There’s an old story that illustrates a very important lesson about managing your money. It goes like this:
A financial advisor, eager to gain a prospective client’s trust, takes the client on a tour of an exclusive yacht club. The advisor points out all the luxury sailboats owned by fellow financial advisors, fund managers, and pension fund administrators. The client is impressed by the display of wealth. At the end of the tour he asks one simple question: “But where are the clients’ sailboats?”
That question hangs in the air. Where do you think your hard-earned money goes when you use a financial advisor? When you put your savings into a managed pension plan or fund?
The Cost of Professional Financial Advice
There are times when paying for professional services is necessary. Most of us can’t fix our cars, repair plumbing, or diagnose complex computer issues. We rely on specialists for these tasks, and we’re willing to pay for their expertise. This is perfectly reasonable. But when it comes to managing your money, things get murky.
There’s a widespread belief that managing money is too complicated for the average person, and only a professional can do it well. This myth has been carefully cultivated by the financial industry for years. It’s used to justify the fees they charge for money management.
But here’s the truth: paying a financial advisor doesn’t guarantee better returns. In fact, most managed funds don’t even beat the market. After you pay the advisor’s fees, which can be as high as 2-3% per year, you’re left with returns that are lower than the average market performance.
Why the Myth Persists
The idea that you need a financial advisor to succeed is driven by millions of dollars in advertising. The financial industry spends vast sums convincing people that they’re incapable of managing their own money. They want you to believe that only a professional can navigate the stock market and find the best investments. But is that really true?
In reality, even the best money managers struggle to consistently outperform the market. Over time, the majority of them fail to do better than the market average. This is largely due to the high fees they charge, which eat into your returns.
Paying for Below-Average Performance
Imagine paying a mechanic to fix your car, but instead of a fully functional vehicle, you drive away with one that’s half-broken. You’d be upset, right? You expect quality service when you pay a professional. Yet, many people trust their money to financial advisors who consistently deliver below-average results.
These professionals often promote complex investment strategies, stock market predictions, and exotic-sounding funds. But at the end of the day, they rarely beat the simple strategy of investing in a market index fund. And they always take their fees, whether you make money or lose it.
Please note that there is a difference between a for fee financial advisor and a financial planner. Read our explanation of the differences at The Difference Between Financial Planners and Managers
A Smarter Way to Invest: Index Funds
There’s a growing trend toward a smarter, simpler approach to investing: index funds. An index fund is a type of investment that mirrors the performance of the stock market by investing in the largest companies that make up the market. Read more at: What are index funds, and how do they work?
Instead of trying to outsmart the market, index funds simply track it. They own a percentage of each company in the index, ensuring that you receive the average market return. Since this approach doesn’t require active management, the fees are much lower. You’re not paying someone to guess where the market is headed—you’re just following the market itself.
Why Low Fees Matter
The beauty of index funds is their simplicity. Because there’s no need for expensive fund managers to make decisions, you pay much lower fees—sometimes as low as 0.1%. Compare that to the 2-3% fees charged by actively managed funds, and the difference becomes clear.
Over time, these lower fees can have a huge impact on your returns. A 2% fee might not sound like much, but over decades of investing, it can cost you tens of thousands of dollars in lost earnings. Every dollar you pay in fees is a dollar that’s not working for you in the market. The longer you invest, the more those fees add up, cutting into your potential growth.
Example: $10,000 invested at 6% with no fee for 20 years becomes $32,071
The same amount invested at the same 6% with a fee of 2% for 20 years becomes only $21,411.
In other words, that small 2% fee over 20 years cost you $10,660 or about one-third of your net potential.
Market Average Returns Are Good Enough
It’s important to understand that no one can consistently predict which way the market will go. Trying to beat the market often results in failure, and even the experts rarely succeed. That’s why accepting the average market return through index funds is a wise decision.
With index funds, you’re guaranteed to receive the same return as the overall market, minus a small fee. This may not sound glamorous, but it’s a reliable and proven way to build wealth over time. You don’t need to worry about picking the right stocks or timing the market. By investing in an index fund, you’re investing in the market as a whole.
Diversification Made Easy
Another advantage of index funds is diversification. When you invest in an index fund, you’re not putting all your money into one company or one sector. Instead, you’re spreading your investment across the entire market. This reduces your risk, as you’re less likely to be hurt by a downturn in any single stock.
Many index funds also offer international stocks and bonds, further diversifying your portfolio. You can find funds that include companies from around the world, giving you exposure to global markets. Some funds also include bonds, which provide a more stable, low-risk investment. This balanced approach is ideal for long-term investors who want to grow their wealth without taking unnecessary risks.
Take Control of Your Financial Future
You don’t need to be an expert in finance to take control of your money. With the right tools, managing your own investments is easier than you think. Index funds provide a simple, low-cost solution that guarantees you’ll earn the market average. By cutting out high-fee advisors and actively managed funds, you can keep more of your hard-earned money working for you.
Managing your money this way isn’t just about cutting fees. It’s about taking control of your financial future. Instead of relying on someone else to make decisions about your money, you’re making the choices yourself. This sense of control can be empowering and lead to smarter financial decisions in the long run.
The Path to Your Own Sailboat
So, how do you get your own sailboat? It’s simple: start investing in low-fee index funds and watch your money grow over time. You don’t need to chase high-risk investments or try to beat the market. By consistently investing in an index fund, you’ll enjoy the steady growth of the market average, with minimal fees eating into your returns.
Over the years, this strategy will put you on the path to financial independence. You may not be able to buy a yacht tomorrow, but with patience and smart investing, you’ll reach your financial goals. And unlike the clients in the story, your sailboat won’t be a distant dream—it’ll be your reality.
Final Thoughts: Invest with Confidence
The story of “The Client’s Sailboats” is a powerful reminder that managing your money doesn’t have to be complicated. The financial industry wants you to believe you need to pay high fees for professional help, but that’s simply not true. With index funds, you can manage your own investments with confidence, knowing you’re getting the market’s average return without the hefty fees.
By taking control of your investments, you’re setting yourself up for long-term success. The road to financial independence doesn’t require complex strategies or high-cost advisors—it simply requires a commitment to sensible, low-fee investing. So take the first step today, and you’ll be well on your way to managing your money with confidence and ease.
Remember: The key to long-term financial success is keeping things simple, minimizing fees, and sticking to a proven strategy like index fund investing. In time, you may find yourself sailing off into the sunset—on your own sailboat.
In my E-books (“Water Barrel” and “The Balance”) I discuss simple methods to live sensibly for today, take charge of your financial affairs, and invest safely for the long term. For more information please visit David Penna Amazon.
Disclaimer for ManageYourMoney.ca
The information provided on ManageYourMoney.ca is intended for educational and informational purposes only. It should not be taken as financial advice. The opinions shared are those of the authors and are meant to encourage sensible financial habits and decision-making. We recommend that you do your own research or consult a certified financial advisor before making any financial or investment decisions. All investments come with risks, and there is no guarantee of success. Past performance is not a reliable indicator of future results. Always consider your personal financial situation and risk tolerance before pursuing any investment opportunities.
As always, we are not a qualified financial advisors. We just relate financial management to our own experience which may not resemble yours at all. Advice is frequently worth exactly what you paid for it. Most of ours came from expensive experiences.
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