A couple weeks ago I gave some advice to a young person that was invested with a robo-advisor. I urged patience and giving up on the goal of a perfect portfolio, especially when you come to the decision that you would like to invest in a low-cost, diversified asset allocation approach.
One of my younger readers followed up with a great question that wasn’t addressed:
How does one even make that decision? And what other decision is to be made by a 20-30 something investing in IRA’s? I’ve never really consciously made that decision, but I wasn’t really aware of any other option besides paying a guy 1-2% to do the same thing for me.
There are many young investors out there that could use some guidance from a legitimate financial advisor. The thing is that most advisors have minimum asset thresholds that 99% of young people can’t hit, so there are very few good advisors taking on younger clients.
I’ve had plenty of old high school and college friends ask for advice over the years about the advisor they chose. Most went with a friend from college that was trying to build up their book of business, but the advisor never offered any attention or actual advice. They picked a few mutual funds, never met to discuss their goals or financial situation and collected a fee for basically doing nothing.
So the conundrum is that while young people could use advice from a financial professional, it’s hard to find a good advisor that’s willing to give you that advice because you don’t move the needle quite yet.
If you’re considering ‘paying a guy 1-2%’ to do these things for you, you’re probably wasting your money. Anyone charging you a 2% fee is not looking out for your best interests in the first place. In fact, if all they’re doing is choosing funds for you, the fee should never exceed 0.40% or so.
While they’re not perfect solutions, a robo-advisor or a targetdate fund in an IRA or defined contribution retirement plan should do the trick for most young people starting out as they find their way as an investor and try to increase the size of their their portfolio. Dollar cost averaging through a periodic savings plan into these types of vehicles is a great way to build up your savings. Once you have more capital in your accounts you can reassess to see if your situation call for a financial professional. There are even some advisors that offer hourly rates if you’d like to test the waters, but it’s not the norm.
I wish that there were better ways for young people to get personalized investment and financial planning advice. Maybe other young people will fill that void eventually. In the absence of that, here are a few things young investors should be focusing on:
- Developing good savings habits.
- Making sure your personal finances are in order.
- Taking advantage of tax deferred retirement accounts.
- Understanding yourself as an investor and how you handle market volatility and losses.
- Finding a strategy that gives you a high probability for success that you are comfortable sticking with over time.
You’ll notice investing falls pretty far down this list. Your investing style will matter at some point, but it’s not your top priority right out of the gate.
The greatest asset you have as a young person is time — time to earn more money, time to allow your savings to compound and time to figure out what it is you would like to do with your life. Focus on these things and the hope is that you’ll have more than enough money to meet the minimums for the really good financial advisors later on if that’s the route you choose to take.