Investments: Professional vs. Self Management

[dmauder]

I'm curious to know what most people are doing with regard to managing their investment portfolio(s). Do most of you self-manage / self-direct, or do you let a professional money manager handle your investments for you?

And if you use a professional manager, do you typically pay by the transaction, or do you just pay an overall percentage of your portfolio value?

I've been a self-directed investor since about 1991 when my wife and I got married and opened our first mutual fund account. Since then, we've built up a portfolio of 401K's, IRA's, and various mutual fund accounts for things like college funds and regular non-tax-sheltered money.

Everything is self directed and has mostly been into mutual funds the entire time (and still is). I've purchased a few individual stocks here and there, but pretty much every one of those transactions ended up as a loss. Whenever you want the market to go down, just let me know and I'll buy some stock! Case in point: I STILL own CSCO and MSFT which I purchased right before the bubble burst in early 2000.

I know I could be doing SO much better with my investments, but I can't get myself to do anything different with the money. I'm constantly tossing around various possibilities such as getting out of funds and doing value investing instead, turning everything over to a professional and trusting them, or just moving everything into fixed income guaranteed investments.

I'd love to hear some thoughts and stories about how others deal with this dilemma.

Thanks!

Dave

[Famous Nabob]

Dave,

Lots of questions here. If you're doing it all yourself, you need to pay attention to your personal risk tolerance and goals, asset allocation, the markets, the economy, taxes, interest rates, global trends, value vs. growth, and a hundred other things. If you're really intersted in these things and you pay attention, this will help you in self-directed investing. Many people are very good at investing for themselves. If instead, you don't have the time or desire to follow these things, you probably should look into getting help. Find someone you trust to help guide you. Trust in this area is critical. Make sure the advisor understands your goals and needs.

Usually you will pay a flat fee for a money manager. Depends on how often they (or you) are trading in your account to determine if fee-based or per-transaction is right for you. Some money managers hold hundreds of positions in a managed account.

As an aside, my personal rule is that if I buy a stock, and it goes down "X" percent, I sell. (You have to define what "X" is for you, if you manage your own account!) Obviously I've missed something that the market knew, and I have a set sales point to preserve capital. I know many people that think "it will come back", but sometimes a stock may take years (if ever) to "come back". What opportunities did you miss while waiting for the comeback? Some stocks do recover, but I know people that are in the position you are with other stocks.

You have to ask yourself lots of questions regarding investing to see what is right for you, and no set of answers produces a "rule of thumb" that applies to everyone. You'll always hear these rules but it's important to remember, investing is never "one size fits all". Good Luck with your investing!

[RT Wolf]

From the value investing camp: if a stock I've bought goes down X, I buy more! Why wouldn't I buy something when it's gone on sale--even more?

I would recommend against transaction costs, because that can cause strong incentive-caused biases for the manager to "trade" your account.

Make sure that the funds you own have beaten and/or matched the market for the last little while. If they are lagging, sell them and just buy some index funds.

I would recommend picking up a good book on personal finance (I believe the For Dummies series and hte Complete Idiot's Guide to has copies of it) to help you to understand your options a bit more.

Good luck and HTH!

[Pat P.]

From my own experience, you can be successful (or unsuccessful) with either strategy. As Famous Nabob posted, it all depends on your risk tolerance, as well you willingness to commit time and energy in the investment process. As a rule of thumb, I do not invest in industries I don't know about.

One of the things that I learned from Kiyosaki's series is that one way to reduce risk is by means of education. If you want to invest in the service sector, learn about it. If you want to enter in the technological sector, learn about.

A way to quickly jump start your investment portafolio is to leverage your current knowledge on your industry, and work your way from there. For example, a realtor knows a lot of the housing market where he/she works, has an idea about the offer/demand dynamics in the past, and may have developed a sense about where the industry is headed for. If that were my situation, I will try some real state investing, looking into the stocks of companies on the industry (suppliers in the construction sector, developers, etc). This does not imply that a realtor shouldn't try buying biotech stocks, but if he/she doesn't know much about, it will be similar to gambling.

There is another advantage of having knowledge about investments: it can help you separte good from bad advisors.

Good luck,
Pat

[ahimel]

Dave:

Why do you pick your own stocks? Do you enjoy it? Which part of it do you enjoy? Is it the thrill of the risk, the joy of putting your money into an unknown future? Is it the ability to go to parties, and casually mention a few stocks you happen to be holding? Is it the hours of research just to find a few stocks worth further study, and then the hours of research to find which of those are really worthwhile, and then the hours of research for each company to determine which ones you should invest in, only to find that the answer is sometimes, "None of the above." ?

Or do you detest investment-picking, and wish it would all just go away?

The benefits of stock-management are a myth propegated by investment advisors and mutual fund managers. The truth is that monkeys throwing darts at the Wall Street Journal do as well or better than 75% of money managers out there. And (I'm sorry to say) the monkey-dart method probably also does better than you do.

The stock market does go up. If you bought one share of every stock on the NYSE, and held that for 10 years, the value of your portfolio would go up, even though a lot of the stock you held would be completely worthless; the companies that do well make up the loss. And of course it would be better to just buy the companies that will do well, and not buy the ones that will be bankrupt in 10 years. But the odds of you doing that successfully are... slim.

It's easier and safer to just buy an unmanaged index fund (which essentially allows you to buy one share of every stock in whatever index you select) and ignore it for 10 years. Check this post for more information on the benefits of index funds.

If you happen to like picking stocks, by all means go for it. Especially if you enjoy the necessary time and research to be an educated an knowledgable investor, you may make quite a bit of money. But just in case... pick stocks with a little money on the side, that you can afford to lose if your picks are really bad. Put the important money -- your IRAs and 529s -- into diversified funds, or into a self-managed investment that you can control, like real estate.

[Famous Nabob]

See Dave-- you have a variety of opinions on investing just in this post. That's why there are so many "answers" to your questions. Investing is a process that some people do fine on their own with, and some people enjoy getting help with. It just depends on you. You can look at web sites and get varying opinions about the do-it-yourself vs. help question also. You can get varying opinions about all types of investing. Just ask 10 people where the housing market is going this year! Actually, just this week, I read two different reports from two different market analysts and they were almost the exact opposite on their viewpoints for 2007.

For the do-it-yourselfers, index funds or ETFs are good low-cost alternatives to look at, as had been said. You can get good diversification by using them too. For people wanting help, you need to find an advisor you can trust and make sure they understand your goals and objectives for your money. Interview a few advisors and understand what process they use-- maybe they are value investors, or maybe they are using a "core-satellite" approach, or they suggest using outside money managers. Understand their fee structure also and make sure it is reasonable. The fee you are paying, whether it's a commission or a yearly fee, is paid to the advisor in exchange for them helping you answer all of these questions as they apply to you.

As for the previous comment by RT Wolf saying, "if the stock goes down X, I buy more", once again, you can see why markets function the way they do. His rule is different from my rule. I previously suggested my rule as a guide to you since I know people that hold the stocks you listed thinking they will "come back", as I said. Investing is different for everybody, and we all have our own rules. Again, you can see how investing can be different from person to person just from our few posts.

Good Luck!

[Hugh Hollowell]

If your daughter were seriously ill, would you use the home remedy you learned that day on Martha Stewart's TV show, or would you consult a doctor?

You are talking about the money that could fund your retirement, educate your children, provide health care to you in your old age. Do you really want to chance that on what Money magazine says to do this month?

Even if you could ( big assumption) do as good a job, is it really the highest and best use of your time? Do you really like scrolling research data, researching corporate reports, trolling the news feeds, and cetera?

I say outsource it.

[dmauder]

Thanks everyone for the great responses! I want to respond individually to a couple of posts (which I will do), but after reading most of the responses, I guess the intent of my original message didn't come across right.

It was really sort of a curiosity thing to see how others are investing. I wasn't really looking for advice as to what I should do with my money - I realize that's something I need to discover on my own.

Actually, I think I've definitely settled on value investing as an overall strategy for myself. I'm still in the process of reading "Rule #1" and learning as much as possible from other websites and forums. The real question I need to answer for myself is whether to just invest in value mutual funds and/or value companies, or pay a professional to do it for me.

Maybe I should have made this a poll.

Dave

[SuccessPundit]

It depends entirely on your objectives, experience, resources, and talent. Very difficult question.

If your objective is to become a billionaire before you pass, then start learning how to invest your money now and plan to keep at it for the rest of your life. On the other hand, if you want to turn $10,000 into a decent retirement over the next 20 years, then someone else may be able to handle that for you.

Your investment options also increase with the amount of money you have to invest. Specifically, accredited investors (people with over $200,000 a year in income OR $1 million net worth, if I remember correctly) are allowed to invest in certain private equity vehicles that are illegal for people with less money to invest in. You can generally expect a much higher return from these investments.

Personally, I've been trained since birth to invest in real estate, and I know the business forwards and backwards. For the first two years after college, my objective was to increase my wealth as quickly as possible, so I invested for myself and built three companies centered on real estate. I worked on it 80-100 hours per week.

Now that I've made a substantial amount of money and don't really need to work full time anymore, I'm becoming a much more passive investor and placing the money with other sophisticated investors. I'll make less money, but I'll have a whole lot more time.

Hope that helps!

[TheIronStar]

I do it myself, mainly because I haven't found anyone who knows more than I do, which is sad because I'm not an MBA or the like--just another educated ordinary person. It's gotten to the point that most "financial advisers" I've met are better described as sales agents and not advisors.

It's also frustrating when they merely repeat the same junk that anyone can read on personal finance sites without offering anything more scientific or otherwise superior given their place as a purported expert ("If you invest in a diversified portfolio and get 8% a year..." without a single reason to believe one specific number over another and no information on how much it would vary, and teaching no defensive measures against a downturn), and also when they never take the time to think exactly how much money it would take over inflation and after taxes to have a [whatever]-class retirement in today's real terms for 45 years without any health-care-access or health-care-cost worries in a post-pension, post-social-security, and most likely post-health-insurance and post-job-as-generally-reliable-income-source world in 40-something years from now.

So these days I just do the stuff the financial news media feeds the middle class. Index funds, keep costs low, etc., because few people seem to be skilled stock/security pickers that beat market averages. I know about market efficiency and all (everything from ordinary US stocks to even glamorous things like emerging markets seem to be becoming more efficient), but I wonder whatever happened to expertise.

I often fear that it'll never be enough, though, and that no amount of work-and-save will truly generate enough wealth when the time comes.

[ahimel]

I have three goals for my money, a la Kiyosaki, although I assume the idea didn't originate with him.

I want to be safe This is my don't-live-in-a-cardboard-box funds. They mostly hang out in my bank account. The emergency funds live in my paypal account, which is currently paying 5% interest.

I want my future to be secure This is my retirement money. It lives in super-aggressive mutual funds in my Roth IRA and SIMPLE. Someday when the stock market has a spectacular year (the future equivalent of the .com boom) I'll pull it out of super-aggressive and put into a basic index fund.

I want to be rich This is income above and beyond that provided by my retirement funds and me working. If I lose all of it, I'll still have enough to pay the mortgage and retire at 65. (Although they'll probably have changed it to 70 or 75 by the time I get there.) At the moment, I'm paying off a real-estate investment course that turned out to be too much for me, and working on a computer-repair business. If all goes according to plan, the real estate will start generating a little income this year (I hope to cover the cost of the course in the first year) and the business will sell for USD1mil or more in 3-4 years.