If you are seeking investment help, look at the video here on my services. If you are seeking a different approach to managing your assets, you have landed at the right spot. I am a fee-only advisor registered in the State of Maryland, charge less than half the going rate for investment management, and seek to teach individuals how to manage their own assets using low-cost indexed exchange traded funds. Please call or email me if interested in further details. My website is at http://www.rwinvestmentstrategies.com. If you are new to investing, take a look at the "DIY Investor Newbie" posts here by typing "newbie" in the search box above to the left. These take you through the basics of what you need to know in getting started on doing your own investing.
Saturday, November 27, 2010
One way in which the world has become meaningfully different in recent decades is that people are now in charge of their own investments and retirement. It used to be that workers received a defined benefit at retirement and had a known monthly check coming in. Now we have IRAs and 401ks or other qualified accounts. Some of us are quick to throw our hands up and seek professional management. Here are some reasons to think about taking a different route - about learning how to manage your own money.
1. Save investment management fees. Pick up the local phone book and call 10 investment advisors out of the yellow pages. They will quote you a fee of between 1% and 2% of the market value of assets to be managed. For $1.0 million, that amounts to between $10,000 and $20,000/year. There are other costs as well. If they use mutual funds, the average expense ratio is 1.4%. If they trade actively, there are trading costs. Here's an idea: at the very least, take $5,000 of the $10,000 you save and take a great vacation. Take the other $5,000 and give it to Children's Hospital. Now you feel good, you've done good, you get a great tax break, and you understand what is happening with your money. Think of it like this: you can either drive your own car or you can have a chauffeur drive you around. For most people, the chauffeur is a big waste of money.
2. You have control of your money. If it is managed by others, you gradually lose an understanding of how it is invested. I know because I ask people questions that they find awkward. I ask them the most important question in investing: what percentage of your assets are in stocks and what percentage in bonds? Many people will hem and haw and sheepishly admit they really have no idea. I ask them how they performed last year. Some say they did OK and give me a dollar amount of how much their account went up. "My guy made me $22,000 last year." This of course, is meaningless. What was the percentage return? If the market went up 12% and "your guy" got you a return of 10%, he actually cost you 2%. I hate to rain on the parade, but this is quite common. People walk around thinking their advisor is doing a good job managing their money when, actually, the performance is horrible and very costly. I know many people will want to put this in the "ignorance is bliss" bin and move on. I'm obviously not in that camp. I've seen how the "ignorance is bliss" crowd handles markets like 2008.
3. It is not difficult to manage your own money. Think about this: you have probably managed or are managing a part of your own money already. If you have a 401k or a similar type of qualified account, you have probably read some investment related material, listened to a fund sponsor rep, and decided on how to invest your assets using the choices provided. Guess what? You are half way there. One thing that is generally missing is how to bring it all together by looking at all your assets holistically. But this is something most people can easily handle. Another thing you have to learn is how to pick appropriate funds and how to get the correct mix of stocks and bonds. Listen to the rep, but take what he or she says with a grain of salt. Many times they are insurance company sales people or brokers getting paid commissions for selling products.
4. It doesn't take a lot of time to manage your own money. Let me put it like this: that advisor I mentioned above who will get between $10,000 and $20,000/year to manage $1.0 million for you is getting one of the highest per-hour compensation rates on the face of the planet. I know. I've been there and done that. I know how many hours ( I probably should say minutes) typical advisors spend thinking about your account. I was in a meeting one time and the stock picker was asked by an advisor when the last time the stock had been reviewed. It turned out the stock was on the "buy list" and hadn't been reviewed in over a year and a half! The upshot is that, with today's technology, it is very easy to track and manage your investments using approaches recommended by highly-respected long time students of the markets.
Tomorrow we'll look at how to become a DIY investor.
Picture by LMW