— is that their chance of beating low-cost index investing— by anyone, anywhere— is better than the survival odds of a snowball in a very hot place.
Q. If this gets into the paper it will be a short answer indeed. My wife and I are both 87 and in reasonably good health for our age. We have excellent Tricare health insurance. I am retired military; my pension is currently $2,818 monthly. My wife is a retired teacher with no pension (Catholic lay teacher). Our combined Social Security comes to a little over $1,400 a month. As you know, both our SS and my pension are tied to the cost of living index. We have a diversified portfolio, mostly with Fidelity, that is hovering around $400,000. Other than the required minimum distribution, we do not take a penny from our portfolio. Upon my passing, my wife will receive 55 percent of my retired pay for life. We are frugal, but not cheap. We own our home (double-wide) and car. Are we OK? —R.G., by email
A. Yes, you are probably OK. Here’s why.
- Your income is higher than the income of most retirees your age. So are your assets.
- Your double-wide is paid for and has low operating costs; particularly if you own the land it’s on. Shelter is the largest single expense for retirees.
- Your Tricare healthcare coverage is widely admired.
- You are old enough that your need for long-term care, if any, will be minimal. At 87 the downhill slope is pretty steep.
The biggest foreseeable problem is the 45 percent loss of pension income if you die before your wife. It means total income will decline by more than your portion of your combined living expenses. You can check how large, or small, this problem will be by taking a close look at how you currently spend your income. Then try to measure how it will naturally decline when you die.
Scott Burns is the retired Chief Investment Officer of AssetBuilder, the creator of Couch Potato investing, and a personal finance columnist with decades of experience.