Part 1: The Why in DIY Money Management
Here’s the good news. Investing has largely been solved.
For the vast majority of people, the most effective way to invest for the long-term is to simply buy a diversified basket of low-cost index funds (1). That’s it. Stock picking, market timing, options trading, thematic investing – all these strategies are just fancy ways to underperform the market. This isn’t financial advice, this is just evidence-based reporting of the facts. Over the long run, 80-90% of professional fund managers historically have failed to outperform the market. Meaning the only thing harder than picking a winning stock, might be picking a winning money manager.
So, let’s assume you’re not going to hire the next Warren Buffett, Geraldine Weiss, or Ray Dalio - and won’t find a money manger with the secret sauce to investing. Legendary investors like those are the exceptions that prove the rule. This is one of the biggest reasons I am a proponent of DIY money management – when it comes to investing, you don’t need to be a professional to outperform the experts. You just need to be patient and persistent.
Countless studies have demonstrated that passive index investing consistently outperforms active management over the long run…but I’m not going to bore you with data sets and the empirical evidence that proves it. Instead, just go pick up a copy of A Random Walk Down Wall Street by Burton G. Malkiel. I promise by the end of that book you’ll be convinced. And entertained.
Now here's the bad news. Just because investing may have been “solved,” it doesn’t mean it’s easy. As Benjamin Graham (Author of The Intelligent Investor) said, “The investor’s chief problem - and even his worst enemy - is likely to be himself.” What he means by this is that an investor’s own behavior is often the biggest threat to his or her long-term investment success. Panic-selling during market downturns, chasing hot stocks, overtrading, or not sticking to an investment plan can often do more damage than market volatility itself. This is why the most valuable qualities an investor can have are discipline, patience, and consistency.
Skeptical? Good. Honestly, I hope you are. A healthy level of skepticism is prudent when listening to anyone talk about money.
But let’s be clear: money management is about far more than just investing. If investing were the only piece, I wouldn’t have created this site. I start there because, for most people, “money management” or “financial advisor” immediately brings investing to mind - but that’s only one part of the picture. True money management goes well beyond that narrow view. Money management is about taking a holistic view of your finances, and making deliberate, informed decisions that align immediate needs with long-term ambitions. This is what I am aiming to help with.
Who Should DIY and Who Shouldn’t?
Before we get into the “how” of DIY money management, let’s define the “who.” Who is best suited to take a DIY approach? While my focus is on Minnesotans who want to manage their own money, the audience I built Minnesota Money Mentor for is even more specific. Here is the type of person I envisioned when creating MMM:
Individuals or couples, aged 25-55 (10+ years from retirement)
W-2 earners with steady salaries and simple tax liabilities
Couples navigating dual incomes, home ownership, and starting families
Independent-minded, financially curious Minnesotans who value autonomy in managing their money and shaping their financial future
If you fall into this group, managing your own finances isn’t just possible – in my opinion, it’s optimal. For others however, outsourcing money management and financial planning is often the sounder strategy. Specifically:
Retirees or those nearing retirement
Small business owners
Ultra-high net worth individuals
Individuals in any of these categories often face highly complex tax situations and benefit from specialized expertise in areas such as estate planning, tax optimization, and insurance analysis. For them, paying a 1% AUM fee can be a justifiable, even valuable, expense.
What Are AUM Fees and Why Should You Care?
The traditional business model for financial planning firms is to charge clients a percentage of their investable assets – typically around 1% of portfolio value per year. This legacy model is being challenged in recent years, with many financial advisors now charging by the hour - a model I am much more in support of - but most customers are still paying advisors AUM (2). And while 1% feels small. Over decades, it’s massive. Let’s do some math to prove it.
Say there are two young working professionals, Jack and Ben. Jack and Ben are both:
25 years old
Employed, W-2 earners making $100,000 per year
Good savers, contributing $12,000 annually to their company 401(k)’s
Let’s also assume both Jack and Ben intend to work until they are 65 and will steadily increase their retirement contributions by 3% each year. So, they have 40 years of saving and investing in their future. The only difference between them is that Jack’s employer connected him with a financial planner to manage his 401(k). Ben on the other hand, opted to manage his retirement himself.
Jack’s advisor is an efficient-markets believer (3), so she puts his retirement savings into a fund that simply tracks the market as a whole. Ben, a DIYer who has done his homework, also believes in indexing and invests his money in the same manner as Jack. So for simplicity sake, assume Jack and Ben will achieve identical investment results over the course of their working lives. We’ll use an assumed annual return of 8% - in line with the historical performance of a balanced retirement portfolio (4).
Fast forward 40 years. To compare the two retirement outcomes, first let’s take a look at how Ben’s investment journey played out. After consistently contributing to his 401(k) and averaging an annual return of 8% over the course of four decades, Ben’s retirement portfolio grew to an impressive $4,450,307. Ben is happy to be retiring a 401(k) millionaire. A feat achieved by less than 5% of American retirees.
How did Jack do? Jack also reached the rare seven-figure balance at retirement, however his portfolio grew to only $3,428,738. Jack invested in the same funds, contributed the same amounts, worked the same number of years, and achieved the same investment returns as Ben - but he retired with over $1 million less.
The projection above is taken directly from the Portfolio Future Value Calculator available to download for free! (download link provided at the end of this post).
How can this be? Well as it turns out, compound interest isn’t always your best friend. By paying his advisor a 1% annual fee, Jack’s effective return dropped to approximately 7% a year - compared with Ben’s 8%. Over 40 years, that “small” fee added up to $1,021,569 in combined advisor compensation and opportunity cost (the amount the money Jack paid in AUM fees could have earned had it been invested and compounded).
Ultimately, entrusting his 401(k) to a financial planner reduced Jack’s nest egg by more than a million dollars - that’s not pocket change - that could be the difference between comfort and compromise in retirement. Ben, the DIY investor, kept every dollar. So the only question left is this: do you want to build wealth for yourself, or hand it over to someone else?
FREE DOWNLOAD
Want to crunch your own numbers? Here’s a free tool so you can plug in your own inputs and see how your own portfolio could grow - and how AUM fees really add up over time. Click here to download to the Portfolio Future Value Calculator directly to your Google Drive.
1. An index fund is simply a mutual fund or ETF that aims to track the performance of a specific index like the S&P 500 or the stock market as a whole.
2. AUM is the total market value of the investments an advisor or financial institution manages on behalf of clients, typically used as the basis for calculating management fees.
3. An efficient-markets believer is an investor who accepts the efficient market hypothesis - the idea that stock prices already reflect all available information - so trying to consistently “beat the market” is seen as futile.
4. A balanced retirement portfolio is typically a portfolio that blends stocks and bonds - often around a 60/40 split - to provide both long-term growth and stability, aiming to reduce risk while supporting retirement income needs.
