After flying for the Air Force in Vietnam and joining Eastern Airlines, Armstrong signed up with Connecticut General Life to pursue the investment biz as a sideline. Later, he formed his own firm and eventually became a pioneer in offering advice on investing to online readers. A biweekly column grew into a free online book, Investment Strategies for the 21st Century, which you can read at www.InvestorSolutions.com. It's filled with sound advice.
To learn about his new, hardcover book, I reached Armstrong this week via his cell phone as he cruised on a yacht in New York Harbor. Edited excerpts from our discussion follow:
Q: Tell me about the boat you're on.
A: This is a 55-foot, long-range cruiser. And we're going to take it back down to Miami now and get it fixed.
Q: That brings to mind the famous old book by Fred Schwed, Where Are the Customers' Yachts? Do your customers have yachts?
A: Yeah, all of them. They all are very wealthy.
A: We take a much smaller portion of their worth than probably any other fully managed [investment] program might. Our average total cost is probably in the range of 1.15%. That includes my fee and the fee for the mutual funds, and any custody fees at either Schwab, Waterhouse, or Fidelity.
Q: So, for a $1 million account, what sort of fee do you typically charge?
A: We would get about three-quarters of a percent.
Q: For your management fee?
A: Right. We use index funds exclusively, though, and so the index funds run about 40 or 45 basis points [one basis point is one one-hundredth of a percentage point].
Q: What's Wall Street's biggest offense against individual investors?
A: The commission structure taints the entire process. I think it's rotten to the core. Why anybody would go and get advice that's not objective is simply beyond me. I don't think, until very recently, people had an alternative to business as usual on Wall Street.
If you're going to pay for advice, you've got to make sure it's objective, and you don't have these conflicts of interest and hidden objectives that so pollute the entire environment on Wall Street.
Q: Is all of your money in index funds?
A: One-hundred percent of my money is in the same index funds that my clients are in, in the same proportions.
Q: Which are?
A: I'm 58 years old, and I like the idea that work is optional. So I have a balanced account that's about 60% global equities, and 40% short-term bonds. We can in fact index the entire world, using these index funds.
Q: Which specific funds do you use, then, in your equity portfolios?
A: Dimensional Funds -- the DFA funds. And we're about 50% foreign and 50% domestic, heavily tilted toward small[-cap] and value [stocks].
Q: And then, in your fixed-income allocation, are you all in municipal bonds and cash, or how does that work?
A: We use a very short-term bond fund.... We don't think it's appropriate for anybody to take a long-term bond position.... Going from 2 years to 30 years [in average bond maturity] on average is going to pick up 1 or 1.2 percentage points in yield, but you're going to pick up an enormous amount of risk.
Q: It's just not a good risk-reward trade-off?
A: Oh, no. Over the last 20 years, probably the 20-year bond has had as much volatility as the S&P 500, and only half or less of the return. And that certainly doesn't strike me as optimum.
Q: Tell me, if a reader buys your book and faithfully reads it, what do you hope that he or she will come away with?
A: Well, first of all, I think they'll make better investment decisions, which is the whole point of doing this. And they'll understand how markets work, and how to make markets work to meet their individual objectives.
And I hope that they're going to enjoy it. I suspect that most of these [books] don't get finished, so I tried to make it understandable and enjoyable for people who might not even have had a college education. And I hope they actually have a good laugh and enjoy the style, and that it's not a chore for them to get through it.
Q: Many books like yours are published all the time. One of the competing titles that's just out, The Four Pillars of Investing, is written by someone who has endorsed your book -- Bill Bernstein.
A: Bernstein is a good friend of mine. I encouraged Bernstein to write his first book. And Larry Swedroe [another of the book's endorsers] is a good friend of mine, and I encouraged him to write his first book.... So I'm very happy for both of them.
I would say that the difference is that mine is more readable. I think that theirs is a drier style. But I think that on all major points, we agree. Barker covers personal finance in his Barker Portfolio column for BusinessWeek. His barker.online column appears every Friday, only on BusinessWeek Online