The most frequent question posed to me by clients, friends & new contacts is this: “Where’s the best place to put my money?” I’ll get to the presumptions behind this question in a minute. But it cannot be honestly answered without more information.
I usually say, “Well, it depends on what you want, what your plans are, your current asset level, when you want to retire, your pre & post-retirement budget, how long you expect to live, your debt level, your rate of return history and expectations, your risk tolerance, your health, your wishes for your family or charities . . ” and so on. Sometimes though, if I’m feeling flippant, I’ll say something like “It all depends on what you want. If you want a money milkshake, the best place for your money is in a blender with vanilla ice cream and blueberries.” I’m sure, more often than not, that feels evasive, like I’m dodging the issue.
So what are people thinking when they pose that question? I suspect most have in the backs of their minds that authoritative but fickle pie chart that shows up on their brokerage/retirement statements. You know, similar to these:
Looking backwards, they are painfully aware that if only they had adjusted those pieces of the pie, they would have made a ton of money rather than losing. Or, if they hadn’t been so conservative, they would have at least kept up with inflation. They blame themselves for responding- or not responding -to Wall Street’s siren call. “Now is always a good time to invest!” as TV’s financial guru (not) Cramer screams. But they shouldn’t blame themselves. Over the 20 years ending 12/31/2010, average equity fund investors earned 3.83%/yr. The S&P500 index earned 9.14%! The problem is chasing returns, buying high and selling low, and incurring too many expenses. (And then there’s the issue of the shrinking number of fund managers who actually beat the unmanaged indexes. As financial data becomes more and more accessible, only about 15% of managers beat the indexes to which their styles are compared.)
But why settle for even the S&P500 returns? Below is a rather complicated graph but it’s very important. It shows RISK (defined as how wildly your account balance swings up and down over time) and RETURN (the average annual return over the 10 year period shown) for the S&P500 vs. Vanguard. Note how much better Vanguard’s unmanaged, low cost index portfolios outperform the S&P500 at large. Even so, can we rely on the past to predict the future?
So embedded in the question, “Where is the best place to put my money.” is this one: “Where can I get the highest returns without any risk?” What is it perhaps more important to ask? Because the key is asking the right questions. In addition to those posed in my second paragraph, these additional money questions are essential:
- How can I minimize my costs? How can I get my money’s worth for the fees I’m paying?
- How can I eliminate risk without taking a bath on poor returns?
- How should I best hold my invested assets (in qualified retirement accounts, real estate, hybrid products, trusts?) to be sure my plans are fulfilled?
- What trends may make historical performance a permanent thing of the past? What is reasonable to expect in the rapidly changing future?
This is my generic answer to, “Where is the best place to put my money“. It all really depends on what you want. And that is my skill. Helping you figure that out, getting it down on paper, and adjusting your affairs accordingly. If any adjusting is even necessary.