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Calling All Small Investors! Here’s A Guide Just For You

Christine Benz, Small Investors

With Christine Benz, Director of Personal Finance at Morningstar

In conversation with Christine Benz, Steve focuses on how small investors can survive and thrive in a world dominated by the giants of Wall Street.  Christine is Director of Personal Finance at Morningstar and the author of 30-Minute Money Solutions: A Step-by-Step Guide to Managing Your Finances and the Morningstar Guide to Mutual Funds: 5-Star Strategies for Success.

Small Investors Cannot Afford Colossal Investment Mistakes

Steve begins the conversation by asking Christine why small investors have to get almost everything right from the outset.  Christine attributes this to the relatively small amounts of money that small investors have to save and invest, leaving little room to pay for high investment fees or to bounce back from large financial losses.

Investment Research Resources

So where can small investors get basic advice on managing their investments? Morningstar.com is a good investor resource with lots of free information and tools.  Also recommended? Bogleheads.org and Investopedia are excellent resources for cost-conscious small investors.  Christine warns investors to be careful about which sites they turn to for investment information because of the fake financial news that’s out there.

On Steve’s prompting, Christine adds that major brokerages such as Fidelity and Schwab are careful about the information they give out on their websites and, therefore, are trustworthy sources.

Target Date Funds

While investment advisors prefer building customized investment mixes that better suit an investor’s needs and risk profile, Christine recommends Target Date Funds as a good low-cost alternative for do-it-yourself small investors because such funds get more conservative as you approach retirement date.  Target date funds do the asset allocation for you as time goes by, adds Steve, but remarks that they continue to be one-size-fits-all and may not work as well as customized solutions.  Christine adds that target date funds are also suitable for 401(k) plans even though retirement plans are increasingly getting customized based on a family’s overall financial situation such as, say, the added retirement assets of a spouse.

Robo Advisors

Next, Steve wants Christine’s thoughts on Robo Advisors, a new entry into the financial planning marketplace. Robo Advisors are computer algorithms that decide what you should invest in and how your asset allocations should change over time, all for a relatively small fee.

Christine sees the cost advantages for small investors but believes Robo Advisors are simplistic and may not be able to optimize assets at high levels of financial complexity.

Hourly Financial Planning Model

While going to a professional advisor is a good option, small investors might not have enough assets to make it worth the advisor’s time.  So the financial planning world has come up with an hourly financial planning model where you pay for every hour of the advisor’s time.  This time is spent meeting with you, preparing your asset allocations, etc.  The cost is about as much as you would pay a lawyer.  Christine believes this model might work well for small investors because they can meet an advisor once every few years, pay for a few hours of advice, and be done.  If  you pay an advisor a percentage of your assets year in and year out, you end up paying for advice yearly and that could cost more over time.

In closing, Steve notes that working in-person with a financial advisor can bring tremendous value and lead to better investment outcomes, so the hourly planning model is probably better for small investors than relying on computer algorithms.

Disclosure: The opinions expressed are those of the interviewee and not necessarily United Capital.  Interviewee is not a representative of United Capital. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions.  Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances.  The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by United Capital.

Read The Entire Transcript Here

Steve Pomeranz: You’ve all heard of Morningstar, I’m sure. And you may have heard of my next guest. Her name is Christine Benz. Christine is Morningstar’s Director of Personal Finance and author of the Morningstar’s 30-Minute Money Solutions: A Step-by-Step Guide to Managing Your Finances and the Morningstar Guide to Mutual Funds: 5-Star Strategies for Success.

Hey, Christine, welcome back.

Christine Benz: Hi, Steve, good to talk to you.

Steve Pomeranz: Today I want to talk about something that doesn’t get discussed very much amongst advisors and others that do shows like this and that is the small investor. The small investor is kind of on their own to a large degree.

So, we’re going to concentrate on the small investor today and figure out ways that investors can get the kind of information they need. So, here’s my first question. Small investors have really little margin for error. Why do small investors have to get almost everything right from the outset?

Christine Benz: Well, with less money to put to work and less money that can compound and accumulate in the market, that means that when it comes to retirement savings or saving for other big picture goals, the retiree can’t afford to have big chunks of his or her assets going to overpriced mutual funds or paying a lot in advisory fees because maybe not every penny, but every dollar certainly counts. So, it’s really valuable to watch closely what you’re paying for fees every step of the way, whether you’re a big or small investor, but especially when you’re a small investor where your plan just doesn’t have a lot of room for error.

Steve Pomeranz: Also, if you’re doing it yourself and you think you can beat the market or somehow play some kind of hot stock, you really risk losing it all or losing much of it and very hard to gain back.

So, you have to be very, very careful.

Christine Benz: Absolutely.

Steve Pomeranz: Yeah. So, what are some of the good places for small investor to seek some basic advice?

Christine Benz: Well, I happen to think we have a lot of great information on morningstar.com.

Steve Pomeranz: I know you do. I know

Christine Benz: We have a premium part of our site, but we also have a lot of great free information and free tools on the site. All of my articles are free. All of the articles, period, are free on the website. So, it’s just a great educational resource. Another resource I like to point people to is a website called, Bogleheads.org.

It’s like deadheads but with Jack Bogle, B-O-G-E-L as kind of the guiding force in terms of inspiring the website. Yeah, he’s there in spirit. He doesn’t work on the website but lots of great information and the bogleheads are all very evangelistic about this idea of low-cost investment, investment provision.

Steve Pomeranz: Right, what about Wikipedia or Investopedia, you like those sites?

Christine Benz: Well, there’s certainly some some good information. A friend of Morningstar, Roger Warner, writes a lot of good financial planning content for Investopedia. You have to pick and choose. You just have to be careful about where you’re going for information.

It’s not always as thoroughly vetted as it may be. Although in the case of Investopedia, I think they’ve been trying to bulk up their library, and they certainly have some good research.

Steve Pomeranz: What about the discount brokers like Fidelity and Schwab and others?

Christine Benz: Well, the good news there is that if you are seeking some basic information, whether it’s on planning or retirement planning, you’re going to find that that content has been very well vetted.

So, whether it’s Schwab or Fidelity, they don’t want to have misinformation about taxes or the logistics of retirement planning. So, you can be pretty well certain that that information has been gone over with a fine-tooth comb.

Steve Pomeranz: Okay.

Christine Benz: So, that’s another good resource.

Steve Pomeranz: All right, so let’s talk about investments themselves.
You know, smaller investors have to have a, well, we all have this huge universe of choices out there. What’s a good place to start with regards to kind of getting a one-size fits all investment package?

Christine Benz: Well, probably the simplest way for small or larger investors to go is to take a look at some of the target date products that are on the market.

These are all-in-one investment products that are designed to get more conservative as you get close to your retirement date. Advisors generally do not like target date funds and many advisors rightly point out that they can create customized investment mixes that suit the investors risk profile and the investors per situation much better.

But certainly, for smaller investors where the choice is, “Well, do I do this myself, and I’m not really sure what I’m doing when it comes to investment selection, or I turn it over to one of these fund companies to manage my assets.” I think that’s the better strategy. So, target date funds are a low cost way to obtain investment advice.

Steve Pomeranz: Very much a low-cost way if you buy the right ones. They’re doing the asset allocation for you and they’re adjusting the portfolios as time goes on as you get closer to retirement or closer to college or whatever it is.

So, there is something very positive that can be said about them. What about your 401K? A lot of people come to us with questions about how to allocate their 401K, what do you recommend for the small investor?

Christine Benz: Well, here again a target date fund is going to be an option in most cases.

In fact, if you do nothing, you’re usually defaulted into a target date fund. But another thing I would point out is that more and more 401K plans are some sort of advice component to the investors. So, you might be able to invest in some kind of a managed account program, and that means you enter a little bit of information about yourself—maybe your spouse has retirement assets, your anticipated retirement date. They gather a little bit more information about your total picture and they provide you with a customized lineup based on what you’ve told them about yourself. So, that’s an option. Those can typically be very cost effective packages.

Steve Pomeranz: Yeah, so, like anything, if you were to go to the mall and buy something that was one-size fits all, it fits everybody but it fits nobody really.

Christine Benz: Right.

Steve Pomeranz: [LAUGH] So it’s really no different when you’re buying that kind of a product, but again it’s better than walking around without any clothes.

Christine Benz: Exactly.

Steve Pomeranz: Right, so you got something covering you. Now there’s been a new entry into the market place—so called Robo-advisors, which are basically computer algorithms that decide what you should invest in and do all the rebalancing and mixing of the investments for relatively low cost.

What do you think about those?

Christine Benz: Yeah, well, I think they can make sense as well. The trade-off is that you can’t always get a holistic view of your total portfolio. So, for example, the Robo-advisor isn’t going to know, “Well, I also have this 401K plan that I can contribute to.”

So, it’s not able to optimize your assets at a very high level. So that’s one potential drawback. But in terms of being cost effective and relying on very low cost in that funds or exchange traded funds as building, that’s a kind of flash out the plan. Robo-advisors I think are a step in the right direction and can be a good resource for small investors.

Steve Pomeranz: Now, going to a professional advisor is another choice. However, if you’re a small investor, you might not have enough to make it worth the advisor’s time to sit down and create a portfolio for you and then earn a fee on those assets. So, there are other models in the financial planning world and one is an hourly financial planning model.

We’ve got about a minute and a half left, take us through that.

Christine Benz: Well this is simply, did you pay your advisor as much as you would an attorney, for example? So that you’re on the clock when you’re with the person and they’ll also tally up. If they need to sort of step aside and work on your portfolio for a few hours, you’re going to get a billed for all of that stuff.

The benefits, though, is that if you’re a small investor, you can be one and done say like every five years. See the advisor. Write the check. And you’re off and on your way. Whereas, if you’re paying an advisor a percentage of your assets year in and year out, you are paying for that advice on a on-going basis and that will probably cost more over time.

Steve Pomeranz: Yeah. Well, the idea is that a lot of people don’t like to stroke that very first check, but you know like anything else it can bring tremendous value. Just making the right decisions can. It’s not guaranteed, but it may lead to higher investment results which would more than pay for itself.

So, like anything else if you want to get your car fixed and you don’t know how to fix the car, you have to hire a professional. And I think the hourly planning model is very good for the small investor. My guest is Christine Benz. She is Director of Personal Finance at Morningstar.

And to get the websites that we mentioned on this show, Morningstar and Bogleheads and the Wiki sites and all that, don’t forget to come to stevepomeranz.com,we will replay this interview. And we’ll have transcripts for you so can get to us at anytime. Christine, thank you so much for joining us.

Christine Benz: Thank you, Steve.