Tips to convince my Dad about Index Funds?

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hudat2021
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Tips to convince my Dad about Index Funds?

Post by hudat2021 »

Hi there,

First time poster. I am trying to convince my Dad (retired) to invest majority of his portfolio in Index Funds. I got him to test the waters by investing approx $60K with Vanguard Advisor Services. They set him up with a 60/40 portfolio of Stocks (VTI) & Bonds (BND).

Instead of investing more with them, he keeps wanting to go back to working with a Portfolio Advisor who would charge him 1.1 to 1.4% of his assets with a target return of 4.5% (his friends are doing this). The Advisor stated that their portfolio of 20-30 stocks would be less volatile than an index fund and would continue to provide dividends during a correction and he wouldn't be forced to sell holdings. I don't completely buy that as VTI/VTSAX is more diversified. I guess the dividends would continue to flow if the companies had records like the Dividend Aristocrats but its not guaranteed.

I have shared this blog along with the Guide to Bogleheads investing . He is starting to see this is the better way but also fears the market dropping in the future or rising interest rates would hurt a bond ETF. He thinks having an advisor would protect him from the worse case scenario.

My recommendation was for him is to hold 3-5 years of living expenses in cash and invest the rest in VTI/VTSAX as he is concerned about a drop or rising interest rates (no bond fund). He does not have a pension or SS. All cash for now so we need to invest soon.

Any tips for convincing him or ideas for the portfolio (~$1.0M cash, needs approx $35K-$40K to live off)? I was thinking he could Dollar Cost Average into VTSAX as well but I don't know if that is a good strategy for someone who is retired (67).

Thanks in advance to anyone who responds.
HomeStretch
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Re: Tips to convince my Dad about Index Funds?

Post by HomeStretch »

Welcome to the forum!

Ultimately it’s your Dad’s decision on how to invest his money. You have done everything possible to show him how you think he should be investing. Maybe it’s time to let the subject drop.

Your suggestion to invest 3-5 years living expenses in cash with the balance in 100% equity (which is at least 80% in equities overall, initially) seems too aggressive in my opinion for a retiree that is withdrawing 3.5-4% from his portfolio at age 67.
radR investing
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Re: Tips to convince my Dad about Index Funds?

Post by radR investing »

Here are a couple of things to consider:

Keeping $200k in cash to cover living expenses for the next 5 years is a good plan.

It is absolutely possible to build a stock portfolio that will be less volatile than VTI. Are you familiar with the concept of Upside Capture/Downside Capture? This metric identifies a stock's (or portfolio's) movement in comparison to an index. For example, Target's Upside/Downside Capture is 86/19 over the last 5 years, meaning it gains 86% of the SPY index when the market is up but only drops 19% of the index when the market drops. Many financial advisory firms target an 80/60 Upside/Downside Capture as this fits conservative investors.

In comparison, the VTI has an Upside/Downside Capture of 102/102 (as expected, it should be very close to 100/100).

Some additional interesting statistics:
  • over a recent 5-year period, only 22 companies contributed 50% of the overall gains of the S&P500, and less than 100 companies accounted for 75% of the total gains. In the two years ending June 2020, 6 companies accounted for 56% of the total returns of the S&P500.
  • over a 30-year period, 40% of the Russell 3000 lost at least 70% of their value - and NEVER RECOVERED. Effectively, all of the index's overall returns came from 7% of the companies
I'm not making any recommendations, but I wanted to share a different perspective so you don't think what your father wants to do is totally ruining his financial status. I also don't think he needs to use an advisor to accomplish this. Because he will keep $200k in cash, in my world he could invest the remaining $800k with a goal of replenishing the $200k cash bucket in 5 years - he can accomplish this by achieving a 5% return!

He can accomplish this with VTI or a basket of stocks/funds - the VTI has averaged better than 17% over the last 5 years; and, the 5-year time span will see him through most volatility that may occur.

As far as timing of entry, I would consider investing in $200k increments each of the next four times the market either dips by 5%+ or levels off for a period of a week-or-more.
Last edited by radR investing on Sat May 08, 2021 7:35 am, edited 2 times in total.
randybobandy
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Re: Tips to convince my Dad about Index Funds?

Post by randybobandy »

You have provided advice and your dad has identified his preferred course of action. I would call it good.

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Re: Tips to convince my Dad about Index Funds?

Post by abuss368 »

hudat2021 wrote: Fri May 07, 2021 11:46 pm Hi there,

First time poster. I am trying to convince my Dad (retired) to invest majority of his portfolio in Index Funds. I got him to test the waters by investing approx $60K with Vanguard Advisor Services. They set him up with a 60/40 portfolio of Stocks (VTI) & Bonds (BND).

Instead of investing more with them, he keeps wanting to go back to working with a Portfolio Advisor who would charge him 1.1 to 1.4% of his assets with a target return of 4.5% (his friends are doing this). The Advisor stated that their portfolio of 20-30 stocks would be less volatile than an index fund and would continue to provide dividends during a correction and he wouldn't be forced to sell holdings. I don't completely buy that as VTI/VTSAX is more diversified. I guess the dividends would continue to flow if the companies had records like the Dividend Aristocrats but its not guaranteed.

I have shared this blog along with the Guide to Bogleheads investing . He is starting to see this is the better way but also fears the market dropping in the future or rising interest rates would hurt a bond ETF. He thinks having an advisor would protect him from the worse case scenario.

My recommendation was for him is to hold 3-5 years of living expenses in cash and invest the rest in VTI/VTSAX as he is concerned about a drop or rising interest rates (no bond fund). He does not have a pension or SS. All cash for now so we need to invest soon.

Any tips for convincing him or ideas for the portfolio (~$1.0M cash, needs approx $35K-$40K to live off)? I was thinking he could Dollar Cost Average into VTSAX as well but I don't know if that is a good strategy for someone who is retired (67).

Thanks in advance to anyone who responds.
Your HEART is in the right place. Unfortunately it can get emotional with family and friends. I have family using Vanguard PAS and could not be happier. Interesting that Vanguard placed him in the Jack Bogle Two Fund Portfolio of Total Stock and Total Bond.

Honestly, I would consider adding everything into the Jack Bogle Two Fund Portfolio as they setup. Keep investing simple! You can read more about the many benefits here:

viewtopic.php?f=10&t=188176

Tony
John C. Bogle: “Simplicity is the master key to financial success."
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nisiprius
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Re: Tips to convince my Dad about Index Funds?

Post by nisiprius »

radR investing wrote: Sat May 08, 2021 7:21 am...Are you familiar with the concept of Upside Capture/Downside Capture? This metric identifies a stock's (or portfolio's) movement in comparison to an index. For example, Target's Upside/Downside Capture is 86/19 over the last 5 years, meaning it gains 86% of the SPY index when the market is up but only drops 19% of the index when the market drops...
In 2007-2009, both the S&P 500 index, the SPY ETF which tracks it, and VTI, all dropped -54%.

If the statement that Target "only drops 19% of that index when the market drops," were reliable, then it should have dropped 19% of -54% = -10%. But in reality, it dropped -59%. It dropped farther than the S&P 500 index. It actually was worse, not better, than an index fund.

Source

Image

But your statistic was only for the last five years, so let's look at that.

In 2020, from 1/1/2020 to their low on 3/23/2020, SPY and the S&P 500 index dropped -30% and VTI dropped -32%.

If the statement that Target "only drops 19% of that index when the market drops," were reliable, then it should have dropped 19% of -30% = -6%.

But in reality, from 1/1/2020 to its low on 4/23/2020, Target dropped, not -6%, but -27%. Not quite as far as the index funds, but almost... and four times worse than it should have been, according to your statement.

Source

Image

So you say Target "only drops 19% of that index when the market drops," but that wasn't even close to true in 2008-2009, and it wasn't even close to true in 2020. Target does not do what you say it does.
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JohnDindex
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Re: Tips to convince my Dad about Index Funds?

Post by JohnDindex »

I wouldn't worry about it. Based on those numbers I think he will be fine. I personally know a bunch of retired people who pay advisors 1% ish and have a portfolio more complex than needed, and including the 30-40 dividend stocks. They are all doing fine. The reality is that this does work, even though it is viewed like a sin on this forum, it works. My grandmother is 92 and has a portfolio of 40 dividend stocks and 10% cash. She honestly would have already ran out of money had she not had this exposure, would an index fund have worked? sure. The biggest difference in having an advisor is likely the final wealth may be lower. If you have ever seen a 1% CFP presentation they usually show the assets being spent down. I am confident most people on this forum will have a portfolio much larger than needed, live on a small percentage, adjust during bear markets and most likely die with large 7 figure portfolios bigger than they started with.

I recently fired both of my clients that I had as a financial adivosr, both were family members. I found that some people can do math, but they cannot do they math it takes to understand a dividend from southern company stock versus VTI and selling 1-2%. It's totally psychological. I have also found that these 2 family members are now following the advice of their advisors, backdoor roths, conversions, saving more, budgeting etc. Even though they are paying .9-1.2 % (1 has a large port, one very small) they will do better long term because they are doing the right things.

Some people just can't handle the idea that all of their money is in 3-4 funds, and that is Ok, not correct but OK.
maj
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Re: Tips to convince my Dad about Index Funds?

Post by maj »

If you want to show him the difference between conservative managed and indexed funds, just create at Vanguard the 10 year comparison between the admiral classes of Wellington and Balanced Index.

In each category Balanced outperformed Wellington by a small margin--with less burden of paying capital gains taxes, and far less worry about management error.

This is not an investment suggestion for your dad.

peace
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Re: Tips to convince my Dad about Index Funds?

Post by donaldfair71 »

nisiprius wrote: Sat May 08, 2021 7:51 am
radR investing wrote: Sat May 08, 2021 7:21 am...Are you familiar with the concept of Upside Capture/Downside Capture? This metric identifies a stock's (or portfolio's) movement in comparison to an index. For example, Target's Upside/Downside Capture is 86/19 over the last 5 years, meaning it gains 86% of the SPY index when the market is up but only drops 19% of the index when the market drops...
In 2007-2009, both the S&P 500 index, the SPY ETF which tracks it, and VTI, all dropped -54%.

If the statement that Target "only drops 19% of that index when the market drops," were reliable, then it should have dropped 19% of -54% = -10%. But in reality, it dropped -59%. It dropped farther than the S&P 500 index. It actually was worse, not better, than an index fund.

Source

Image

But your statistic was only for the last five years, so let's look at that.

In 2020, from 1/1/2020 to their low on 3/23/2020, SPY and the S&P 500 index dropped -30% and VTI dropped -32%.

If the statement that Target "only drops 19% of that index when the market drops," were reliable, then it should have dropped 19% of -30% = -6%.

But in reality, from 1/1/2020 to its low on 4/23/2020, Target dropped, not -6%, but -27%. Not quite as far as the index funds, but almost... and four times worse than it should have been, according to your statement.

Source

Image

So you say Target "only drops 19% of that index when the market drops," but that wasn't even close to true in 2008-2009, and it wasn't even close to true in 2020. Target does not do what you say it does.
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Enolacs
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Re: Tips to convince my Dad about Index Funds?

Post by Enolacs »

ABCs of advice

A: Never give ADVICE
B: Unless its part of a BUSINESS
C: For which you receive COMPENSATION
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Re: Tips to convince my Dad about Index Funds?

Post by nisiprius »

hudat2021, you made your case to your dad. It sounds as if you not only introduced him to the concept, but even got him to try it out.

At this point, I think you should just relax and say it's his life and his money. It's as if he were buying a new car at a dealer he's used for years, and you think he's paying too much and that the dealer is selling him a car you don't like. At some point, friends do let friends buy red Miatas.

There are basically two areas in which you might feel a responsibility to do more. The first would be if you actually believed your father was not in good cognitive shape--but you haven't even hinted at this.

The second thing you might do is to verify that this a real advisor, registered with the SEC, and not a fake. If you know the name of the advisor and the advisor's firm, you might check out his ADV form. This is sort of like making sure his bank is FDIC-insured or checking that his doctor is really licensed with the state medical board. It's almost certain that everything is fine, and it is slightly insulting to your father and to his advisor even to make the check, so I probably wouldn't say anything about it unless you actually see a problem. Like lots of things in life, everyone should do this before signing with an advisor firm but most people don't. You check an ADV form here:

https://adviserinfo.sec.gov

I checked the only name of the only advisor I know, and saw what I expected... guy at a bank who once tried to convince me to pay sales loads for American funds... registered, years in the industry, passed a bunch of exams, and, most important, no "disclosures."
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Re: Tips to convince my Dad about Index Funds?

Post by J295 »

Has your dad asked you to give him advice?
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Re: Tips to convince my Dad about Index Funds?

Post by RadAudit »

hudat2021 wrote: Fri May 07, 2021 11:46 pm I am trying to convince my Dad (retired) to invest majority of his portfolio in Index Funds.
You tried. He tried. Now back off. You're fighting an uphill battle against a number of obstacles. His friends aren't on board with your approach. And then, there is the "powdered butt syndrome" - Fathers, who powdered your butt when you were a baby, don't usually take financial advice from their children.

On the upside, it looks as if you got to the BH philosophy fairly early in your career. I didn't get to that philosophy until about 20 years after I got out of grad school.
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Re: Tips to convince my Dad about Index Funds?

Post by 7eight9 »

Many conservative investors like your father, myself included, favor multi-year guaranteed annuities (MYGAs) these days on the fixed income side of their portfolio. They pay much better than bank accounts, money market funds, CD and other low-risk fixed income investments.

There was a good thread recently titled Purchasing MYGAs - Blueprint Income vs. Gainbridge vs. Canvas that might be worth a look.
viewtopic.php?f=1&t=334589

I've purchased from Blueprint Income and Canvas.
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Re: Tips to convince my Dad about Index Funds?

Post by JoMoney »

J295 wrote: Sat May 08, 2021 8:39 am Has your dad asked you to give him advice?
This is a very important question.

hudat2021 wrote: Fri May 07, 2021 11:46 pm ... The Advisor stated that their portfolio of 20-30 stocks would be less volatile than an index fund and would continue to provide dividends during a correction and he wouldn't be forced to sell holdings. I don't completely buy that as VTI/VTSAX is more diversified. I guess the dividends would continue to flow if the companies had records like the Dividend Aristocrats but its not guaranteed...
You didn't share what the portfolio was, but they could be correct with what you said they said. What they're leaving out is that their 1%+ in fees will most likely eat into his returns (considerably over time), and the difference in the volatility will likely be negligible unless he took the time to measure it.
... but, larger cap stocks do tend to be less volatile than smaller cap stocks or even "more diversified" portfolios including smaller cap stocks. The Dow 30 tends to be less volatile (lower standard deviation) than "Total Stock Market". Dividend paying stocks tend to be larger stocks.
Companies that pay regular dividends are usually reluctant to stop or decrease the dividend as it's perceived as a negative signal about the company and can further degrade the companies ability to finance its operations in rough times, it does happen when things get bad, but dividends tend to be a lot stickier than stock prices. That's not a 'free lunch' though, dividends come out of the total return for the portfolio.
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Re: Tips to convince my Dad about Index Funds?

Post by RickBoglehead »

hudat2021 wrote: Fri May 07, 2021 11:46 pm Instead of investing more with them, he keeps wanting to go back to working with a Portfolio Advisor who would charge him 1.1 to 1.4% of his assets with a target return of 4.5% (his friends are doing this).
So he wants to pay someone 1.1 to 1.4% of his assets, every year, to get him 4.5% (target). Will they charge less when they get less?

A portfolio 60/40 will beat 4.5%.

Given that PAS put him in two funds, he could drop them, save the 0.3%, put everything in those two funds, go 40/60, and beat 4.5%.

You can lead a horse to water, but...
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Re: Tips to convince my Dad about Index Funds?

Post by dbr »

hudat2021 wrote: Fri May 07, 2021 11:46 pm Hi there,

First time poster. I am trying to convince my Dad (retired) to invest majority of his portfolio in Index Funds. I got him to test the waters by investing approx $60K with Vanguard Advisor Services. They set him up with a 60/40 portfolio of Stocks (VTI) & Bonds (BND).

That sort of experiment does not usually prove anything other than demonstrate that it can be done.

Instead of investing more with them, he keeps wanting to go back to working with a Portfolio Advisor who would charge him 1.1 to 1.4% of his assets with a target return of 4.5% (his friends are doing this).

1. It is unfortunate if a target return is taken as a promise. Short of having him ask the advisor what he is doing to ensure that target is actually obtained I don't know what you can say. I don't know if it would help to point out that all investment portfolios have an expected return that can behave as a target. Otherwise what is happening here is a fundamental lack of understanding of what investments do. How educable is your father?

2. The single most powerful mechanism for recruiting customers to an advisor is social confirmation. You are one against many.


The Advisor stated that their portfolio of 20-30 stocks would be less volatile than an index fund and would continue to provide dividends during a correction and he wouldn't be forced to sell holdings. I don't completely buy that as VTI/VTSAX is more diversified. I guess the dividends would continue to flow if the companies had records like the Dividend Aristocrats but its not guaranteed.

1. That is baloney. The advisor needs to supply some data to show what the expected volatility is. You could show your father some actual data for his portfolio, for example from Portfolio Visualizer. Have him look at the max drawdown and the standard deviation of annual returns and compare to VTI. If concepts like standard deviation of annual returns aren't comfortable it becomes difficult to educate a person. That number is the definition of volatility in investing.

2. The idea about dividends is baloney. It is sad to see that misconception sold by a professional or your father to not understand. You are correct that total market is more diversified. I guess you could ask your father how he would feel if one or two of those thirty stocks had been GM or GE.

3. None of this means that his stock portfolio is a mistake. It just means he doesn't understand what he has. On that note the one single thing that is clearly harmful to what he needs is paying the fee, but see more discussion below.


I have shared this blog along with the Guide to Bogleheads investing . He is starting to see this is the better way but also fears the market dropping in the future or rising interest rates would hurt a bond ETF. He thinks having an advisor would protect him from the worse case scenario.

It would be interesting to see what the advisor would say he plans to do if interest rates go up. But are you saying the entire advisor portfolio is in stocks? In that case the question for the advisor would be what the plan is when the next large stock market decline happens.

My recommendation was for him is to hold 3-5 years of living expenses in cash and invest the rest in VTI/VTSAX as he is concerned about a drop or rising interest rates (no bond fund). He does not have a pension or SS. All cash for now so we need to invest soon.



1. There is so far for you to go for him understanding an appropriate asset allocation I am not sure where to start. In general a good choice for a person entirely dependent on invested assets at 3.5%-4% withdrawal rate is probably 60/40. 3-5 years in cash has no rationale as such. The great mystery is how a person with a high stock allocation can be afraid of bonds losing money and not be afraid of stocks losing money. This is so mind boggling one does not know what to say.

2. Note that once you get withdrawal rates down to 3%-3.5% historically all asset allocations have almost no chance of failing and high stock allocations have a good chance of leaving a person very wealthy at death. This really comes back to what he would do if stocks crash. An answer to that which argues for staying with the advisor is that the advisor would do nothing, which is the correct answer.[

3. However, there is an issue here that a sustainable withdrawal rate includes the cost paid. If he is losing 1% of his portfolio per year in fees then that 3.5% withdrawal rate needs to be reduced to 2.5%. Convincing your father that this is an issue would require understanding and accepting the whole analysis behind withdrawal rates.


Any tips for convincing him or ideas for the portfolio (~$1.0M cash, needs approx $35K-$40K to live off)? I was thinking he could Dollar Cost Average into VTSAX as well but I don't know if that is a good strategy for someone who is retired (67).

Dollar cost averaging is always pointless. I have no tips for what amounts to a relationship issue regarding why he should rely on you for financial advice and how you would plan to cope if things don't go well in his eyes. The only "fix" if you are adamant that a fix is needed is for your father to be willing and able to obtain systematic education about investing.

Thanks in advance to anyone who responds.
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Re: Tips to convince my Dad about Index Funds?

Post by Wiggums »

When you have confidence in your investments, it’s very understandable why they won’t switch. I think that’s ok.
NotWhoYouThink
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Re: Tips to convince my Dad about Index Funds?

Post by NotWhoYouThink »

Unless the advisor is Bernie Madoff or Allen Stanford, your dad will probably be fine. He'll pay more than a confident investor with good judgement and impulse control would pay, but that doesn't mean he'll pay more than he needs to pay.

The only risk I would check is to see who is the custodian for the funds. If it is Schwab or Fidelity or some large company you've heard of, your dad will likely be fine. If it is TraderBill's PrivateBank, you may have met the next Madoff or Stanford.
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Re: Tips to convince my Dad about Index Funds?

Post by delamer »

The worst part of this may be that your father thinks that the advisor offers him some kind of protection when the stock market is down.

Markets go down, markets go up. If you are investing in stocks and bonds —assuming a reasonably diversified portfolio — then your allocation is what is going to determine how big a hit you take during market downturns.

An index-based portfolio with a 40/60 allocation offers more protection than a 60/40 portfolio based on a collection of 20 stocks that sone advisor has divined.

Your father should review and understand this: https://investor.vanguard.com/investing ... allocation
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Re: Tips to convince my Dad about Index Funds?

Post by tibbitts »

hudat2021 wrote: Fri May 07, 2021 11:46 pm I got him to test the waters by investing approx $60K with Vanguard Advisor Services. They set him up with a 60/40 portfolio of Stocks (VTI) & Bonds (BND).

Instead of investing more with them, he keeps wanting to go back to working with a Portfolio Advisor who would charge him 1.1 to 1.4% of his assets with a target return of 4.5% (his friends are doing this). The Advisor stated that their portfolio of 20-30 stocks would be less volatile than an index fund and would continue to provide dividends during a correction and he wouldn't be forced to sell holdings. I don't completely buy that as VTI/VTSAX is more diversified. I guess the dividends would continue to flow if the companies had records like the Dividend Aristocrats but its not guaranteed.

I have shared this blog along with the Guide to Bogleheads investing . He is starting to see this is the better way but also fears the market dropping in the future or rising interest rates would hurt a bond ETF. He thinks having an advisor would protect him from the worse case scenario.

My recommendation was for him is to hold 3-5 years of living expenses in cash and invest the rest in VTI/VTSAX as he is concerned about a drop or rising interest rates (no bond fund). He does not have a pension or SS. All cash for now so we need to invest soon.

Any tips for convincing him or ideas for the portfolio (~$1.0M cash, needs approx $35K-$40K to live off)? I was thinking he could Dollar Cost Average into VTSAX as well but I don't know if that is a good strategy for someone who is retired (67).

Thanks in advance to anyone who responds.
I'm surprised and a little disappointed to see PAS is pushing a no-international portfolio.

It's also confusing why he feels some other adviser would help during a downturn but PAS wouldn't. You or I might not think either would help in the sense your father does, but that's not the point. What is it about Vanguard advisers that he feels is inadequate... or just different?

Your recommendation for 3-5 years in cash and the rest in Total Stock is... radical. If you recommended that to me I probably wouldn't take anything else you said seriously.

Regarding "we need to invest": there's no "we" here.
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Re: Tips to convince my Dad about Index Funds?

Post by willthrill81 »

You are fighting an uphill battle due to the 'I wiped your butt, so you couldn't possibly know more than I do about this' syndrome.

I too have fought this battle and decided that it couldn't be won.
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Re: Tips to convince my Dad about Index Funds?

Post by Taylor Larimore »

hudat2021 wrote: Fri May 07, 2021 11:46 pm Hi there,

First time poster. I am trying to convince my Dad (retired) to invest majority of his portfolio in Index Funds. I got him to test the waters by investing approx $60K with Vanguard Advisor Services. They set him up with a 60/40 portfolio of Stocks (VTI) & Bonds (BND).

Instead of investing more with them, he keeps wanting to go back to working with a Portfolio Advisor who would charge him 1.1 to 1.4% of his assets with a target return of 4.5% (his friends are doing this). The Advisor stated that their portfolio of 20-30 stocks would be less volatile than an index fund and would continue to provide dividends during a correction and he wouldn't be forced to sell holdings. I don't completely buy that as VTI/VTSAX is more diversified. I guess the dividends would continue to flow if the companies had records like the Dividend Aristocrats but its not guaranteed.

I have shared this blog along with the Guide to Bogleheads investing . He is starting to see this is the better way but also fears the market dropping in the future or rising interest rates would hurt a bond ETF. He thinks having an advisor would protect him from the worse case scenario.

My recommendation was for him is to hold 3-5 years of living expenses in cash and invest the rest in VTI/VTSAX as he is concerned about a drop or rising interest rates (no bond fund). He does not have a pension or SS. All cash for now so we need to invest soon.

Any tips for convincing him or ideas for the portfolio (~$1.0M cash, needs approx $35K-$40K to live off)? I was thinking he could Dollar Cost Average into VTSAX as well but I don't know if that is a good strategy for someone who is retired (67).

Thanks in advance to anyone who responds.
hudat2021:

Welcome to the Bogleheads Forum!

When someone I know wants financial advice, I give them John Bogle's "Little Book of Common Sense Investing."

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: “It is the power of words and books—explaining and dramatizing great ideas and articulating high ideals—that is the greatest weapon in the missionary’s arsenal.”
"Simplicity is the master key to financial success." -- Jack Bogle
anil686
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Re: Tips to convince my Dad about Index Funds?

Post by anil686 »

JohnDindex wrote: Sat May 08, 2021 7:53 am I wouldn't worry about it. Based on those numbers I think he will be fine. I personally know a bunch of retired people who pay advisors 1% ish and have a portfolio more complex than needed, and including the 30-40 dividend stocks. They are all doing fine. The reality is that this does work, even though it is viewed like a sin on this forum, it works. My grandmother is 92 and has a portfolio of 40 dividend stocks and 10% cash. She honestly would have already ran out of money had she not had this exposure, would an index fund have worked? sure. The biggest difference in having an advisor is likely the final wealth may be lower. If you have ever seen a 1% CFP presentation they usually show the assets being spent down. I am confident most people on this forum will have a portfolio much larger than needed, live on a small percentage, adjust during bear markets and most likely die with large 7 figure portfolios bigger than they started with.

I recently fired both of my clients that I had as a financial adivosr, both were family members. I found that some people can do math, but they cannot do they math it takes to understand a dividend from southern company stock versus VTI and selling 1-2%. It's totally psychological. I have also found that these 2 family members are now following the advice of their advisors, backdoor roths, conversions, saving more, budgeting etc. Even though they are paying .9-1.2 % (1 has a large port, one very small) they will do better long term because they are doing the right things.

Some people just can't handle the idea that all of their money is in 3-4 funds, and that is Ok, not correct but OK.
This x 1000

I have said so many times that the posters on this forum (even the new ones who are going to learn about investing) are farther ahead than 95% + of all investors. Many people do not know about SWR, understand fees and do just fine. The way I liken it is to school - you can have all the great study habits, work really hard, and get 100s in your classes, or you can not work that hard, study a little, go to lectures and get a 70%. You both still graduate, one just has more opportunities and options at the end than the other. But both are - ironically - satisifed and not satisfied - because the 70% never had any idea those opportunities existed that the 100% student had and is satisfied with their options. The 100% student is never satisfied because they are always trying to achieve more.

Back to the OP and the father - family is family. Great job trying to show him various alternatives but my experience is that you risk your relationship over this especially if there is a market downturn and he can’t handle it or if your dad feels ostracized from his friend group because he no longer can commiserate over individual stocks or his advisor. Many people do okay with an advisor - it is not ideal from a terminal wealth perspective, but if he is happy with this - I think maybe you should let it go.... JMO though....
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Re: Tips to convince my Dad about Index Funds?

Post by averagedude »

Although your strategy is more sound than your dad's, their is a chance that the outcome of your strategy will have lower returns. Your dad has a concentrated stock portfolio and their is a chance that his strategy will outperform broad based index funds over his assumed shorter time horizon. He won't be happy with your advice when he see's his buddies having higher stock market returns than him.
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Re: Tips to convince my Dad about Index Funds?

Post by abuss368 »

Taylor Larimore wrote: Sat May 08, 2021 10:04 am hudat2021:

Welcome to the Bogleheads Forum!

When someone I know wants financial advice, I give them John Bogle's "Little Book of Common Sense Investing."

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: “It is the power of words and books—explaining and dramatizing great ideas and articulating high ideals—that is the greatest weapon in the missionary’s arsenal.”
I could not agree more. I have done this as well. Any family and friend will have a much better understanding and learn that Jack Bogle’s recommendation of Total Stock and Total Bond is a winning strategy.

Learn from the best!
Tony
John C. Bogle: “Simplicity is the master key to financial success."
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Re: Tips to convince my Dad about Index Funds?

Post by abuss368 »

hudat2021 wrote: Fri May 07, 2021 11:46 pm Hi there,

First time poster. I am trying to convince my Dad (retired) to invest majority of his portfolio in Index Funds. I got him to test the waters by investing approx $60K with Vanguard Advisor Services. They set him up with a 60/40 portfolio of Stocks (VTI) & Bonds (BND).

Instead of investing more with them, he keeps wanting to go back to working with a Portfolio Advisor who would charge him 1.1 to 1.4% of his assets with a target return of 4.5% (his friends are doing this). The Advisor stated that their portfolio of 20-30 stocks would be less volatile than an index fund and would continue to provide dividends during a correction and he wouldn't be forced to sell holdings. I don't completely buy that as VTI/VTSAX is more diversified. I guess the dividends would continue to flow if the companies had records like the Dividend Aristocrats but its not guaranteed.

I have shared this blog along with the Guide to Bogleheads investing . He is starting to see this is the better way but also fears the market dropping in the future or rising interest rates would hurt a bond ETF. He thinks having an advisor would protect him from the worse case scenario.

My recommendation was for him is to hold 3-5 years of living expenses in cash and invest the rest in VTI/VTSAX as he is concerned about a drop or rising interest rates (no bond fund). He does not have a pension or SS. All cash for now so we need to invest soon.

Any tips for convincing him or ideas for the portfolio (~$1.0M cash, needs approx $35K-$40K to live off)? I was thinking he could Dollar Cost Average into VTSAX as well but I don't know if that is a good strategy for someone who is retired (67).

Thanks in advance to anyone who responds.
Dividends are important to a retiree! Jack Bogle often discussed “income risk” and would tell a story about walking to your mailbox, opening it, and getting your dividend checks. He would further say retirees need dividends to pay the bills.

Tony
John C. Bogle: “Simplicity is the master key to financial success."
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hudat2021
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Re: Tips to convince my Dad about Index Funds?

Post by hudat2021 »

HomeStretch wrote: Sat May 08, 2021 7:15 am Welcome to the forum!

Ultimately it’s your Dad’s decision on how to invest his money. You have done everything possible to show him how you think he should be investing. Maybe it’s time to let the subject drop.

Your suggestion to invest 3-5 years living expenses in cash with the balance in 100% equity (which is at least 80% in equities overall, initially) seems too aggressive in my opinion for a retiree that is withdrawing 3.5-4% from his portfolio at age 67.
Thank you and yes ultimately it is his decision. 80% equities is too aggressive but I was comparing it to the 100% equities portfolio of 20-30 stocks recommended by the advisor.
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hudat2021
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Re: Tips to convince my Dad about Index Funds?

Post by hudat2021 »

radR investing wrote: Sat May 08, 2021 7:21 am Here are a couple of things to consider:

Keeping $200k in cash to cover living expenses for the next 5 years is a good plan.

It is absolutely possible to build a stock portfolio that will be less volatile than VTI. Are you familiar with the concept of Upside Capture/Downside Capture? This metric identifies a stock's (or portfolio's) movement in comparison to an index. For example, Target's Upside/Downside Capture is 86/19 over the last 5 years, meaning it gains 86% of the SPY index when the market is up but only drops 19% of the index when the market drops. Many financial advisory firms target an 80/60 Upside/Downside Capture as this fits conservative investors.

In comparison, the VTI has an Upside/Downside Capture of 102/102 (as expected, it should be very close to 100/100).

Some additional interesting statistics:
  • over a recent 5-year period, only 22 companies contributed 50% of the overall gains of the S&P500, and less than 100 companies accounted for 75% of the total gains. In the two years ending June 2020, 6 companies accounted for 56% of the total returns of the S&P500.
  • over a 30-year period, 40% of the Russell 3000 lost at least 70% of their value - and NEVER RECOVERED. Effectively, all of the index's overall returns came from 7% of the companies
I'm not making any recommendations, but I wanted to share a different perspective so you don't think what your father wants to do is totally ruining his financial status. I also don't think he needs to use an advisor to accomplish this. Because he will keep $200k in cash, in my world he could invest the remaining $800k with a goal of replenishing the $200k cash bucket in 5 years - he can accomplish this by achieving a 5% return!

He can accomplish this with VTI or a basket of stocks/funds - the VTI has averaged better than 17% over the last 5 years; and, the 5-year time span will see him through most volatility that may occur.

As far as timing of entry, I would consider investing in $200k increments each of the next four times the market either dips by 5%+ or levels off for a period of a week-or-more.
Interesting info. I haven't heard of upside/downside capture before. Thank you.
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hudat2021
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Re: Tips to convince my Dad about Index Funds?

Post by hudat2021 »

abuss368 wrote: Sat May 08, 2021 7:43 am
hudat2021 wrote: Fri May 07, 2021 11:46 pm Hi there,

First time poster. I am trying to convince my Dad (retired) to invest majority of his portfolio in Index Funds. I got him to test the waters by investing approx $60K with Vanguard Advisor Services. They set him up with a 60/40 portfolio of Stocks (VTI) & Bonds (BND).

Instead of investing more with them, he keeps wanting to go back to working with a Portfolio Advisor who would charge him 1.1 to 1.4% of his assets with a target return of 4.5% (his friends are doing this). The Advisor stated that their portfolio of 20-30 stocks would be less volatile than an index fund and would continue to provide dividends during a correction and he wouldn't be forced to sell holdings. I don't completely buy that as VTI/VTSAX is more diversified. I guess the dividends would continue to flow if the companies had records like the Dividend Aristocrats but its not guaranteed.

I have shared this blog along with the Guide to Bogleheads investing . He is starting to see this is the better way but also fears the market dropping in the future or rising interest rates would hurt a bond ETF. He thinks having an advisor would protect him from the worse case scenario.

My recommendation was for him is to hold 3-5 years of living expenses in cash and invest the rest in VTI/VTSAX as he is concerned about a drop or rising interest rates (no bond fund). He does not have a pension or SS. All cash for now so we need to invest soon.

Any tips for convincing him or ideas for the portfolio (~$1.0M cash, needs approx $35K-$40K to live off)? I was thinking he could Dollar Cost Average into VTSAX as well but I don't know if that is a good strategy for someone who is retired (67).

Thanks in advance to anyone who responds.
Your HEART is in the right place. Unfortunately it can get emotional with family and friends. I have family using Vanguard PAS and could not be happier. Interesting that Vanguard placed him in the Jack Bogle Two Fund Portfolio of Total Stock and Total Bond.

Honestly, I would consider adding everything into the Jack Bogle Two Fund Portfolio as they setup. Keep investing simple! You can read more about the many benefits here:

viewtopic.php?f=10&t=188176

Tony
Thank you. Will check out the thread.
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hudat2021
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Re: Tips to convince my Dad about Index Funds?

Post by hudat2021 »

nisiprius wrote: Sat May 08, 2021 7:51 am
radR investing wrote: Sat May 08, 2021 7:21 am...Are you familiar with the concept of Upside Capture/Downside Capture? This metric identifies a stock's (or portfolio's) movement in comparison to an index. For example, Target's Upside/Downside Capture is 86/19 over the last 5 years, meaning it gains 86% of the SPY index when the market is up but only drops 19% of the index when the market drops...
In 2007-2009, both the S&P 500 index, the SPY ETF which tracks it, and VTI, all dropped -54%.

If the statement that Target "only drops 19% of that index when the market drops," were reliable, then it should have dropped 19% of -54% = -10%. But in reality, it dropped -59%. It dropped farther than the S&P 500 index. It actually was worse, not better, than an index fund.

Source

Image

But your statistic was only for the last five years, so let's look at that.

In 2020, from 1/1/2020 to their low on 3/23/2020, SPY and the S&P 500 index dropped -30% and VTI dropped -32%.

If the statement that Target "only drops 19% of that index when the market drops," were reliable, then it should have dropped 19% of -30% = -6%.

But in reality, from 1/1/2020 to its low on 4/23/2020, Target dropped, not -6%, but -27%. Not quite as far as the index funds, but almost... and four times worse than it should have been, according to your statement.

Source

Image

So you say Target "only drops 19% of that index when the market drops," but that wasn't even close to true in 2008-2009, and it wasn't even close to true in 2020. Target does not do what you say it does.
Thanks for looking this up.
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hudat2021
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Re: Tips to convince my Dad about Index Funds?

Post by hudat2021 »

JohnDindex wrote: Sat May 08, 2021 7:53 am I wouldn't worry about it. Based on those numbers I think he will be fine. I personally know a bunch of retired people who pay advisors 1% ish and have a portfolio more complex than needed, and including the 30-40 dividend stocks. They are all doing fine. The reality is that this does work, even though it is viewed like a sin on this forum, it works. My grandmother is 92 and has a portfolio of 40 dividend stocks and 10% cash. She honestly would have already ran out of money had she not had this exposure, would an index fund have worked? sure. The biggest difference in having an advisor is likely the final wealth may be lower. If you have ever seen a 1% CFP presentation they usually show the assets being spent down. I am confident most people on this forum will have a portfolio much larger than needed, live on a small percentage, adjust during bear markets and most likely die with large 7 figure portfolios bigger than they started with.

I recently fired both of my clients that I had as a financial adivosr, both were family members. I found that some people can do math, but they cannot do they math it takes to understand a dividend from southern company stock versus VTI and selling 1-2%. It's totally psychological. I have also found that these 2 family members are now following the advice of their advisors, backdoor roths, conversions, saving more, budgeting etc. Even though they are paying .9-1.2 % (1 has a large port, one very small) they will do better long term because they are doing the right things.

Some people just can't handle the idea that all of their money is in 3-4 funds, and that is Ok, not correct but OK.
Agreed. At the end of the day, I am just trying to help him reach his goals. If paying 1% to an advisor helps him sleep better, that is the right choice for him.
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hudat2021
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Re: Tips to convince my Dad about Index Funds?

Post by hudat2021 »

Enolacs wrote: Sat May 08, 2021 8:22 am ABCs of advice

A: Never give ADVICE
B: Unless its part of a BUSINESS
C: For which you receive COMPENSATION
:D Yup. My advice is worth $0
tibbitts
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Re: Tips to convince my Dad about Index Funds?

Post by tibbitts »

hudat2021 wrote: Sat May 08, 2021 11:26 am
Enolacs wrote: Sat May 08, 2021 8:22 am ABCs of advice

A: Never give ADVICE
B: Unless its part of a BUSINESS
C: For which you receive COMPENSATION
:D Yup. My advice is worth $0
And, even if you consider it to be part of your job, don't give advice if giving it may prevent you from receiving future compensation.
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hudat2021
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Re: Tips to convince my Dad about Index Funds?

Post by hudat2021 »

nisiprius wrote: Sat May 08, 2021 8:25 am hudat2021, you made your case to your dad. It sounds as if you not only introduced him to the concept, but even got him to try it out.

At this point, I think you should just relax and say it's his life and his money. It's as if he were buying a new car at a dealer he's used for years, and you think he's paying too much and that the dealer is selling him a car you don't like. At some point, friends do let friends buy red Miatas.

There are basically two areas in which you might feel a responsibility to do more. The first would be if you actually believed your father was not in good cognitive shape--but you haven't even hinted at this.

The second thing you might do is to verify that this a real advisor, registered with the SEC, and not a fake. If you know the name of the advisor and the advisor's firm, you might check out his ADV form. This is sort of like making sure his bank is FDIC-insured or checking that his doctor is really licensed with the state medical board. It's almost certain that everything is fine, and it is slightly insulting to your father and to his advisor even to make the check, so I probably wouldn't say anything about it unless you actually see a problem. Like lots of things in life, everyone should do this before signing with an advisor firm but most people don't. You check an ADV form here:

https://adviserinfo.sec.gov

I checked the only name of the only advisor I know, and saw what I expected... guy at a bank who once tried to convince me to pay sales loads for American funds... registered, years in the industry, passed a bunch of exams, and, most important, no "disclosures."
He is in good cognitive shape. He's been burned before with complicated investments with high fees so this time I'm sharing what I do for my investments (index). Thanks for the link. I'll lookup the advisor. He stated he had signed a fiduciary duty to have the clients interests in mind and also suggested passive index funds as a strategy if we wanted to go that route but we got Vanguard for that!
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Re: Tips to convince my Dad about Index Funds?

Post by ruralavalon »

Welcome to the forum :) .

hudat2021 wrote: Fri May 07, 2021 11:46 pm Hi there,

First time poster. I am trying to convince my Dad (retired) to invest majority of his portfolio in Index Funds. I got him to test the waters by investing approx $60K with Vanguard Advisor Services. They set him up with a 60/40 portfolio of Stocks (VTI) & Bonds (BND).

Instead of investing more with them, he keeps wanting to go back to working with a Portfolio Advisor who would charge him 1.1 to 1.4% of his assets with a target return of 4.5% (his friends are doing this). The Advisor stated that their portfolio of 20-30 stocks would be less volatile than an index fund and would continue to provide dividends during a correction and he wouldn't be forced to sell holdings. I don't completely buy that as VTI/VTSAX is more diversified. I guess the dividends would continue to flow if the companies had records like the Dividend Aristocrats but its not guaranteed.

I have shared this blog along with the Guide to Bogleheads investing . He is starting to see this is the better way but also fears the market dropping in the future or rising interest rates would hurt a bond ETF. He thinks having an advisor would protect him from the worse case scenario.

My recommendation was for him is to hold 3-5 years of living expenses in cash and invest the rest in VTI/VTSAX as he is concerned about a drop or rising interest rates (no bond fund). He does not have a pension or SS. All cash for now so we need to invest soon.

Any tips for convincing him or ideas for the portfolio (~$1.0M cash, needs approx $35K-$40K to live off)? I was thinking he could Dollar Cost Average into VTSAX as well but I don't know if that is a good strategy for someone who is retired (67).

Thanks in advance to anyone who responds.
You did your best, a 60/40 portfolio of Stocks (VTI) & Bonds (BND) is a good idea, just encourage him to invest the rest in that portfolio.

You could simply:
(1) give him the SEC Mutual Fund Cost Calculator so he can see the huge impact of fees of 1.1 to 1.4%;
(2) show him the historical returns, and relative safety of a 60/40 fund like Vanguard Balanced Index Fund (VBIAX); and
(3) show him the historical returns and safety of the 60/40 portfolio of VTI/BND.

But it's his money so he gets to do what he wants.
Last edited by ruralavalon on Sat May 08, 2021 11:52 am, edited 2 times in total.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started
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hudat2021
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Re: Tips to convince my Dad about Index Funds?

Post by hudat2021 »

Taylor Larimore wrote: Sat May 08, 2021 10:04 am
hudat2021 wrote: Fri May 07, 2021 11:46 pm Hi there,

First time poster. I am trying to convince my Dad (retired) to invest majority of his portfolio in Index Funds. I got him to test the waters by investing approx $60K with Vanguard Advisor Services. They set him up with a 60/40 portfolio of Stocks (VTI) & Bonds (BND).

Instead of investing more with them, he keeps wanting to go back to working with a Portfolio Advisor who would charge him 1.1 to 1.4% of his assets with a target return of 4.5% (his friends are doing this). The Advisor stated that their portfolio of 20-30 stocks would be less volatile than an index fund and would continue to provide dividends during a correction and he wouldn't be forced to sell holdings. I don't completely buy that as VTI/VTSAX is more diversified. I guess the dividends would continue to flow if the companies had records like the Dividend Aristocrats but its not guaranteed.

I have shared this blog along with the Guide to Bogleheads investing . He is starting to see this is the better way but also fears the market dropping in the future or rising interest rates would hurt a bond ETF. He thinks having an advisor would protect him from the worse case scenario.

My recommendation was for him is to hold 3-5 years of living expenses in cash and invest the rest in VTI/VTSAX as he is concerned about a drop or rising interest rates (no bond fund). He does not have a pension or SS. All cash for now so we need to invest soon.

Any tips for convincing him or ideas for the portfolio (~$1.0M cash, needs approx $35K-$40K to live off)? I was thinking he could Dollar Cost Average into VTSAX as well but I don't know if that is a good strategy for someone who is retired (67).

Thanks in advance to anyone who responds.
hudat2021:

Welcome to the Bogleheads Forum!

When someone I know wants financial advice, I give them John Bogle's "Little Book of Common Sense Investing."

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: “It is the power of words and books—explaining and dramatizing great ideas and articulating high ideals—that is the greatest weapon in the missionary’s arsenal.”
Thank you! It's been a while I read it. I'll get him a copy for Fathers Day 😀
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Re: Tips to convince my Dad about Index Funds?

Post by tibbitts »

hudat2021 wrote: Sat May 08, 2021 11:35 am
nisiprius wrote: Sat May 08, 2021 8:25 am hudat2021, you made your case to your dad. It sounds as if you not only introduced him to the concept, but even got him to try it out.

At this point, I think you should just relax and say it's his life and his money. It's as if he were buying a new car at a dealer he's used for years, and you think he's paying too much and that the dealer is selling him a car you don't like. At some point, friends do let friends buy red Miatas.

There are basically two areas in which you might feel a responsibility to do more. The first would be if you actually believed your father was not in good cognitive shape--but you haven't even hinted at this.

The second thing you might do is to verify that this a real advisor, registered with the SEC, and not a fake. If you know the name of the advisor and the advisor's firm, you might check out his ADV form. This is sort of like making sure his bank is FDIC-insured or checking that his doctor is really licensed with the state medical board. It's almost certain that everything is fine, and it is slightly insulting to your father and to his advisor even to make the check, so I probably wouldn't say anything about it unless you actually see a problem. Like lots of things in life, everyone should do this before signing with an advisor firm but most people don't. You check an ADV form here:

https://adviserinfo.sec.gov

I checked the only name of the only advisor I know, and saw what I expected... guy at a bank who once tried to convince me to pay sales loads for American funds... registered, years in the industry, passed a bunch of exams, and, most important, no "disclosures."
He is in good cognitive shape. He's been burned before with complicated investments with high fees so this time I'm sharing what I do for my investments (index). Thanks for the link. I'll lookup the advisor. He stated he had signed a fiduciary duty to have the clients interests in mind and also suggested passive index funds as a strategy if we wanted to go that route but we got Vanguard for that!
I'm still not understanding what he perceives as the advantage of this other adviser vs. his existing Vanguard adviser.
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hudat2021
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Re: Tips to convince my Dad about Index Funds?

Post by hudat2021 »

tibbitts wrote: Sat May 08, 2021 9:54 am
hudat2021 wrote: Fri May 07, 2021 11:46 pm I got him to test the waters by investing approx $60K with Vanguard Advisor Services. They set him up with a 60/40 portfolio of Stocks (VTI) & Bonds (BND).

Instead of investing more with them, he keeps wanting to go back to working with a Portfolio Advisor who would charge him 1.1 to 1.4% of his assets with a target return of 4.5% (his friends are doing this). The Advisor stated that their portfolio of 20-30 stocks would be less volatile than an index fund and would continue to provide dividends during a correction and he wouldn't be forced to sell holdings. I don't completely buy that as VTI/VTSAX is more diversified. I guess the dividends would continue to flow if the companies had records like the Dividend Aristocrats but its not guaranteed.

I have shared this blog along with the Guide to Bogleheads investing . He is starting to see this is the better way but also fears the market dropping in the future or rising interest rates would hurt a bond ETF. He thinks having an advisor would protect him from the worse case scenario.

My recommendation was for him is to hold 3-5 years of living expenses in cash and invest the rest in VTI/VTSAX as he is concerned about a drop or rising interest rates (no bond fund). He does not have a pension or SS. All cash for now so we need to invest soon.

Any tips for convincing him or ideas for the portfolio (~$1.0M cash, needs approx $35K-$40K to live off)? I was thinking he could Dollar Cost Average into VTSAX as well but I don't know if that is a good strategy for someone who is retired (67).

Thanks in advance to anyone who responds.
I'm surprised and a little disappointed to see PAS is pushing a no-international portfolio.

It's also confusing why he feels some other adviser would help during a downturn but PAS wouldn't. You or I might not think either would help in the sense your father does, but that's not the point. What is it about Vanguard advisers that he feels is inadequate... or just different?

Your recommendation for 3-5 years in cash and the rest in Total Stock is... radical. If you recommended that to me I probably wouldn't take anything else you said seriously.

Regarding "we need to invest": there's no "we" here.
The "We" was a figure of speech. It's obviously his call. I can only help. My recommendation is actually to follow what PAS suggested. But his response is I am seeing the Bond funds go down and interest rates may be rising in the future, so why buy more Bond Funds right now? Why is Vanguard suggesting Bonds? I don't have a good answer to that so I suggested cash in a high interest savings account might be better? Although the yield on BND is better. Can someone explain the argument to continue buying bond funds as interest rates go up? I looked up BND and it states the fund has an average duration of 6.6 years to maturity so how will rising interest rates play into the coupons received while the price of the fund goes lower?

https://investor.vanguard.com/etf/profile/BND

Average effective maturity
8.5 years
Average duration
6.6 years
Yield to maturity
1.6%

Price and yield

Market price
as of 05/07/2021
$85.36
-$0.01 -0.01%
NAV
as of 05/07/2021
$85.33
-$0.01 -0.01%
30 day SEC yield
as of 05/06/2021
1.31%A
Topic Author
hudat2021
Posts: 15
Joined: Fri May 07, 2021 11:14 pm

Re: Tips to convince my Dad about Index Funds?

Post by hudat2021 »

anil686 wrote: Sat May 08, 2021 10:10 am
JohnDindex wrote: Sat May 08, 2021 7:53 am I wouldn't worry about it. Based on those numbers I think he will be fine. I personally know a bunch of retired people who pay advisors 1% ish and have a portfolio more complex than needed, and including the 30-40 dividend stocks. They are all doing fine. The reality is that this does work, even though it is viewed like a sin on this forum, it works. My grandmother is 92 and has a portfolio of 40 dividend stocks and 10% cash. She honestly would have already ran out of money had she not had this exposure, would an index fund have worked? sure. The biggest difference in having an advisor is likely the final wealth may be lower. If you have ever seen a 1% CFP presentation they usually show the assets being spent down. I am confident most people on this forum will have a portfolio much larger than needed, live on a small percentage, adjust during bear markets and most likely die with large 7 figure portfolios bigger than they started with.

I recently fired both of my clients that I had as a financial adivosr, both were family members. I found that some people can do math, but they cannot do they math it takes to understand a dividend from southern company stock versus VTI and selling 1-2%. It's totally psychological. I have also found that these 2 family members are now following the advice of their advisors, backdoor roths, conversions, saving more, budgeting etc. Even though they are paying .9-1.2 % (1 has a large port, one very small) they will do better long term because they are doing the right things.

Some people just can't handle the idea that all of their money is in 3-4 funds, and that is Ok, not correct but OK.
This x 1000

I have said so many times that the posters on this forum (even the new ones who are going to learn about investing) are farther ahead than 95% + of all investors. Many people do not know about SWR, understand fees and do just fine. The way I liken it is to school - you can have all the great study habits, work really hard, and get 100s in your classes, or you can not work that hard, study a little, go to lectures and get a 70%. You both still graduate, one just has more opportunities and options at the end than the other. But both are - ironically - satisifed and not satisfied - because the 70% never had any idea those opportunities existed that the 100% student had and is satisfied with their options. The 100% student is never satisfied because they are always trying to achieve more.

Back to the OP and the father - family is family. Great job trying to show him various alternatives but my experience is that you risk your relationship over this especially if there is a market downturn and he can’t handle it or if your dad feels ostracized from his friend group because he no longer can commiserate over individual stocks or his advisor. Many people do okay with an advisor - it is not ideal from a terminal wealth perspective, but if he is happy with this - I think maybe you should let it go.... JMO though....
Thank you. Yes, I agree on the relationship advice. Interestingly, now his friends are also starting to see the light on index funds. He told me they have been talking about it.
Topic Author
hudat2021
Posts: 15
Joined: Fri May 07, 2021 11:14 pm

Re: Tips to convince my Dad about Index Funds?

Post by hudat2021 »

tibbitts wrote: Sat May 08, 2021 11:48 am
hudat2021 wrote: Sat May 08, 2021 11:35 am
nisiprius wrote: Sat May 08, 2021 8:25 am hudat2021, you made your case to your dad. It sounds as if you not only introduced him to the concept, but even got him to try it out.

At this point, I think you should just relax and say it's his life and his money. It's as if he were buying a new car at a dealer he's used for years, and you think he's paying too much and that the dealer is selling him a car you don't like. At some point, friends do let friends buy red Miatas.

There are basically two areas in which you might feel a responsibility to do more. The first would be if you actually believed your father was not in good cognitive shape--but you haven't even hinted at this.

The second thing you might do is to verify that this a real advisor, registered with the SEC, and not a fake. If you know the name of the advisor and the advisor's firm, you might check out his ADV form. This is sort of like making sure his bank is FDIC-insured or checking that his doctor is really licensed with the state medical board. It's almost certain that everything is fine, and it is slightly insulting to your father and to his advisor even to make the check, so I probably wouldn't say anything about it unless you actually see a problem. Like lots of things in life, everyone should do this before signing with an advisor firm but most people don't. You check an ADV form here:

https://adviserinfo.sec.gov

I checked the only name of the only advisor I know, and saw what I expected... guy at a bank who once tried to convince me to pay sales loads for American funds... registered, years in the industry, passed a bunch of exams, and, most important, no "disclosures."
He is in good cognitive shape. He's been burned before with complicated investments with high fees so this time I'm sharing what I do for my investments (index). Thanks for the link. I'll lookup the advisor. He stated he had signed a fiduciary duty to have the clients interests in mind and also suggested passive index funds as a strategy if we wanted to go that route but we got Vanguard for that!
I'm still not understanding what he perceives as the advantage of this other adviser vs. his existing Vanguard adviser.
Mostly, the ability to talk whenever he wants to get some advice. I told him he can call Vanguard whenever he wants but because they don't deal with individual stocks, he probably finds that to be less exciting that chatting about Amazon or some other stock. :confused
Freefun
Posts: 805
Joined: Sun Jan 14, 2018 3:55 pm

Re: Tips to convince my Dad about Index Funds?

Post by Freefun »

If your dad may be more receptive to advice from others (like Buffett) ...

https://youtu.be/9BOefaL-RPI
Remember when you wanted what you currently have?
Topic Author
hudat2021
Posts: 15
Joined: Fri May 07, 2021 11:14 pm

Re: Tips to convince my Dad about Index Funds?

Post by hudat2021 »

Freefun wrote: Sat May 08, 2021 12:36 pm If your dad may be more receptive to advice from others (like Buffett) ...

https://youtu.be/9BOefaL-RPI
:thumbsup :thumbsup :thumbsup
Topic Author
hudat2021
Posts: 15
Joined: Fri May 07, 2021 11:14 pm

Re: Tips to convince my Dad about Index Funds?

Post by hudat2021 »

ruralavalon wrote: Sat May 08, 2021 11:40 am Welcome to the forum :) .

hudat2021 wrote: Fri May 07, 2021 11:46 pm Hi there,

First time poster. I am trying to convince my Dad (retired) to invest majority of his portfolio in Index Funds. I got him to test the waters by investing approx $60K with Vanguard Advisor Services. They set him up with a 60/40 portfolio of Stocks (VTI) & Bonds (BND).

Instead of investing more with them, he keeps wanting to go back to working with a Portfolio Advisor who would charge him 1.1 to 1.4% of his assets with a target return of 4.5% (his friends are doing this). The Advisor stated that their portfolio of 20-30 stocks would be less volatile than an index fund and would continue to provide dividends during a correction and he wouldn't be forced to sell holdings. I don't completely buy that as VTI/VTSAX is more diversified. I guess the dividends would continue to flow if the companies had records like the Dividend Aristocrats but its not guaranteed.

I have shared this blog along with the Guide to Bogleheads investing . He is starting to see this is the better way but also fears the market dropping in the future or rising interest rates would hurt a bond ETF. He thinks having an advisor would protect him from the worse case scenario.

My recommendation was for him is to hold 3-5 years of living expenses in cash and invest the rest in VTI/VTSAX as he is concerned about a drop or rising interest rates (no bond fund). He does not have a pension or SS. All cash for now so we need to invest soon.

Any tips for convincing him or ideas for the portfolio (~$1.0M cash, needs approx $35K-$40K to live off)? I was thinking he could Dollar Cost Average into VTSAX as well but I don't know if that is a good strategy for someone who is retired (67).

Thanks in advance to anyone who responds.
You did your best, a 60/40 portfolio of Stocks (VTI) & Bonds (BND) is a good idea, just encourage him to invest the rest in that portfolio.

You could simply:
(1) give him the SEC Mutual Fund Cost Calculator so he can see the huge impact of fees of 1.1 to 1.4%;
(2) show him the historical returns, and relative safety of a 60/40 fund like Vanguard Balanced Index Fund (VBIAX); and
(3) show him the historical returns and safety of the 60/40 portfolio of VTI/BND.

But it's his money so he gets to do what he wants.
Good stuff. Thank you.
dbr
Posts: 35928
Joined: Sun Mar 04, 2007 9:50 am

Re: Tips to convince my Dad about Index Funds?

Post by dbr »

Freefun wrote: Sat May 08, 2021 12:36 pm If your dad may be more receptive to advice from others (like Buffett) ...

https://youtu.be/9BOefaL-RPI
Wonderful. And here is the picture of the other side:

https://www.bing.com/videos/search?q=jo ... ORM%3DVDRE
NostraHistoria
Posts: 32
Joined: Sat May 01, 2021 2:53 pm

Re: Tips to convince my Dad about Index Funds?

Post by NostraHistoria »

Buy him a copy of The Little Book of Common Sense Investing. After I read it, I bought into index funds. That book is excellent and persuasive. It is a classic.
Dottie57
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Re: Tips to convince my Dad about Index Funds?

Post by Dottie57 »

100% equities is way too high for most retirees - even with 5 years expenses in cash. Some where between 40/60 to 60/40 is good for a retiree. I am assuming he doesn’t have enough that a long and. Deep. Drop in stocks would still allow him enough for expenses.
delamer
Posts: 11519
Joined: Tue Feb 08, 2011 6:13 pm

Re: Tips to convince my Dad about Index Funds?

Post by delamer »

Dottie57 wrote: Sat May 08, 2021 1:41 pm 100% equities is way too high for most retirees - even with 5 years expenses in cash. Some where between 40/60 to 60/40 is good for a retiree. I am assuming he doesn’t have enough that a long and. Deep. Drop in stocks would still allow him enough for expenses.
If you have 5 years in cash, by definition you aren’t 100% in equities.

With 25 years of expenses saved, you’d be 80% in equities and 20% cash. Although I think that 80% equities is still too high if you have 25 years of expenses saved.

A portfolio of 10 years in TIPS and 15 years in equities would give you 60% equities; 15 years in TIPS would give you 40% equities. Those would be a reasonable, sleep-well portfolios for many retirees.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. | | Alexandre Dumas, fils
User avatar
ApeAttack
Posts: 175
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Re: Tips to convince my Dad about Index Funds?

Post by ApeAttack »

Enolacs wrote: Sat May 08, 2021 8:22 am ABCs of advice

A: Never give ADVICE
B: Unless its part of a BUSINESS
C: For which you receive COMPENSATION
But aren't you giving advice now? :shock:
Just another lazy index investor who recently found out about I-Bonds (https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds.htm).
tibbitts
Posts: 13948
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Re: Tips to convince my Dad about Index Funds?

Post by tibbitts »

hudat2021 wrote: Sat May 08, 2021 12:10 pm
tibbitts wrote: Sat May 08, 2021 9:54 am
hudat2021 wrote: Fri May 07, 2021 11:46 pm I got him to test the waters by investing approx $60K with Vanguard Advisor Services. They set him up with a 60/40 portfolio of Stocks (VTI) & Bonds (BND).

Instead of investing more with them, he keeps wanting to go back to working with a Portfolio Advisor who would charge him 1.1 to 1.4% of his assets with a target return of 4.5% (his friends are doing this). The Advisor stated that their portfolio of 20-30 stocks would be less volatile than an index fund and would continue to provide dividends during a correction and he wouldn't be forced to sell holdings. I don't completely buy that as VTI/VTSAX is more diversified. I guess the dividends would continue to flow if the companies had records like the Dividend Aristocrats but its not guaranteed.

I have shared this blog along with the Guide to Bogleheads investing . He is starting to see this is the better way but also fears the market dropping in the future or rising interest rates would hurt a bond ETF. He thinks having an advisor would protect him from the worse case scenario.

My recommendation was for him is to hold 3-5 years of living expenses in cash and invest the rest in VTI/VTSAX as he is concerned about a drop or rising interest rates (no bond fund). He does not have a pension or SS. All cash for now so we need to invest soon.

Any tips for convincing him or ideas for the portfolio (~$1.0M cash, needs approx $35K-$40K to live off)? I was thinking he could Dollar Cost Average into VTSAX as well but I don't know if that is a good strategy for someone who is retired (67).

Thanks in advance to anyone who responds.
I'm surprised and a little disappointed to see PAS is pushing a no-international portfolio.

It's also confusing why he feels some other adviser would help during a downturn but PAS wouldn't. You or I might not think either would help in the sense your father does, but that's not the point. What is it about Vanguard advisers that he feels is inadequate... or just different?

Your recommendation for 3-5 years in cash and the rest in Total Stock is... radical. If you recommended that to me I probably wouldn't take anything else you said seriously.

Regarding "we need to invest": there's no "we" here.
The "We" was a figure of speech. It's obviously his call. I can only help. My recommendation is actually to follow what PAS suggested. But his response is I am seeing the Bond funds go down and interest rates may be rising in the future, so why buy more Bond Funds right now? Why is Vanguard suggesting Bonds? I don't have a good answer to that so I suggested cash in a high interest savings account might be better? Although the yield on BND is better. Can someone explain the argument to continue buying bond funds as interest rates go up? I looked up BND and it states the fund has an average duration of 6.6 years to maturity so how will rising interest rates play into the coupons received while the price of the fund goes lower?

https://investor.vanguard.com/etf/profile/BND

Average effective maturity
8.5 years
Average duration
6.6 years
Yield to maturity
1.6%

Price and yield

Market price
as of 05/07/2021
$85.36
-$0.01 -0.01%
NAV
as of 05/07/2021
$85.33
-$0.01 -0.01%
30 day SEC yield
as of 05/06/2021
1.31%A
I would be surprised if this other unnamed advisor didn't also recommend bonds, even if an assortment of dozens of individual bonds. Really "bonds" are just fixed income and while PAS probably limits itself to Vanguard funds as you mention.

The last time CDs were paying 7% I only bought 18mo CDs because it was obvious to me that rates were going up. 18mo at 7% just seemed much more prudent than 36mo or more at 8%.
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