With advances in fin-tech portfolio products, and wider access to low-cost, easy-to-use index funds and exchange-traded funds, it’s never been easier to be your own financial planner.
While data is mixed on whether or not it’s a good idea to be your own portfolio manager, know going in that there are some vital rules of the road going into a do-it-yourself portfolio management campaign, and some serious speed bumps along the way if you don’t know what you’re doing.
Studies show there’s plenty of evidence on both sides of the issue that going the DIY investing route is a good idea — or not.
Data from Davis Advisors show the average stockholding mutual fund returned 9.9 percent annualized from 1991 to 2010, “but the average fund owner earned only 3.8 percent on average per year.”
[See: 10 Long-Term Investing Strategies That Work.]
Vanguard, the mutual fund giant based in Malvern, Pennsylvania, says in a 2014 research report that company investors who went the DIY portfolio path earned 3 percent less than investors who worked with Vanguard advisors to choose and manage funds.
Meanwhile, according to the American Enterprise Institute, between June 20, 2015, and June 30, 2016, 84.62 percent of large-cap managers, 87.89 percent of mid-cap managers, and 88.77 percent of small-cap managers underperformed the Standard & Poor’s 500 index, the S&P MidCap 400, and the S&P SmallCap 600.
Similarly, in a five-year period ending June 30, 2016, 91.91 percent of large-cap managers, 87.87 percent of mid-cap managers, and 97.58 percent of small-cap managers fell short of their respective benchmarks, the report says.
What do investment professionals think? Unsurprisingly, since they make a living providing investment advice, they’re not big fans of the go-it-alone approach. Even so, they make some fair points.
“Investing for retirement is inherently complicated, particularly as people get closer to retirement,” says Robert R. Johnson, president and CEO of the American College of Financial Services, in Bryn Mawr, Pennsylvania. “The costs of mistakes can be major and many individuals are simply not wired to be effective DIY retirement investors. One simply can’t make up for major retirement mistakes both early and late in one’s working life.”
Johnson says the relative effectiveness of DIY portfolio management requires that investors stay the course, but too many don’t do that.
“The biggest reason that DIY investors fail is that they don’t stick to the plan and attempt to time the market,” he says. “DIY investors should heed the Wall Street adage that time in the market is more important than timing the market.”
DIY investors also too often believe they need to make changes to their portfolios in light of market events, when they really don’t have to, Johnson adds.
“One simply needs to watch a few minutes of 24/7 financial news networks where talking heads lay out strategies for investing in light of the French election results or in response to President (Donald) Trump’s proposed tax plan,” he says. “In my opinion, those developments should have zero impact on your retirement portfolio, especially as DIY retirement investors underperform because they lose courage in tumultuous markets. DIY investors would do well to heed Warren Buffett’s advice to be greedy when others are fearful, and fearful when others are greedy.”
Johnson sums it up like this: “Basically, when people get sick they go to a doctor. When people get in a legal tangle, they seek the advice of a lawyer. Yet, somehow, people believe they should be able to navigate the complex financial waters on their own.”
[See: 13 Ways to Take the Emotions Out of Investing.]
Other financial experts say the human element corrupts a DIY portfolio, thus the need of an objective, detached investment professional to call the shots.
“The main problem with most DIY investors and their portfolios is emotion,” says Roger S. Balser, managing partner and chief investment officer at Balser Wealth Management in Avon, Ohio. “It’s been shown time and time again that an investor usually does not do the right thing, and their emotions get in the way.”
An investor should focus on “what you can control,” Balser adds.
“If the investor’s goal is to beat the market every year they will be disappointed,” he says. “Just have a process, follow it religiously and reduce unforced errors by automating your decision. This takes away the emotion.”
If you still want to take the portfolio reins yourself, make sure you’re factoring in some critical considerations. “First, you need discipline,” says Bob Weisse, chief investment officer at Heritage Financial Services in Westwood, Massachusetts. “Many investors have a poor investment experience because they buy high and sell low.”
Weisse says most people think they can control their emotions, but many were buying technology stocks in the late 1990s, selling stocks in 2008, 2011 or early 2016, or holding cash because they weren’t sure where the market was going.
“These timing mistakes can be devastating to a portfolio’s return,” he says.
Do-it yourself investors also need a solid asset allocation plan, Weisse says.
“You need to set a prudent asset allocation today, and then only change it to rebalance or potentially make smart adjustments based on market conditions,” Weisse says. “Like the ‘discipline’ theme, if you have an asset class that’s underperforming for an extended period of time, selling it is probably not a good strategy.”
With the advent of index funds, robotics, and do-it-yourself podcasts, blogs and newsletters, it’s tempting to avoid using a financial professional and run your investment portfolio on your own. But there’s a significant risk in doing so, and perhaps the best path is to at least run them by a trained money management professional before you hit any “buy” or “sell” buttons.
[See: 10 Questions to Ask Before You Hire a Financial Advisor.]
That way, you’re still in charge, but have a sounding board on the potentially life-changing decisions you make managing your own money.
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Do-It-Yourself Investing: Know the Risks, and Have a Good Plan originally appeared on usnews.com
