moneyFYI
Financial Freedom Is Merely Organized Common Sense
D-I-Y Investing Is Not For Everyone
Some things often look easier than they are. If you want to achieve financial independence or adequate retirement funds, investing is one thing that matters to you. Do-It-Yourself should be avoided when outcomes matter.
When the market is down
As with any other adversity in life or business, when a downturn happens, the first place people look is at costs that can be temporarily or permanently reduced. Paying exorbitant management fees is a weak decision. A recent article in the Globe and Mail by money columnist Rob Carrick makes the point.
The arithmetic is compelling, and you should understand it. But, that is not the critical part. Fees are price. There are other non-price factors to consider if you do it yourself.
Investing is not as easy as it looks. I have noticed people with some knowledge think they can easily do it. They know how to keep records, they have a way to pick winners, and they know about tax reporting. They may be a little short on their strategic vision, and most have only a vague idea about what they don’t know. They never ask themselves, what do professional fund managers know that they do not? What resources do those managers have that the average person does not have? Do they have colleagues with contrary ideas that can keep their opinions balanced? What happens when the markets move against them?
The real question is two-fold.
There is a cost to do nothing, hire a fund manager, and there is a cost to do something do-it-yourself.
- How much does using a professional advisor or fund manager cost me? That’s the arithmetic part?
- How much could it cost me to not use a professional advisor? To cost yourself more than an advisor, all you have to do is earn about 1% less than a fund aimed at your specific purposes. To that, add the price of lost peace of mind when you try to cope with adversity that seems random.
Some questions you might ask yourself. How do I know when a stock is cheap relative to its earnings and growth potential? What about currency risk and opportunities? When should I sell? What risks have I inadvertently added? What opportunities did I miss? Do I have a sense of investing outside my own country?
Most of the material I can access discusses diversity and a dozen statistical factors, but how do I use that? There is a common condition among the do-it-yourself group – deworsification. Owning 40 stocks is not diversification within the ideas used by professionals. They look for securities that are not likely to move the same way as market conditions change.
It shouldn’t be about price; it should be about value.
Can you beat the professionals?
How badly could I do? Really? The answer is “shockingly badly.” Part of the managed money in the market includes the do-it-yourself crowd. While professionals, on average, don’t outperform the market after fees, many of them do. Is that just luck? I doubt it. Luck favours the prepared, and “the prepared” doesn’t include amateurs.
I have written on this subject before.
First, in 2014, “How hard would it be to outperform “Shockingly Badly?”
With an update on that in 2022. Could you outperform shockingly badly?
The answer remains elusive.
Your defence
Keep in mind what the purpose is? Compared to your needs, if you doubled your money, would that have as much effect on your life as losing half?
Sometimes management fees should be seen as preventing disasters and providing peace of mind.
The takeaway
Pay no more in fees than what’s necessary, but be sure you are not making the achievement of your goal less likely. Usually, zero is not the right amount to pay.
If you don’t know what professionals do, how do you know you can do better?
Looking at bigger pictures and asking questions is how organized common sense works.
I build strategic, fact-based estate and income plans. The plans identify alternate ways to achieve spending and estate distribution goals. In the past, I have been a planner with a large insurance, employee benefits, and investment agency, a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business. I have appeared on more than 100 television shows on financial planning. I have presented to organizations as varied as the Canadian Bar Association, The Ontario Institute of Chartered Accountants, The Ontario Ministry of Agriculture and Food, and Banks – from CIBC to the Business Development Bank.
Be in touch at 705-927-4770 or by email at don.shaughnessy@gmail.com.
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