Do-it-yourself investing

Some months ago I saw the following which is a re-hash of many similar articles that I’ve seen in the business sections of the newspapers. Unfortunately, I put it aside as a basis for a new article and I’ve forgotten where I’ve first seen it!

" ...folks who buy mutual funds through brokers (and, therefore, pay a fee to buy the fund) lose 1% per year on average versus those who buy mutual funds directly (and, therefore, don’t pay a fee to buy the fund). How significant is 1% a year? Over a 30 year time span, this annual 1% erosion will eat more than 25% of an investor’s total return."

The 1% referenced above is the cost of an adviser. What the above paragraph is trying to suggest is that if you don’t want professional management of your life savings and you want to do it entirely yourself without any help, you could indeed, save the 1%.

Are we being penny wise and pound foolish? What if the 1% saved (as stated above) is offset by a 3%, 4% or more annual loss because maybe you are not really equipped to be a great portfolio manager? Should saving money on the management of your life savings be your single ultimate goal?

The answer is clearly – no.

Obviously the author of this article does not like financial advisors and has intentionally used the word “losing” in what I think, is an example of irresponsible reporting.

Are costs the same as losses?

I don’t believe they are.

My doctor provides a valuable service. His or her fee is embedded in the price of the service. I (thankfully) do not get a bill when I need medical attention. Medical costs are not open, transparent or disclosed and I do not need to take medical courses to become medically literate so I can qualify to be a patient. I do not perceive my doctor as losing me so many percent per year but I do recognize there is a cost element in seeing a doctor.

Problem is the average investor does indeed “lose” say, 3% per year(or more) due to shooting oneself (predictably irrationally, speaking) in the foot. Buying when they should have sold. Selling when they should have bought or just too much buying and selling in general or trying to catch up with the latest investment fads of the day. People after all are people. We are just not genetically hardwired to be great portfolio managers.

What if the investor hired an adviser for one reason only - to dissuade the investor from bad investment behaviors and to intercede at crucial inflection points? Perhaps talking an investor from not selling at the depths of despair in 2009 and losing 57% of your life savings forever? Or not buying into the tech euphoria and avoiding the resultant tech crash.

Have we all forgotten the lessons of the Great Financial Panic of 2008 - 2009 already? If an adviser (by sheer force of Will) managed to protect an investor from himself or protect investors from the ravages of the media during the Crisis, would the investor still perceive his adviser to be a guaranteed annual loss of 1%?

Certainly not.

Managing your life savings is not a do-it-yourself project. Knowing one’s own limitations and turning things over to a professional when it is appropriate to do so, may be one of the smartest things you’ll ever do.


Related articles:

  1. The Great No-help Lie
  2. Value of Advice


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