the financial adviser says

[sailorboy1]

Met with a financial adviser today about my cruising plan. He ran all these "Monte Carlo" scenarios and in the end he said "your plan looks like it works".

So take that you wife person!


BTW - I feel all like a yachtie now with a financial adviser and am going to go out and get a white cap thingy

[donradcliffe]

All my financial advisors ever did was to lose me money.

[CarlF]

My MIT statistics professor called the Monte Carlo method the most complicated way ever invented to calculate an average.

[cardude]

Excellent news !

What is your "SWR" if I may ask?

http://www.bogleheads.org/wiki/Safe_withdrawal_rates

[Ded reckoner]

I'm excited for you that "your plan looks like it works." But, if I may take your wife person's side for a moment, all plans are only as good as their assumptions. Has your financial advisor been a good guide before and during both downturns and upturns? How does your financial advisor's advice align with his best interest? Monte Carlo simulations are based upon datasets and make assumptions about distributions; don't be too impressed by the technology; a Monte Carlo simulation is just a way of making a prediction; the weakness of any simulator is extrapolating beyond the known. In any case, you might want to ask for the model overlay to the last hundred years of the DJIA. Then see what it looks like against the Russell 2000 and the S&P 500. Which dataset did he use? Even with good correlation, the past isn't necessarily a good predictor of the future. Robert Shiller, the 2013 Nobel laureate in economics, thinks there's some likelihood we're experiencing an asset bubble due to the Federal Reserve's quantitative easings. When that bubble bursts, does the Monte Carlo simulation predict a rough ride or a hole in the boat? If your financial well-being currently is dependent upon salaried income, before you cast off and your skillsets quickly obsolesce, you may do well to do common sense assessments. Plan for the worst and hope for the best.

[sailorboy1]

Originally Posted by donradcliffe

All my financial advisors ever did was to lose me money.

Well to be honest "my" is a very loss word as I haven't given him any business yet. But one thing I've been thinking is that I've been doing fine without him, so maybe I don't even need him at all.

[Pelagic]

I think the basic phalicy of depending on a financial planner to advise on your safe withdrawal rate is that there is no commitment to the dear lady in question

[Bluegrass]

Here is how we plan if this helps...Our first assumption is, you should be able to make a 5% return over time, after taxes, if you invest mostly in diversified stocks such as an index fund. The last recession is a good example of what "over time" means - some years you'll make a lot, some you'll lose money. Over a 20-30 year business cycle you should make an average of at least 5% after taxes.

Our first rule is...spend half what you make and save the other half. So, a $500,000 portfolio would have an average return of $25,000/year. Of that, spend $12,500 and reinvest $12,500.

Doing this, one will never run out of money and will have a cushion for emergencies. This is probably a little over the top conservative, but this type of plan makes us comfortable.

Keep this in mind about often quoted withdrawal rates, at the end point you have zero money (if you are withdrawing your whole portfolio) and the average life expectancy figure means half the people will have die by the expectancy age - the other half are still alive. Also, if you're alive at 60, you're probably going to make it into your 80s.

[belizesailor]

Originally Posted by donradcliffe

All my financial advisors ever did was to lose me money.

EVERY so called financial advisor I know is still showing up at the office every day. Apparently their plans have not worked too well for them. And most are just thinly veiled brokers for something.

[Bayside Bert28]

Originally Posted by belizesailor

EVERY so called financial advisor I know is still showing up at the office every day. Apparently their plans have not worked too well for them. And most are just thinly veiled brokers for something.

My experience as well.

[CaptTom]

Originally Posted by Pelagic

I think the basic phalicy of depending on a financial planner to advise on your safe withdrawal rate is that there is no commitment to the dear lady in question

Was that pun intended? I think what you'll get from most of "financial advisers" is phallic indeed.

I have to stand with belizesailor and bayside bert28 on this one. I'll admit that there may be good fee-for-service advisers out there, and that in some cases of high net worth, insurance products have a place in your overall retirement strategy. But my experience with run-of-the-mill financial planners is they're just insurance salesmen. And as was pointed out, if they're so smart, why are they still going in to work every day?

[practicalme]

What gets me with financial advisors is they get paid no matter how their advice works out. Its a win/win deal for them. You the client only get to win if the advice turns out to be good advice. For that reason I prefer to be my own financial advisor. I read financial stuff to educate myself. I read A LOT in the beginning. Not so much now as I feel much more confident making decisions. So my advice is be your own financial advisor.

What works best for me is investing directly in individual shares in companies that have a good track record in paying dividends. I own shares in 21 companies. My portfolio is diversified enough to reduce risk but small enough that I can keep track of each company. So my advice is to read, read and read until you feel confident enough to make your own decisions. Nobody will take more care looking after your money than you. But do your own research.

[El Pinguino]

If financial advisors are that smart why do they still have to work for a living?
In my experience they prey on them as never had a large slab of cash in their hot little sweatys until they retired.
Oh... we only charge 2% to manage your money.... 2% of your capital which if you are lucky will be making 4%..... theiving devious rogues. In Oz I think it involves a 2 week course to get 'qualified' as a financial advisor.

Come the revolution they will be the first to get the hot end of the gun..... even before the lawyers... and no I have never had dealings with them... but know people who have....
El Ping

[Certeza]

Well, I'm in the asset management industry and I share the opinion of many here. But just to clear up a couple things...

It's true that becoming an "advisor" takes very little effort, knowledge, or skill. A quick course to pass a $75 test. History indicates that there is little added value there as most people who use this type of advisor typically underperform the broader market equivalent to the 1/2-2% management fee.

A step up from that is the CFP. More schooling and harder to get this cert. They can add value as 'planners' for those who don't manage finances well, but still typically have little to offer in the form of investment analysis and selection. Most still just hook up with an insurance underwriter and mutual fund company and sell those products to their clients for a commission in addition to the management fee.

Then there are those of us in the pooled fund and alternative managed account space. The best of us have spent many years developing the analysis models to consistently generate "alpha" (excess non-correlated returns) for our clients. Many of us aren't interested in management fees and instead charge a percentage of profits. Typically, fees are 15-30% of net new profits with a high water mark. IOW, if my clients' account balance this quarter isn't higher than the highest previous quarter, they don't pay me any fees.

We don't sell a product. We don't prepare budgets. Any joker can do that. My job is to generate high positive returns regardless of market conditions. No excuses! Unlike financial advisors who can use the excuse of a down market, I operate in the realm of absolute returns. Up, down, or sideways market doesn't matter, my clients expect good returns in all conditions.

BTW, the Monte Carlo is prob the most misunderstood and misused tool in all of finance. To use it to stress test a financial plan based on historical market returns is just silly. It is appropriately used in our more complex statistical algorithms along with kernel density estimation in cases where simple arithmetic averages are useless. As such, it is incredibly useful and in fact the only way to accomplish what we do. Used otherwise, it really is just 'the most complex averaging method ever'.

[Certeza]

Originally Posted by practicalme

What gets me with financial advisors is they get paid no matter how their advice works out. Its a win/win deal for them. You the client only get to win if the advice turns out to be good advice. For that reason I prefer to be my own financial advisor. I read financial stuff to educate myself. I read A LOT in the beginning. Not so much now as I feel much more confident making decisions. So my advice is be your own financial advisor.

What works best for me is investing directly in individual shares in companies that have a good track record in paying dividends. I own shares in 21 companies. My portfolio is diversified enough to reduce risk but small enough that I can keep track of each company. So my advice is to read, read and read until you feel confident enough to make your own decisions. Nobody will take more care looking after your money than you. But do your own research.

Many of us in the real analyst realm don't get paid for losing advice. Anyway, I caution anyone that a portfolio of 25 stocks isn't diversified. In fact, a portfolio of 500 stocks isn't properly diversified. Some stock holdings is fine but proper diversification can only be achieved through non-correlated assets. Unfortunately, 99% of investment options that most people are familiar with are very highly correlated in a down market.