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I've been reading the Retirement, Investing, and Personal Finance forums over the past month. I've noticed there seems to be a number of people who prefer the investment approach espoused by financial advisors, such as Wade Pfau and Michael Kitces. Yet there seems be to relatively fewer people who prefer the approach of investment legends such as, Buffett, Charlie Munger, and John Bogle. I would summarize the two approaches as follows:
Buffett/Munger/Bogle Approach: Advocates a simple, low cost, index-based, buy and hold approach that avoids the use of financial advisors. This perspective is shaped by decades of investment experience.
Pfau/Kitces Approach: Advocates a more complex approach that is intended to produce results that beat the indices. It may involve actively managed funds, insurance products, and the use of financial advisors and insurance agents to implement. This perspective appears to be more shaped by academic research.
Personally, I lean toward the first approach because I like simplicity in all things. One of my favorite quotes is from Einstein, who said, "Things should be as simple as possible, but not simpler." I also believe it's difficult to beat the investment drag of fees over a long period of time.
That said, I would appreciate the perspective of any of you who like either approach. I think all of us might benefit from a respectful discussion of the two. This not an attack on the Pfau/Kitces approach just because I prefer the other method. There are many ways to skin a cat.
I'd say that my investing style over the years is more like Buffett/Munger/Bogle approach. I have neither made a killing nor lost any sleep. Over the last 30 years or so, my portfolio has gained on the average 8- 10% a year. We are well positioned for our retirement and can weather another market downturn period like the last one.
I do not see any reasons for me to switch to the Pfau/Kitces approach. There may be some competent, honest financial advisors and insurance agents out there who could produce net results better than what I have done (after their commissions or fees). However, I don't believe that any extra gain is worth the anxiety of wondering whether I have found good advisors/agents. Besides, I like to be in the driver seat ;-)
Same with me. I prefer the steadier course of indexes and DCA (dollar cost averaging). It may not go guns to the wall but it also will not come crashing down in flames and remain in that depressed state either. The simplicity of it all makes it more palitable as well.
Interesting. I don't find the Pfau/Kitces approach to be complicated at all. I see their approach as adding a layer of protection which makes things more simple in the long run. When Pfau talks about annuities he is referring to the DIA and the SPIA both of which are simple insurance products with low commission structures. The commissions are not taken out of the annuity premium so I fail to see why someone earning a commission would be a problem.
Interesting. I don't find the Pfau/Kitces approach to be complicated at all. I see their approach as adding a layer of protection which makes things more simple in the long run. When Pfau talks about annuities he is referring to the DIA and the SPIA both of which are simple insurance products with low commission structures. The commissions are not taken out of the annuity premium so I fail to see why someone earning a commission would be a problem.
You've brought up an interesting point of simplicity vs complexity with annuities as an example. Perhaps simplicity has to do with one's personal perspective. Without debating the pros and cons of annuities, I think it's fair to say that DIAs and SPIAs are simple products, but the decision to buy them is not. Therefore, you view them as simple and I view them as complex.
You've brought up an interesting point of simplicity vs complexity with annuities as an example. Perhaps simplicity has to do with one's personal perspective. Without debating the pros and cons of annuities, I think it's fair to say that DIAs and SPIAs are simple products, but the decision to buy them is not. Therefore, you view them as simple and I view them as complex.
Yes, I can see your point. However, there are a million mutual funds and ETF's and all sorts of bonds, not to mention a world of individual stocks, BDCs and REITs. So the decision to invest is a complicated one too.
Yes, I can see your point. However, there are a million mutual funds and ETF's and all sorts of bonds, not to mention a world of individual stocks, BDCs and REITs. So the decision to invest is a complicated one too.
Exactly. That's the argument for investing in low cost index funds for normal people like us. The idea is to make investment decisions easier and increase the chances for satisfactory results.
But you still have to make the decision to invest in an index fund. Then you have to choose which index fund you want to invest in. Those are the same choices you have to make with a SPIA or DIA. The questions is do you want to purchase one. Then you have to choose which company.
I think low cost, indexed, mutual funds, and advice based on sound academic research serves the needs of most working people who want to retire with safety and comfort. There is no mystery about it if you follow Bogel or Merriman. But you do need to educate yourself and know what you are doing. It is not difficult to do.
On the other hand if you have millions, make millions, and have no time to invest in educating yourself, can afford risk for higher returns, then there are plenty of ways to invest and get someone to do it for you for a nice fee.
I feel quite confident we can manage the money we have worked hard to earn and I don't want to relinquish control to someone who wants to make money off of our money.
But you still have to make the decision to invest in an index fund. Then you have to choose which index fund you want to invest in. Those are the same choices you have to make with a SPIA or DIA. The questions is do you want to purchase one. Then you have to choose which company.
I should have been more clear. My bad. When I refer to index funds in this context, I am referring to one of two kinds of index funds at one or two fund companies. The two funds are: 1) A Total Market Index; or 2) An S&P 500 Index. The two companies are Fidelity or Vanguard. The choice is quite simple when it comes to index investing.
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