The Surprising Truth of Investing: Mediocre Advice Is Best

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My investing success made it possible for me to quit working a regular job 10 years ago, at age 48. Even so, I have written very little about investing compared to what I've written about other personal finance topics. There's a reason for that: I'm a mediocre investor.

Over the course of my career as a software engineer, I saved and invested, earning a mediocre investment return. Since becoming a full-time writer, I've continued to earn investment returns — which although still mediocre, have been enough to supplement my income from writing.

As a mediocre investor, I have hesitated to hold myself out as an investment adviser, even if my results have met my own needs in a very satisfactory way. I figured people would quite legitimately compare me to superior investment advisers, and it was a comparison that I didn't think would put me in the best light. And yet, I'm going to overcome my hesitation, because looking for superior investment advisers is probably a mistake.

There are two big reasons why mediocre investment advice is the better choice: It's adequate, and it's cheap.

Mediocre Investing Advice Is Adequate

The purpose of your investment portfolio is to support your goals in life, and a mediocre return will do the trick. A mediocre return — just a few percentage points over inflation — will turn a modest flow of savings into a portfolio large enough to let you buy a house, send your kids to college, and fund a retirement (even an early retirement).

Trying to get a better-than-mediocre return requires taking financial risks that put all your life goals at risk.

If you have plenty of money available for investing, you can do both. You can cover your basic life goals with a portfolio invested for mediocre returns, and then you can direct your surplus investible funds into a portfolio that shoots for superior returns.

It can be fun if you enjoy that sort of thing. I did some of that. Looking back, I'd probably have been better off just going for mediocre returns on the whole thing.

Mediocre Investing Advice Is Cheap

Superior investing advice tends to be expensive. It's expensive because it's worth it — but it's really only worth that much to the truly wealthy.

Think about it. Let's say really good advice can boost your average annual return by five percentage points. On a $100,000 portfolio, that's an extra $5,000 a year. On a $1 billion portfolio, it's an extra $50 million a year. If someone can really earn that kind of extra return, they won't be working for you. They'll be working for the 1%.

And it's not only getting superior advice that's expensive. Just following it is expensive. Following any financial advice — good or bad — costs money, but not only is getting mediocre advice cheap, following it tends to be cheap as well. And that cost savings turns out to support your investment returns better than even pretty good advice does.

Go With Mediocre

Just looking for superior financial advice is fraught. Most people who say they're providing superior investment advice are wrong. Some are simply deluded, others are flat-out lying. Either way, you really don't want to follow their financial advice — following bad financial advice can easily cost you your life savings.

Fortunately, it's easy to tell the difference: Bad financial advice costs money, while mediocre financial advice tends to be free (or nearly so).

Where can you get mediocre financial advice? Lots of places. You might start with two books I reviewed here on Wise Bread years ago that provide just the sort of mediocre financial advice I'm talking about:

• The Little Book of Common Sense Investing by John C. Bogle: A perfect capsule of mediocre investment advice. It's also really short, because you can say about all there is to say about mediocre investing in a really short book.
   
• The Only Investment Guide You'll Ever Need by Andrew Tobias: A slightly longer book that also covers basic personal finance stuff — so, not just investing your money, but also earning, spending, and insuring it.

How to Know It's Mediocre

It's easy to tell if the advice you're getting is the sort of mediocre advice you want. There are two characteristics to look for:

1. It's free — or, available for no more than the cost of a book.
2. It doesn't claim to be better than mediocre.

If somebody charges money for their advice — or, more importantly, charges a commission, or a percentage of your assets for their advice — then it's probably not mediocre financial advice. (Charging a small fraction of 1% to cover the costs of running an investment fund is fine. It's charging extra on top of that for advice that's the danger sign.)

If somebody claims that their advice is superior investment advice, or in any way better than mediocre financial advice, then it probably isn't mediocre financial advice.

If you spot any of those warnings signs, I suggest that you avoid those advisers. It doesn't really matter whether they are people who genuinely think they're providing superior financial advice, or people who are just playing on your hopes for superior financial advice. If you follow their investment advice, I can confidently predict that your long-term investment returns — after expenses — will be crappy. And crappy returns mean a lower standard of living, less security, no chance to retire early, and maybe no retirement at all.