I’ve Got The Brains. You’ve Got The Looks.  Let’s Save Lots Of Money.

FOTF really likes his financial advisor.  They have a warm personal relationship.  She took him on as a favor to his parents when he had few assets and she had plenty of bigger clients to occupy her time.  He’s enjoyed their annual financial reviews, although since he and I started the dialogue about whether he might personally assume these responsibilities, he’s noted that she has him invested in a few high expense (2% expense ratio plus loads) funds.  Her fees are 1% of assets under management.

We spoke by phone recently, because he was planning a visit to our hometown to see his parents and (ostensibly) to break up with her at their annual meeting.  In the months leading up to his trip home, he left excited messages on my voicemail articulating his resolve to go through with the separation.  But like any comfortable relationship, when seated across from her last weekend, he couldn’t execute.  He came up with many justifications.  

I’m the Decider
Most of his rationale boiled down to inertia.  The second he leaves her, he’s suddenly faced with the responsibility of having to decide what to do with his finances.  He’ll need to read some books, select an asset allocation, and move his investments to a new brokerage.  The prospect of this time commitment is enough to stay with his advisor a little longer.

So what might you advise your own FOTF, someone who knows enough to know better, but needs a final nudge?  Maybe, if you’re honest, you recognize a bit of yourself in FOTF.  Here are three better options for FOTF to park his money while he figures out what to do with it.

Option One: The Jim Collins
A terrific source of newbie investing knowledge, Jim Collins is a blogger who advocates young people simplify their investing into a total stock market index fund such as Vanguard’s VTSAX, where rock-bottom expenses and an efficient design mean you can hold this single fund in all your taxable and tax-deferred accounts and reproduce market gains.  The pros: when you’re young enough, with your career ahead of you, there is plenty of time to be concentrated in equities and ride out the volatility of the stock market over decades.  Do you think you could contribute regularly while remaining oblivious to the daily ups and downs of the market?  Then this strategy would suit you well.  Furthermore, VTSAX is likely to be a key component of your eventual asset allocation given its hallowed position among do-it-yourself (DIY) investors.  The cons: By being invested entirely in equities, your portfolio might lose half its value in a bad bear market; if this possibility could frighten you into selling at the bottom in a down market, this strategy is definitely not for you. With an expense ratio of .04% as of this writing, that’s already at least a .96% return on investment just for booting the advisor!

Option two: Vanguard Target Retirement Fund
Target date funds have received a lot of press lately, primarily because they prevent lay persons from doing stupid things with their retirement funds.  The idea here will be familiar for those of you J.R.R. Tolkien-fantasy-loving-I-used-to-play-Dungeons-and-Dragons nerds: One fund to rule them all.  Vanguard created a diversified fund of funds with a dynamic asset allocation that is most aggressive (favoring equities) early in your career, and gradually grows more conservative (favoring fixed-income) as you approach your target retirement date.  You choose the date, put everything into the fund, and all the drudgery - the rebalancing and changing allocation over time - are competely handled within the fund.  Pros: Easy like Sunday morning to choose a single fund for all your investments.  Cons: Not tax-efficient.  If you invest both tax-deferred and taxable investments in the same LifeStrategy fund, the bond component of the taxable fund will incur capital gains on the income from dividends.  With an expense ratio of .13% as of this writing, FOTF would have paid his advisor nearly eight times this amount to accomplish the same.

Option Three: Vanguard Life Strategy Fund
The LifeStrategy Funds from Vanguard offer different flavors of all-in-one funds that automatically rebalance to maintain your desired asset allocation using extremely low cost Vanguard Index Funds.  If you want a 60% stock/40% bond allocation, this fund will do that using a total stock market and total bond market fund.  Because asset allocation has a far more significant impact on long-term returns than the specific funds used, this is a great set it and forget it strategy.  The pros and cons are identical to option two above.  With an expense ratio of .15% as of this writing, that’s an order of magnitude less than FOTF would have paid his advisor to do the same.

What are you waiting for?  What would it take for you to come down off the fence and become a DIY investor?