Pedal, Please

Peter: ‘Seven years ago I started using a financial planner, on the recommendation of a friend. I told her I planned to retire in 7-10 years and that I was willing to trade some upside gains for some protection against downside losses. [One must be particularly wary of downside losses – they are even worse than regular losses, let alone upside losses. – A.T.] Seven years later, she has delivered one of my two requests – my upside gains for 5 years averaged about 8%. However, during the last two years, she did not protect against losses. Now I find myself pretty much back where I started 7 years ago. I have decided to look for other help. I find my friends are not using advisors, but I don’t feel comfortable investing on my own or spending the time to do so. One friend has suggested that I use Vanguard, which does the investing for the Washington Post where her husband was an editor. She says that I can get some initial advice and then do it on my own. What I found appealing is that she says they use a lot of index funds which I know you are a big advocate of. What do you think of this approach? Do you have any other suggestions?’

☞ It is the right approach. For most people, anyway. My incredibly self-serving suggestion is that you read The Only Investment Guide You’ll Ever Need. If you should choose to buy your own copy at full price and pay local sales tax, you will be set back the better part of a $20 bill. But that’s not much compared to the $25,000-plus you would have paid your financial planner if she took 1% a year and you started with $300,000. (The S&P 500 index funds have more than doubled in those same seven years. If you had gone that route, you’d have more than $600,000 instead of $300,000.) And it’s fine with me if you buy it used or borrow it from the library.

This is not to knock all financial planners. My friend Less Antman, for one, makes a good case for his services in some situations. Indeed, when he reads this he will probably write me an e-mail making that case, and I will happily post it.

But my view is that ultimately you do best if you really understand your plan and if – whether you have come to it with the help of a $14 book or a $3,000 planner – you ‘own’ it. Much of it has to do with making a budget and spending less than you earn and living beneath your means and socking the dough into the Roth IRA at the start of each year, if you can, and never paying credit card interest – pretty basic stuff. But you have to do it. As I have written elsewhere, it’s like exercise equipment. It’s not enough to buy it; you have to pedal.