The Investment Answer: Learn to Manage Your Money & Protect Your Financial Future

The Investment Answer: Learn to Manage Your Money & Protect Your Financial Future

by Gordon Murray, Daniel C. Goldie


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Product Details

ISBN-13: 9781455503308
Publisher: Grand Central Publishing
Publication date: 01/25/2011
Pages: 88
Sales rank: 101,228
Product dimensions: 5.70(w) x 8.50(h) x 0.50(d)

About the Author

Daniel C. Goldie is president of Dan Goldie Financial Services, LLC, a registered investment advisory firm. A former professional tennis player and Wimbledon quarterfinalist, he has been recognized by Barron's as one of the top 100 independent financial advisors in the United States. He graduated from Stanford University and has an MBA degree from the Haas School of Business, University of California at Berkeley.

Gordon S. Murray spent more than twenty-five years working on Wall Street, primarily at Goldman Sachs, Lehman Brothers, and Credit Suisse First Boston in a variety of institutional sales and management roles. After his Wall Street career, Murray worked as a consultant with Dimensional Fund Advisors. He is a graduate of the University of North Carolina at Chapel Hill, and earned an MBA from Columbia University.

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The Investment Answer

Learn to Manage Your Money & Protect Your Financial Future
By Murray, Gordon

Business Plus

Copyright © 2011 Murray, Gordon
All right reserved.

ISBN: 9781455503308

The Decisions


The Do-It-Yourself Decision


The do-it-yourself (DIY) approach is increasingly popular in some industries: home repair and renovation, decorating, self-publishing, and fashion. However—we are not going to beat around the bush here—in most cases, we do not believe it is prudent when it comes to investing. Finance is complex, the odds are stacked against you, and the stakes are very high: your entire financial future. Most people would never make serious medical decisions without consulting a doctor. We believe you should take care of your financial health the same way you take care of your physical health—with the appropriate professionals by your side!

Attempting to invest on your own can be difficult, time-consuming, and emotionally taxing. Most individual investors do not have the skills or the inclination to manage their own investments. However, even for those who do, this may not be a good idea. In today’s world of global markets and complex financial instruments, professionals have access to superior resources. It is difficult for an individual investor to effectively put together and maintain an efficient portfolio that is properly diversified, minimizes fees and taxes, and avoids overlapping assets. In addition, the ongoing monitoring of your portfolio and maintenance of your desired risk exposure can be challenging and overwhelming without access to the tools that are used by competent professional financial advisors.

What’s more, our own natural instincts can be our worst enemy when it comes to investing. This is illustrated in an annual study conducted by Dalbar, a leading financial services market research firm that investigates how mutual fund investors’ behavior affects the returns they actually earn. Figure 1-1 shows data from the most recent Dalbar study covering the 20-year period ending in 2009:

  • The average stock fund investor earned a paltry 3.2 percent annually versus 8.2 percent for the S&P 500 Index;

  • The average bond fund investor earned only 1.0 percent annually versus the Barclays U.S. Aggregate Bond Index return of 7.0 percent; and

  • What is perhaps most remarkable and unfortunate is that the average stock fund investor barely beat inflation, and the average bond fund investor barely grew his money at all.

How could this happen? The simple answer is that we tend to buy stocks and bonds after their prices have risen. We do this because we feel comfortable and confident when markets are up. Similarly, when markets have experienced a downturn, fear sets in and we are often quick to sell. This behavior can result in our buying at or near market highs, and selling at or near market lows, thus failing to capture even a market rate of return.

Figure 1-2 illustrates what we call the emotional cycle of investing and how it can cause us to make costly mistakes.

Certainly the media and the Wall Street brokerage industry are motivated to contribute to this phenomenon. As you search for your next great investment idea, you might read a financial periodical such as Fortune, Forbes, or Money, or you might tune into CNBC, Bloomberg, or Fox Business News, all of whom try to turn investing into entertainment. Then when the hook is in and you decide to act on some new idea, your transactions will put additional commissions in your broker’s pockets. Many financial institutions still take far too big a cut as you move your money from one hyped investment to another.

There are many behavioral inclinations that work to our detriment as long-term investors. For example, do any of the following sound familiar?

Overconfidence. A general disposition to be overconfident can help society in many ways. For example, without this bias, many new inventions, companies, and pioneering research would never come about. However, we need to understand that overconfidence with regard to investing can be detrimental to our financial health. Success in one walk of life does not automatically translate to success in investing. Unfortunately, many highly accomplished people have learned this lesson the hard way—through severe investment losses.

Attraction to rising prices. When the prices of most consumer goods such as gasoline or beef rise, people tend to either cut back or find a substitute. However, with financial assets the opposite seems true. Many investors are more attracted to a stock whose price has risen than one whose price has fallen because we incorrectly extrapolate past price changes into the future. Likewise, mutual funds that have done the best recently are aggressively purchased, while recent underperformers are sold. It is important to know that with investments, past performance is not indicative of future results.

Herd mentality. There is a comfort in being part of a group. When others do something we are more comfortable doing the same. A recent example is the influx of money into mortgage-backed securities and risky loans, and the debacle that followed. Of course, history has shown that when the herd moves in one direction it may be time to consider going the other way. (See chapter 5, The Rebalancing Decision, for how to avoid this problem).

Fear of regret. We are often reluctant to make investment decisions for fear they will turn out badly. For example, have you ever left money sitting uninvested because you were afraid to enter the market at the wrong time? Our view is that the right time to invest is when you have the money and the right time to sell is when you need the money.

Affinity traps (Bernie Madoff, anyone?). Instead of doing our own research, how often do we make an investment simply because we have mutual ties to an organization, or because it was recommended by a respected friend or famous person?

Certainly, there are other emotions that are hazardous to our financial health if left unchecked. Many of us can relate to an observation made by the economic historian Charles Kindleberger, author of the classic Manias, Panics and Crashes: “There is nothing so disturbing to one’s well-being and judgment as to see a friend get rich.”

Market fluctuations cause us to continuously battle against our biases. We need discipline to counter these normal human tendencies. The right discipline begins with an understanding of how markets work. It establishes a process that allows us to focus our time and effort on those things we can control. This helps us achieve our investment goals more efficiently and with less worry.

It is very difficult to accomplish this on your own without a good steward in your corner. This is why we believe most investors who are serious about managing their wealth should seek the assistance of a professional. A qualified financial advisor should bring discipline and clarity to the investment process and help you avoid behavioral traps that can impede your ability to realize your financial goals.

If you agree with us, the question then becomes which type of advisor to choose: a retail broker or an independent, fee-only advisor.

Years ago, before the widespread availability of independent, fee-only advisors, retail brokers were the primary means of obtaining investment advice. Now you have a choice. There are significant differences between the two that you must understand.


Retail brokers are commissioned agents compensated by their firm or a third party for selling you investment products. Traditionally known as stock brokers, today they call themselves Financial Advisors and Financial Consultants. Despite the titles they put on their business cards, they should not be confused with independent, fee-only advisors.

Retail brokers typically offer two different types of accounts—a “classic” brokerage account and an investment advisory account.

Brokerage Account

With a brokerage account your broker will act as an agent for his firm. In this capacity, your broker’s first duty is to his firm, not to you, even though you are his customer. While he may offer the periodic stock tip or some occasional advice, that is incidental to his main business of generating trades and commissions.

With this type of account, your broker is not held to the legal standards of the Investment Advisers Act of 1940, which requires that anyone who offers both investment advice and charges an asset-based or flat fee to register as an investment advisor. According to the law, advisors must disclose any conflicts of interest and put their clients’ interests first. You do not get this protection with a brokerage account.

With a brokerage account, you should be aware of these potential conflicts and drawbacks inherent in the relationship:

Your broker is:

  • better compensated for generating more trades;

  • better compensated for selling certain investment products over others; and

  • limited to selling the investment products approved by his firm.

Investment Advisory Account

With an investment advisory or “managed account” your broker may offer many services such as financial planning and advice on the selection of investment managers and investment products—all for a single fee.

With managed accounts, your broker is held to the legal standards of the 1940 Advisers Act. He is therefore considered to have a fiduciary relationship with you and must disclose any conflicts of interest and put your interests first. While these advisory accounts eliminate much potential for abuse, there are drawbacks with this model as well.

For example, the broker is still limited to offering only his firm’s menu of approved investment products. In addition, the investment managers or mutual funds he recommends to you may be paying his brokerage firm to be included as an approved investment for all its clients.

It also might be the case that the investments you have through your broker’s current firm may not be transferrable to another firm. This could mean having to sell your investments, potentially triggering costly capital gains, to move your account to another firm, either to switch to a new broker or to follow your current broker when he moves to a new firm.

The Name Game and Changing Hat Tricks

It is important to keep in mind that regulators have done a poor job of policing the dozens of misleading titles that brokers often use. This means that you are on your own when it comes to asking the hard questions about whether they really work for you. Don’t believe those glitzy ads that you see in the Wall Street Journal or on TV about how they work just for you.

To complicate things even more, not all brokers work for Wall Street firms, although they still face the same conflicts and incentives. Some brokers may call themselves independent because technically they are not employees of a Wall Street firm. Instead, they are independent contractors of a brokerage house that might even be based in your home town. There are some 5,000 such firms around the country with thousands of branch offices. To clear things up, simply ask if they are a registered representative—this is the technical term used by all brokers. If so, they are not truly independent.

Closely related to the name game is the hat changing issue when dealing with someone who is registered as an advisor and broker. While brokers are required to act in a fiduciary role when giving investment advice under the 1940 Advisers Act, they can “switch hats” and act as a salesperson when selling you other investment or retirement products. This can be a problem because, with any advice you receive, you’ll need to ascertain whether it’s for your benefit, or because they’re getting a commission on the sale. In short, you need to be wary of a potential “bait and switch” problem caused by gaps in the law.


In contrast to brokers, independent, fee-only advisors are always legally required to act as fiduciaries to their clients. This means that they must put their clients’ interests first. Also, independent, fee-only advisors should be more closely aligned with their clients because they are generally free from the conflicts, constraints, and pressures that brokers face.


An independent advisor will generally calculate his fee as a percentage of the amount of money he is managing for you. Because of economies of scale, this percentage fee generally declines as your account size increases. Unlike a broker, whose fees are often buried in hard-to-read disclosure documents, an advisor’s compensation is described in a straightforward, transparent fashion. Also, unlike a broker, an independent advisor only receives compensation from you. He does not receive payment from the investments he selects for you or commissions from moving your money back and forth between investments.

Custody of Your Assets

An independent, fee-only advisor should use a third-party custodian (a firm like Charles Schwab or Fidelity) to serve as the safe-keeper of your investments. These firms are responsible for ensuring that your money is in a separate account under your name with your advisor only having the limited authority to manage the account on your behalf. You receive regular statements, trade confirmations, and other information about your account directly from your custodian. Under no circumstances should you work with any advisor that takes custody of your money himself. This is how Bernie Madoff and others were able to steal from their clients.

We want to say again that an advisor is a fiduciary who must put your interests ahead of his own. Without the financial incentive to generate more trades or sell higher margin products, or the limitations of only having his firm’s approved investment offerings, an advisor is free to use any money manager or type of investment product that he feels is best for you.

A capable advisor can help you stay disciplined and avoid the temptation to move money from security to security, market to market, or money manager to money manager—particularly at times when the potentially destructive emotions of fear or greed set in. Because independent, fee-only advisors are not spending their time thinking about how to generate additional revenue from your account, they have the capacity to help you with many other important financial decisions—such as retirement and estate planning, insurance questions, and whether to refinance your mortgage.

In our opinion, the difference is clear: A broker is working for his firm. An independent fee-only advisor is working for you.


Finding the right independent, fee-only advisor for you is important. You don’t want to hire an advisor only to later feel like you want to make a change. Getting the right person from the start will save you both emotionally and financially.

We have found that there are two areas of “fit” that are essential for having a long-term, successful relationship with an advisor:

  1. Investment philosophy. There are many different philosophies and methods of managing investments and providing financial advice. After reading this book, you will have a clear sense of the investment approach that you feel is best. You want to find an advisor that shares your investment philosophy and thinks about investing and markets the same way that you do. Of course, you want your advisor to have—and be able to articulate well—a clear set of investment beliefs and methods. If he does not have a clearly defined view or cannot communicate it well, you should look for a different advisor.

  2. Personal connection and trust. You will be establishing a close working relationship with your advisor—sharing important personal information (both financial and emotional) about yourself and your family. To do his job best, your advisor needs to know you well. In addition to the financial facts, he needs to understand your feelings about money, and your dreams and aspirations for the future. Do not hire an advisor if you don’t feel comfortable sharing this information with him!

Some other things to consider as you interview potential advisors include:

  • Professional qualifications—An advisor who has earned one or more professional designations has demonstrated a commitment to education and professionalism, and at least reasonable proficiency in his field. Some common professional financial designations include: Certified Financial Planner (CFP), Chartered Financial Analyst (CFA), and Certified Public Accountant (CPA).

  • Education—As you might inquire about a potential employee’s formal education, knowing where an advisor went to school and what he studied can help indicate his level of general intelligence, knowledge, and ability to problem-solve.

  • Experience—Financial advisors often have a variety of careers before they become advisors. Knowing an advisor’s work history can help you evaluate his level of experience and relative success. You should be careful before engaging an advisor who is very new to the profession or has not demonstrated success in financial services or a related pursuit such as accounting.

  • Business structure—Advisory firms have a variety of organizational structures. Some advisors work as solo practitioners. Others work in small professional partnerships, and a few work in larger organizations with many employees and advisors. There are advantages and disadvantages of each structure, and you want to be sure you understand how a business is set up before you become a client.

  • Services offered—Some advisors only offer asset management while others offer a more complete set of services that usually includes personal financial planning (sometimes called wealth management). It can be helpful to work with an advisor who incorporates financial planning into his practice because investment decisions should be made only after considering one’s overall financial situation.

  • Current clients—You should ask a potential advisor about the types of clients he works with and who he feels is his ideal client. You don’t want to be an unusual client—it is better to fit well within an advisor’s client base so that you benefit from his experiences with others like you.


Excerpted from The Investment Answer by Murray, Gordon Copyright © 2011 by Murray, Gordon. Excerpted by permission.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

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The Investment Answer: Learn to Manage Your Money and Protect Your Financial Future 3 out of 5 based on 0 ratings. 64 reviews.
JSMilne More than 1 year ago
This book is undoubtedly the starting point for any investor; not intended as an investing bible, but a synopsis of necessary basics and therefore a launching pad. An easy read in one sitting and you'll find yourself time and time again concurring with the concepts presented as common sense, yet often neglected. The benefit of the brevity and structure of such a book encourages frequent review, which is necessary for all investors. Can't recommend it enough!
szarka on LibraryThing 10 months ago
Although the title of this slim book seems to promise yet another system for "beating the market", it's really an antidote for the kind of hype that litters the personal finance section of most bookstores (not to mention a cable channel or two). The authors argue that investors should aim simply to build a diversified portfolio that delivers the broad market rate of return consistent with their desired degrees of risk and liquidity. While this is hardly revolutionary advice, the book's strength is that it explains fundamental concepts in a way that's accessible to the lay reader, and at a length that can be read and digested in an afternoon.If any aspect of Goldie's and Murray's advice is controversial, it's their stress on the importance of working with an independent, fee-only financial adviser. While, as they acknowledge at least in passing, this may not be the best approach for every investor, they do make a case that ought to be compelling to their book's intended audience. (Even for the experienced investor, they argue, a good adviser can help avoid common psychological traps.) At the very least, their explanation of the conflicts of interest that may impact brokers' advice, and the dangers of using an adviser who doesn't use a third-party custodian, may help investors avoid being taken advantage of by the unscrupulous.I'd recommend The Investment Answer as the starting point for anyone trying to make sense of the bewildering array of investment advice available today.
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Suncity-Son More than 1 year ago
This is a good solid foundation for investors. It is meant to be read in one session. That is very uncommon for an investment book. This is not necessarily a magic bullet but can serve you well. Highly recommended for anybody looking for strong primer.
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