Why You Should Manage Your Own Money

August 30, 2014
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Bronze sculpture of J. Robert Oppenheimer in Los Alamos.

Bronze sculpture of J. Robert Oppenheimer in Los Alamos.

Daniel Goldie and Gordon Murray pose several decisions to investors in their small (70 pages) book, The Investment Answer: Learn to Manage Your Money and Protect Your Financial FutureWhile I agree with most of their advice, I arrive at a different conclusion when it comes to the “Do-It-Yourself” decision.  Goldie and Murray try to persuade readers they need professional help when it comes to handling investments.  There are two primary reasons for managing your own investments and they are:

  • Cost:  Professional management is expensive – very expensive.
  • Returns:  Over a lifetime of investing, the market will beat approximately 90% of active managers, if not more.

What are you paying for when you hire professional management?  A reasonable cost is 50 basis points per year or one-half of one percent of the portfolio value. (0.01% = 1 basis point)  Most advisors charge more, but I’ll use 50 basis points to be conservative.  For comparison, one can purchase the U.S. Equities market (VTI) for 5 basis points.  A fee of 50 basis points on a $100,000 portfolio over 30 years runs 0.005 x 100,000 x 30 = $15,000.  If your portfolio is $100,000 at age 40 and it grows 5% over the next 30 years, run the numbers and see what you are laying out for a performance that has a very low probability of outperforming the market.  We will define the market as the performance of VTI.

Does professional management have no value?  I will not go that far.  Advisors are useful in that they provide a stabilizing influence and keep investors from making harmful decisions.  They frequently provide services that go beyond investment advice.  Tax advice quickly comes to mind.  There are situations where an advisor can open the door to investments not normally available to the small investor.  When considering a professional advisor, examine your situation, but be aware of the cost over a lifetime of investing, and that can easily exceed 50 years.

This morning I was looking through the latest articles published on Seeking Alpha and came across this one on the debate to hire a manager or go passive.  The author, Mark Perry, cites another very interesting article, The Decline and Fall of Fund Managers, that at least partially backs my Do It Yourself argument.  Take the time to read the second article in particular as it makes the point of why so many investors are moving toward index investing, the philosophy advocated on this blog.

 

 

 

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