Be Your Own Jedi Master Money Manager

You Can Manage Your Money Better Than Anyone Else

As you can probably guess, I'm at least somewhat biased towards people managing their own wealth and financial futures, as opposed to having people pay a "professional" to do it for them. There are numerous reasons for this, and I hope that after I've shared them with you, you'll realize on a somewhat deeper level why I evangelize about "self-directed investing" so much. And, I hope that in doing so, I can prevail upon you to take me up on all the awesome information I offer you on this budding blog.
_________________________________________
 
A while back, the investment bank where I worked did some right-sizing, and they ended up moving an office of 200 or so positions back east, including my own. In the process, I was offered a position and opportunity at nearly double my current salary, if only I would consider moving out east to the big city. As you can tell, I turned it down. Best decision I could have made.

By the time my termination date rolled around, I still didn't have a job offer that would pay me anywhere near what I was making before. But, since a man has to put food on the table, I took a temporary job that would tide over my family until something better came up.

It was about this time that I launched this blog. To my surprise, it was only a short time before I had friends and acquaintances asking me to do some financial consulting work for them in the area of personal investing. I'd visit on a Saturday, my day off, and they'd pay me a small hourly fee to go over investing basics so I could get going them on the path to personal investing.

One appointment I set up was with an old friend from college. He was fascinated with the things he was reading on my blog, and wanted to get involved.

He and his family were close to paying off some debts, and they would soon have some money freed up, which they could begin to sock away into investments. His questions ranged from, "How do I start?" to "Where do I invest," and "How do I make sure I don't lose money?"

To be honest, these are easy questions to answer. The hard part is execution. Even harder, is the conditioning of psychology you should undergo first in order to be successful. But because the answers to all of these questions and more are being answered in nitty gritty detail as the progress of this site marches forward (browse my past list of posts here), I want to talk more about the reason of "why" you need to do it.

Why You Need to Manage Your Money Personally

A friend of the family not long ago inherited a sum of money. Having lived basically hand to mouth for the last 25 years of her life, it was a sum larger than she ever dreamed she would have. Since I and this friend were close, she came right to me for advice on what to do with the money.

Now, as you know, I’m not a financial adviser, and I don't want to be. I’m not even licensed to give you individualized investment advice on this website. I also don’t get paid to put together retirement plans or to manage money.

I just write articles about things I find interesting. But, I do have a few good ideas from time to time on how to put extra cash to work. And there's no law that says good ideas about finance can't be shared between friends.

As a favor, I prepared to walk my friend through the simple process of setting up her own brokerage account, and slowly buying into high-quality, blue-chip, income-producing, dividend-gushing, cash-flowing companies to ensure this modest pile of cash served her well for the next 35 years before retiring, and then beyond.

For now, her money was sitting with a “wealth adviser” at a well-known US firm. She had been considering just leaving the money where it was. Would there be anything wrong with that?

Not necessarily. That is, assuming this “adviser” uses the same principles I do. My observation, however, is that most do not.

I have friends who are wealth advisers, and I have acquaintances who work for this same firm. They’re good people from what I’ve seen. They seem to have a nominal grasp of finance.

The problem is, the money they're managing isn't their own. This is rule number one: No one will be as vigilant about securing your financial future as you will, as long as you have the "vision" of financial freedom on the horizon.

A short time ago, I almost went to work for one of these same "wealth adviser" firms. Thankfully, I decided not to, because I had serious doubts about the job. From the time I spent asking questions and interviewing with the firm, my suspicions were confirmed.

The problem with handing your money over to a wealth adviser is that, most of them are glorified insurance salesmen. The limited money management they do is focused on under-performing mutual funds, a select few indexes, and annuities. ANNUITIES for crying out loud!

These guys (and gals) are really a wealth acquisition force, not money managers. They get paid for getting your money, and keeping it at the firm, not growing it. And if you ever move your money out of there, they charge you a fee to give it back to you.

Most advisers I know can’t even explain what a stock option is, and have never sold one. To a licensed securities professional, this is Class 101. You probably know more about this than they do, if you've read even one of my recent articles.

Some of the questions I asked when I was interviewing with these wealth management firms was about their fee structure, and how I would make money. Fee Structure is reason number two.You're going to love this!

When I buy an individual stock with my online brokerage account, I pay between $1 and $7, depending on the firm my money is sitting with. I make about 20-30 trades a year, MAXIMUM, so it will cost me between $30 and $250 a year in commissions to make my money grow.

Compare this with the fee structure of a "wealth adviser."

For taking your money and buying index funds, something you can do on your own for the cost of $0 withing 30 days after setting up your account with a major firm, which takes ten minutes, wealth advisers will take 1-2% of your wealth every year, and charge you a horrendous fee every time they move your money into a new investment--anywhere between $20 and $100 per transaction.

Having an adviser manage my wealth will cost me ten times what it would to do it myself.  

To sum up, the personal broker model to managing money is such that the broker receives both an annual base commission off total assets under management, usually a percentage like 1%. That’s gravy for him, whether or not he transacts or does anything with the account during the course of the year—even if the account loses a ton of money. They skim right of the top, offsetting any gains, or adding to losses. In addition, a broker receives commissions off any individual trade which he transacts on the account. These individual commissions are much higher than the fees which would be charged by a discount broker in a self-directed account, like TD Ameritrade, Schwab, or Interactive Brokers. They are often an unbelievable five to ten times higher.

Imagine how much money you're losing year after year if you have a large nest egg built up, and it's sitting with an adviser!

Do you think I'm being too cynical about this? Or realistic?

The Dilemma of Trusting Someone Else Who's Getting Paid

As a result of being a market junky, I’ve read too many articles and books on the finance industry and its various scandals, conflicts, and dark secrets to ever consider leaving my money management to a “wealth adviser.”

Let me be clear—I’m not saying that all wealth advisers or financial planners are unsavory types, nor am I saying that all brokers are corrupt. I know they’re not. I just like to avoid situations where conflicts of interest may arise. Like with investment accounts.

I’m referring to what’s called a principal-agent problem. Listen very closely. It’s the essence of the Wall Street money machine.

A principal-agent problem, or agency dilemma, arises when an agent (in this case, the broker), becomes motivated to act in his own best interests rather than those of the principal (the client).

The dilemma I mentioned is such that if he chooses, a broker may initiate more trades than is necessary on the account, a condition called “churn,” to rack up higher fees for himself. Or, he may find incentive to get his client into higher-risk, higher-commission trades in order to pad his own paycheck. While his paycheck is getting bigger and bigger, there’s a good chance your returns are getting smaller and smaller.

This is akin to government work. As you probably well know, government agencies are not incentivized to save money, be frugal, or stay within a budget. The nature of the government beast is such that, if an agency’s budget is not used, the next year it is lost or reduced. So, agencies needlessly waste money in order to get bigger and bigger budgets, growing their organizations, and spending more and more money, year after year.

This is in stark contradiction to a business, which has every incentive to save money and be profitable.

As I foreshadowed above, big investment banks on Wall Street work exactly the same way. To be sure, Wall Street is selling something…. but it’s not good advice. More like a bridge to nowhere. Its business model is fee- and commission-based. There is no incentive for them to help you produce good investment results for you.

Consequently, Wall Street analysts go on the TV networks everyday and tell you what to buy. But they mostly recommend what’s already popular…what everyone’s already talking about, because that is what generates viewership. By the time it gets to the average investor, it’s too late to maximize gains and minimize risk.

If this weren’t the nature of Wall Street, where was the truth in analysis during the 90’s tech bubble? Broker sold unwary investors internet stocks by day, making a fortune, and by night they emailed each other, calling those same companies “pieces of sh*t.”

And for that matter, where were they in 2008 just before the mortgage securities collapsed? Days before the crap hit the fan, these securities were all a “Buy.” Triple-A quality indeed! Well, those Wall Street alchemists turned gold investments into shite within a few hours.

The sad thing is, every mom and pop investor believes listening to Wall Street is the right way to manage their finances. In reality, it’s just a sure-fire way to ensure your money pile stays flat, or collapses, instead of fattening up over time.

It’s a game of musical chairs. It really sucks to be far away from a chair when the music stops.

In The Village, we always stay a few paces ahead of them. Wall Street only recommends stocks when they have become popular and run up in price. We recommend things that are hated and cheap, before everyone has piled in.

I’ve never been one to take comfort in being with the crowd. I have seen too many bone-headed, irrational things happening in crowds to feel any degree of comfort there.

Think about it like this…in my household, we’re advocates of self-reliance, and especially emergency preparedness. If or when the next disaster hits, I’m set…I don’t need to run out to the store to gather supplies for base survival. Even if I did, I wouldn’t be the only one there… the mobs would be there already. It would be sheer pandemonium as hoards of people raid shelves and head for the exits. With my luck, by the time I get there, the store’s empty.

I don’t mean to pick on individual brokers too much… the thing is, most brokers may be honest. They just don’t know any better. They’re educated, yes… but they’re still humans, ruled by emotions, and fall into the herd mentality. It is too hard to be an outsider broker in the finance industry. There’s too much pressure not to conform.

And now, the final reason for learning to grow your own wealth: Personal Development. Hear me out!

The understanding and worldview you gain by delving into the subjects of business, politics, numbers, and finance is incredibly fascinating and enlightening. You begin to better understand what makes the world go 'round. What's more, taking an idea you have, putting it to work, and seeing it pay off is a priceless and irreplaceable feeling.

This is the real reason I love investing. I don't love money... I see it as a means to an end. What I do love is the process of investing, understanding how a business or industry functions, and the feeling of success which comes after hard mental work and sweat has paid off.

This is an unconventional way of thinking about things, I’ll admit. Until you get to the point where this is second-nature for you, you’ll feel uncomfortable and unsure too. But you’ll feel great when these strategies begin to successfully play out in your life.

So in summary, why do you need to manage your own wealth?

• No one cares about your financial future as much as you should
• You'll save yourself thousands of dollars over your lifetime
• Learning to invest is pricelessly enriching, enlightening, and informative

If you're ready to start taking control of your money in a real way, don't wait even one day to turn things around.

Can't seem to find any money in your budget to put away towards saving and investing? Start with my Personal Finance areas, to help give you some ideas on how to get some cash stashed away.

Ready to start learning about some how to keep your money safe, and where the safest places are to park it? Stop by my Investments and Research sections.

Live long and invest,

Jeremiah