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Originally Posted by l2ridehd
Yes the fee paid an advisor goes up and down based on a % of your portfolio when your total value goes up and down. And this is exactly why most advisors try to sell you "things" you shouldn't buy so they get high commissions. And why they put you in investments that have higher risks then you should be taking so the potential returns may be higher. Think of it like this. You could put all your money in 20 different banks using CD ladders and have almost zero risk. You would also have VERY low returns. So you take 20% of your money and put it in stocks to improve your return.
You have also just increased your risk. And so you take 80% and put it in stocks and your risk goes much higher. Then you decide to put that 80% all in twitter stock and your risk of failure is now through the roof. You may get lucky and get a very high return, but your risk is still extremely high. So how do you balance risk and return? You set an asset allocation that you are comfortable with and then make sure your fixed income and your stock portion are both highly diversified. You have lots of different bonds and stocks. So if one should fail your returns have limited impact.
Lower your risk by having many different stocks and bonds by using index funds. Total stock market, total bond market and total international stock and bond funds accomplish that objective. Then get your expenses as low as possible so you keep a very high % of your returns. You can use a tool from Morningstar called Portfolio Xray to determine your total expenses. Mine are .011% for everything. That is for every $1000 invested, I pay $1.10 a year. All in mutual fund expense ratios. If your paying 1.5% a year then your paying $15.00 for every $1000 invested. Over time that adds up to very expensive advice. If you have a 1 million dollar portfolio you would pay just in advisor fees $15000 plus your also paying the expense ratios and loads for what ever investments your in. In this example I would pay $1100.00 a year. That means I would have a minimum of $15000 savings to invest even if the advisor also used very low cost funds. Most don't. Over ten years that's a huge advantage of $150,000 to re-invest. And I can almost guarantee that my downside risk is significantly lower.
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There are some interesting analyses, I think I read in John Bogle's first? book (Vanguard founder), that shows you can actually DECREASE an all bond portfolio risk while increasing returns, by including 10 or 20% equities. An interesting read.