Author Topic: Can banks do a better job in investing in index funds than we can do ourselves?  (Read 792 times)

Linda_Norway

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My FIL is visiting and he talked about cashing in his whole selfowned pension, something he has to do by new dutch government regulations. Then he gets a whole bunch of his money at once instead of spread over the next 15 years or so.
He talked about investing the money in stock and I suggested him to look into index funds, because of the much lower cost. He says it is all index funds the banks invest in nowadays. He plans to go to his bank, make a risk profil and let them invest in index funds for him. Because it is their profession and they will be able to do so much better than he could do. He doesn't want to think about investing and wants his bank to do it for him. He says there are so many index funds in specific branches, like medicine or solar energy, that you need a real expert for to buy these funds for you. Somehow, I think banks will only sell you what they make most money on. I can't imagine banks help you for free and probably eat up some of the profits. You would probably do just as well buying once yourself and then stop thinking about it.
Who of us is right? Can banks do a better job by following the market and investing in odd index funds, or can I do better by investing in some big funds that cover a part of the world, like world, Asia, etc?

East River Guide

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He doesn't want to think about investing

IMHO the short answer is no, investing is something almost anyone can learn, but there is an emotional element some people can't get past.   I'd suggest having him spend a month reading the Bogleheads forum.  Most folks don't need more than a 2-3 fund portfolio and it doesn't take long to figure that out.  If at the end of that month he doesn't feel comfortable then he can find a crutch at the bank.  In any event he should educate himself so he doesn't get taken advantage of by the broker (those mentions of sector funds sound like he is headed toward unnecessary fees and market timing) and properly understands his own risk profile and how his portfolio reflects that.   
« Last Edit: April 16, 2017, 02:24:24 PM by East River Guide »

Car Jack

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Your father in law is still of the opinion that investing is hard or mysterious or something that a normal human person can't possibly do, which of course is hogwash.

If the bank truly has his interest in mind, let's say they cover the world by putting all his money into Vanguard Total World Stock Index Investor Shares VTWSX at 0.21 ER and then adds their 1% to that so they can make their money.

How would that be better than your FIL simply buying VTWSX on his own at 0.21% and have that be his total cost.

Banks are the same as financial advisers.  In general, they invest for you the way they think might work ok for you, but definitely will work great for them.  If he's made up his mind, chances are good that you won't change it with logic and reason. 

Canadian Ben

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Ask him to bring back an example of recommendations from the bank without agreeing to anything, then compare to what he'd do alone.

Explain to him the different of what he's getting for 1% MER more at the bank (nothing).

Linda_Norway

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FIL law is very interested in making high earnings with his stock. That's why he is using the bank.
I tried to reason with good argument for about half an hour and explained that maintenace fees would be higher if a bank would do the work. But he really thinks the banks can do more magic than we can do.

The other thing is that he is 74. In my opinion he should choose a low risk profile, investing modtly in rent. But he says this makes almost no profit (true at this moment). So therefore he is investing most in stock. It happened before to him that his private pension funds lost a year income in a day because of market swings. I am not sure if he could financislly survive a big crash now. On the other hand, he is financially planning to become 92 years old, giving him another 16 years to live. Maybe taking a bit more risk in the sense of buying stock instead of rent is smart, as it will generate more money.

specialkayme

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The ultimate question, in my opinion, is does your FIL believe in an Efficient Market, or does he believe in the Random Walk Down Wallstreet.

If your FIL believes in an Efficient Market, in that there truly are "magic stocks" or "magic funds" to be purchased because some of those stocks/funds contain information that no one knows about yet and thus haven't been reflected in their price, he'd be better off going to the bank. He doesn't have the time or resources to do all the background work to find that magic purchase, and the banks (or their contracted employees) do.

If your FIL believes in the Random Walk, over the long term there aren't any "magic stocks" or "magic funds" to be purchased, as the market has already taken into consideration all available information and priced their stocks accordingly. As no one can predict the future on any one item, all stocks and funs are just as likely to go up as they are down at any point in time. Diversification becomes the key at this point. Since you're hoping to do as good as the market itself, then just buy a whole stock market index and be done with it.

As far as I'm aware, over short periods of time (a year or two) several funds and managers have beat the market. But only three can consistently do it over extended periods of time. One manages Yale's endowment fund. Another was Peter Lynch. The third is Buffet. Those are the only three that I know of that can consistently beat the market. And according to Buffet, unless you have a team of researchers at your disposal, you're better off buying broad range index funds, as you can't compete with the big guys and the fees will eat yourself up.

Most people on here likely believe in the Random Walk. Myself included. Which means there's no reason to pay a bank any fees to give me results that, over the long term, are all but guaranteed NOT to beat the market. So just buy the market and be done with it.

East River Guide

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If your FIL believes in an Efficient Market, in that there truly are "magic stocks" or "magic funds" to be purchased because some of those stocks/funds contain information that no one knows about yet and thus haven't been reflected in their price, he'd be better off going to the bank. He doesn't have the time or resources to do all the background work to find that magic purchase, and the banks (or their contracted employees) do.

If your FIL believes in the Random Walk, over the long term there aren't any "magic stocks" or "magic funds" to be purchased, as the market has already taken into consideration all available information and priced their stocks accordingly. As no one can predict the future on any one item, all stocks and funs are just as likely to go up as they are down at any point in time. Diversification becomes the key at this point. Since you're hoping to do as good as the market itself, then just buy a whole stock market index and be done with it.

The Efficient Market hypothesis means there are no magic stocks, and it is not inconsistent with a Random Walk theory.

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Efficient-market hypothesis (EMH) is a theory in financial economics that states that an asset's prices fully reflect all available information. A direct implication is that it is impossible to "beat the market" consistently on a risk-adjusted basis since market prices should only react to new information or changes in discount rates (the latter may be predictable or unpredictable).

https://en.wikipedia.org/wiki/Efficient-market_hypothesis

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The random walk hypothesis is a financial theory stating that stock market prices evolve according to a random walk and thus cannot be predicted. It is consistent with the efficient-market hypothesis.

https://en.wikipedia.org/wiki/Random_walk_hypothesis

He apparently doesn't believe in Efficient Markets and thinks the bank can deliver Alpha.  Whether than can do it, or do it for less than their fees is unknown.

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Alpha is a measure of the active return on an investment, the performance of that investment compared with a suitable market index. An alpha of 1% means the investment's return on investment over a selected period of time was 1% better than the market during that same period; an alpha of -1 means the investment underperformed the market. Alpha, along with beta, is one of two key coefficients in the capital asset pricing model used in modern portfolio theory and is closely related to other important quantities such as standard deviation, R-squared and the Sharpe ratio.[1]

https://en.wikipedia.org/wiki/Alpha_(finance)




ysette9

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https://personal.vanguard.com/pdf/s296.pdf

This is a good summary paper on active versus passive management (the paper addressing actively managed funds specifically, but having someone actively manage your portfolio is basically the same thing; it probably means you are in more than one actively-managed fund). As others have been saying, there is basically little to no chance that your FIL would earn even the same returns as a passively-managed portfolio and the overwhelming probability is that he will end up with less money over time after all of that hand-holding.

I don't know how your financial industry is structured, but if he needs the comfort of someone guiding his finances, I would recommend finding the equivalent of a fee-only fiduciary financial planner who can put together a plan and steer him in the direction of what we all know is the best choice for him: a simple portfolio of passive index funds with an asset allocation appropriate for his age and risk profile. Some people just need to hear the same message from a netural, third-party "professional" for it to stick.
"It'll be great!"

specialkayme

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The Efficient Market hypothesis means there are no magic stocks, and it is not inconsistent with a Random Walk theory.


You're right. I was thinking of value investing theory. For some reason my brain put EMH in its place, and I ran with it.

marty998

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I'll wager that since he's 74, he grew up in a time when Banks were more likely to be upstanding pillars of society.