There’s a stark difference between what I call “retail” financial planning and “academic” financial planning.
Retail financial planning is heavily advertised and is what we’re bombarded with on a daily basis, i.e.: “top ten stocks to buy now”, annuities, etc. In the words of Nobel Prize winning economist Bill Sharpe, this has resulted in “[a]n absolutely abhorrent amount of money being transferred from ordinary individuals trying to save…to the financial industry…for which they are getting nothing.”*
Twenty years ago, I started reading the advice that comes from academia. It’s no surprise that those who study finance for a living give better and markedly different advice than those selling products for a living.
I started Atlantic to provide financial solutions grounded in academic research. I create a clear financial path by drawing on my experience as a financial planner, researcher, and financial planning software developer. The latter has helped me gain a deep technical understanding of how a financial plan should be optimally integrated. I’ve been accepted as a Real Fiduciary™, by the Institute for the Fiduciary Standard and maintain those high standards throughout the planning process.
* MIT series "In Pursuit of the Perfect Portfolio", Youtube video, 33:44, May 26, 2016
There are generally two investment approaches:
01 | Active Investing
Entails hiring an investment firm or mutual fund to find undervalued securities that have been missed by other investors. This endeavor is costly and seldom works.
02 | Passive Investing
Accepts that financial markets efficiently incorporate all available information into security prices. This is often referred to as the efficient market hypothesis.
This hypothesis argues that the market price of any publicly traded security reflects the consensus of all the worlds money managers (the vast majority of which are institutional traders). Passive investing involves low-cost mutual funds or exchange-traded funds that simply buy and hold the securities of indexes that track entire markets or sections of it. With this approach, you get the consensus of all the worlds money managers at a fraction of the cost of active investing.
I believe passive investing is the better approach. Studies confirm this. Each year Morningstar compares the performance of actively managed funds to their low-cost index fund counterparts. The latest report (2018) found that only 24% of actively managed funds outperformed their index fund rivals over the last ten years. So why not just invest in those particular actively managed funds? Because they change over time. In other words, their out-performance is random and impossible to predict.