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Subject:  Re: Roth IRA Date:  6/16/2005  1:06 PM
Author:  Hawkwin Number:  46525 of 78299

(I am not a fan of parsing every sentence made by a person; and that is one reason why I don't tend to quote other people's specific replies -- but since your reply suggests I was talking to you directly, I will do so in this one case.)

<<People with little experience typically don't perform their own surgery.

Which is why we're not advising them to jump into stock picking. Buying an index fund is more like getting exercise and eating healthy -- it's something you can understand and is not too complicated, and gives decent results over the long-term.>>

How you define long term and how someone else defines long term may be different. Your tolerance to volalitiy may be much higher than someone else with the same timeline. Folks that invested in the S&P Index five years ago can and often are still negative. I can't see the correlation between exercising and eating healthy for five years and being worse off to show for it.

<<When making significant retirement decisions (and that lack a moderate amount of investment experience), consult a professional.

That's great advice if someone wants personalized advice and handholding and is willing to pay for it, however not everyone needs the advice and handholding. You can get just as good advice out of a book for much lower cost, and you can also get advice (worth slightly less than what you pay for it) and handholding right here.>>

You don't have to pay any more for it, is my point. As a FA, I don't charge for my advice. If someone wants to buy a no-load, no 12b-1 fee fund, I sell to them. I don't add a sales charge for doing so. I also don't believe I am the exception to the rule. Additionally, no one here is responsible or accountable for the advice they give. You can't walk into their office and chew their ear if you don't like the recommendation.

<<All the rage of the 90's were index funds.

I thought that tech stocks, IPOs, and Fidelity Magellan were the rage of the '90s. Most 401(k) plans didn't even offer index funds throughout the '90s.>>

OK, late 90s then. They were certainly very popular as I see dozens of clients ever month that bought them in the 90s.

<<Everyone thought they could do it themselves, with no experience, by simply picking an index fund.

Umm...what is your source for this statement? I believe that is far from the case.>>

It was a generalization. Geesh *rolls eyes*. And it isn't far from the case. There was a large move away from working with a financial advisor to simply doing on your own. There was a belief (rightly or wrongly) that people could simply buy and index and beat any managed account most of the time. As a FA, I saw this, and I am now seeing the same type of client come back to get advice.

<<All it took was a significant downturn in the market to prove them wrong.

My investments are (and have been) mostly in index funds, and despite the downturn I am still on track. How exactly was I "proven wrong"?>>

Don't know why you thought I was talking to you. I wasn't. While your anecdotal situtation may be "on track", it does not apply for everyone. In a down market, index funds are often lousy performers. Managed accounts can and often significantly outperform during those times. I teach many of my clients not to be concerned with making only 10% when the market (index) is making 12%. We want to make sure you are only losing 10% when the market is losing 20%.

<<Index funds are lousy when the market is going down or sideways - as it is generally considered doing today.

Most investments are lousy when the market is going down or sideways. As far as I know, nobody has yet found a way to predict with good accuracy when the market is heading up again. So I'm remaining fully invested in my index funds so I can capture the gains when they come back.>>

Good for you but what if you can't wait for them to come back? What if you have a change in your financial situation that does not allow you to wait for them to come back? Perhaps you have a long enough timeline to wait for the Dow (for example) to go from 12000, down to 7000, and back up to 10500, and still wait for it to get back to 12000 to break even (not counting dividends; or inflation). But, not everyone can.

<<Additionally, a financial advisor can sell you the same vanguard funds, if that is what you want, at no additional cost.

Why would he? He wouldn't get paid for it. It's my opinion that those who do work should get paid for the work.>>

Why would he/she? Because the client asks for it. I am not going to refuse a client if that is what they want. That would be stupid and short-sighted. I don't have to make money from every appointment I make. I often give free advice to clients that simply want to make sure their 401K is invested appropriately. I don't make ANY money from that appointment but I provide a good customer/community service. I teach a quarterly class at a local library on saving for retirement. I pay my money to rent the room and provide the food. I will eventually be compensated for my charity, either in this life or the next.

<<financial advisor can also help you stay the course when you get cold feet and want to sell out of the account when it goes down.

If someone gets cold feet when their investments go down, they have no business being in that investment, and *should* sell and move into something more conservative. No amount of potential gains can make up for lying awake at night worrying.>>

And there is the rub. Index funds are not a good recommendation for everyone as they can be volatile. That was much of my original point. I am glad we can find agreement.

<<d lastly, you can hold an advisor responsible (civil and criminal) if they give bad advice.

Are there any instances you can point to of an advisor giving bad advice and being held responsible for it? Most of the time the advisor goes bankrupt right alongside his clients and has no money to pay the civil claims.

Also how can you hold an advisor responsible for the normal fluctuations of the markets?>>

Absolutely. I have seen it in the company I work for. If an advisor in my firm recommends an investment that is too agressive and we don't have proper documentation for the reason for that investment (risk tolerance assessment), the client can file a complaint. I have seen where a client that has a moderate to conservative risk tolerance has won their complaint due to the advisor placing them in a fund that is too risk and outside of the client's risk tolerance. Broker does not go bankrupt, the client simply gets their money back and perhaps the growth they would have received if they would have been in the appropriate fund. The Advisor gets a charge-back for the loss. This is not about normal fluctuations of the market, this is about determining tolerance to risk, timeline, age, goals (in