Friday, November 2, 2007

Confused about Investing: Join the Majority

A small number of investors in America pound their chests and loudly proclaim they are experts. However, an even larger population appears to be thoroughly baffled about the basics associated with investing; nearly half admit investing is confusing. The community of the perplexed is probably larger because only a portion of investment holders are willing to step up and admit their incomprehension.

Many investors struggle with basic concepts such as diversification and understanding basic asset classes such as stocks and bonds. Multiple studies have demonstrated that many investors need help, including a number who smugly believe they are knowledgeable experts.

A recent article from Bankrate outlines the dynamics associated with investor knowledge and competence:
Half of investors confused; is the other half lying?

What should an inexperienced investor do?

Inexperienced investors should focus on low fees in their mutual funds and concentrate on investing in index funds for many asset classes. Reducing fees has been demonstrated to have much greater impact on long term investment returns then excess market returns generated by some actively managed funds with higher fees. John Bogle, the founder of Vanguard, has outlined this in many of his presentations

For those who need guidance regarding their investments, I would urge that they hire a “Fee only” financial advisor. At the NAPFA site you can search for “fee-only” planners in your area. NAPFA, the National Association of Personal Financial Advisors, is the nation’s leading organization dedicated to the advancement of Fee-Only comprehensive financial planning. See the Find an Advisor form at:

You should NEVER use a commission based (“No-Fee”) advisor. These advisors, generally associated with large brokerage firms, normally put you into high-load products that earn them the most commissions; rather then low-expense funds that are proper for your financial future. Any advisor who attempts to place you in a mutual fund that is not “No-Load” is doing you a disservice.

So in summary; use low-expense mutual funds, focus on index funds, and get “fee-only” guidance if you need help.