Reasons to Hire an Investment Manager
“The investor’s chief problem – and even his worst enemy – is likely to be himself.” – Benjamin Graham, The Intelligent Investor
Finding a sensible investment strategy isn’t that difficult, but executing it over the long term is. You may expect the randomness of market returns to likely be the biggest challenge to successful investing, but it’s not. It’s you.
You are a living, breathing investment risk comprised of innate behavioral biases. It’s okay, you’re human. And, it’s not as bad as it sounds because you have choices.
Certainly, you can self-manage. You can find lots of good financial advice online, all for free. For example, Bogleheads.org is a forum where investors who follow the philosophy of Vanguard founder John Bogle discuss a variety of investment topics. Most members manage their own portfolios.
However, while it’s possible to invest on your own, most people are just not very good at it. That leads to the preferred choice for the smart investor, hiring a low-cost investment manager. Here’s why:
Discipline isn’t easy…
You may be confident in your ability to create the right portfolio with an appropriate asset allocation, and you may have every intention to diligently rebalance. But, are you certain that you have the discipline to stick with that asset allocation at all times?
Imagine how you would feel about your portfolio if it declined by 30% or more. Do you still think at that time you would have the fortitude to buy more of your assets that have done poorly and sell those that have done well?
Or, would you abandon your portfolio? That would be your worst mistake, as exemplified in a JPMorgan Asset Management study of the S&P 500 from 1994 to 2013. An investor who missed just the 10 best days, from 1993 to 2013, would have an annualized return of 5.49%, compared to 9.22% if that investor stayed fully invested.
An investment manager can be the reassuring voice to help you stay the course. This personal, objective advice isn’t always available to you when you self-manage, nor when using automated online investment services like robo-advisors. This is most important in retirement when you rely on a portfolio to help meet income needs and when it’s harder to recover from financial mistakes.
…because you’re emotional.
We’re all predisposed to the occasional emotional reaction. Making financial decisions based on emotions, such as greed and fear, often lead to costly mistakes.
When investors let their emotions get the best of them, they typically chase returns – they buy what’s hot and shun what’s cold. This is a losing strategy. A 2014 research paper by Vanguard compared a buy-and-hold approach to a performance-chasing approach over a 10-year period. It found that the buy-and-hold approach outperformed performance-chasing in all Morningstar style boxes studied, such as large-growth, small-value, mid-blend, etc.
It turns out, that by picking only top-performers you end up breaking a cardinal rule of investing – buy low and sell high. Emotion tells you to do one thing, but sometimes the best move is doing the opposite or nothing at all.
Plus, life is complicated…
Life is full of questions, which only become more plentiful as you age and your financial goals become more complex. Another reason for hiring an investment manager actually can be summed up in several individual questions:
- Are you nearing retirement and wondering if you have enough saved?
- Do you need your investment portfolio to supplement retirement income?
- If so, how do you set up a reliable cash flow from your portfolio?
- Can you use your assets to buy a new house or donate to charity?
- How much risk should you take if you hope to leave money for grandchildren?
…and so on. If you invest on your own and don’t have the answers, who do you turn to?
…and who’s got the time?
Investing your hard-earned money for the future is important, so you need better than a “good enough” investment strategy. You need to determine the right asset allocation that offers the best chance at meeting your financial goals at a comfortable risk level. Then, you have to research and find which funds best represent the asset classes you need in your asset allocation.
But, that’s not all. There’s also the responsibility of periodically monitoring your portfolio and rebalancing when necessary.
Investing can be time consuming. Most people simply do not have spare time to dedicate to their investments; especially, those in retirement who would prefer to optimize their time for other pursuits. By using low-cost index funds instead of active funds and hiring a low-cost investment manager, you’re more likely to save time and money.
After reading this, you may be skeptical. Of course, this is an investment manager writing about the benefits of hiring an investment manager.
So if you would rather self-manage, at least take some fundamental advice: invest in a broadly diversified portfolio, consisting of low-cost index funds with an asset allocation that doesn’t exceed your tolerance for risk; keep the cash you need separately and don’t spend more than you need; ignore the noise of market news; and otherwise hang tight.
And, good luck. If you’re like the average investor, you’re going to need it.