Friday, April 13, 2007

The best person to manage your money

It’s so tempting when you see the ads with the guy sitting next to you. He tells you that you can retire more comfortably than you ever thought possible. Then the voiceover comes: “Trust [insert investment bank name here] with your money.”

Ah, yes, write some guy a check, and when you’re ready to put down payment on your dream house, retire, or finance your son’s world-changing rocket-science Ph.D. work, you’ll have all the money you need.

Beware the flashing teeth. These are two instances of a typical meeting with a financial advisor. The first, someone meet this financial advisor which advise him to invest in a XXX index fund, so he could invest it in a mix of individual stocks. The annual fee was 5% of the assets, plus trading costs.

In the second instance, an advisor told someone young and urged an aggressive investing agenda. “No risk no reward” may or may not have been his exact words. Comparatively, this guy was cheap – he charged a flat fee of about 3% of assets. But (you knew a “but” was coming, right?) he wanted 2% of all returns.

If someone took those baits, they’d better be good. The fee structure was such that Advisor No.1’s stock picks would have to outperform the S&P 500 by 10 percentage points – a feat that would rank him among the top rung of the best investors ever. Advisor No.2 had a lower outperformance threshold, but he’d skim 2% of the gains (no matter how large or small) off the top.

The odds that either of them would do better than the plain-vanilla (and cheap) S&P 500 index fund were not good. Considering about 75% of actively managed funds fail to beat their far cheaper benchmarks (e.g., S&P 500). So how likely is it that those financial advisors were going to earn their keep?

Fortunately, the two potential clients of the advisors said: “Thanks but no thanks” and decided to go it alone. That’s scary – investing isn’t their day job, after all. And like most folks, they’ve a job and a family and responsibilities.

I mean, who has the time to manage his or her investments?

That’s a question we see a lot and it is a reason contributing to the large majority of people trusting their hard-earned money to “advisors.” And although you may not have the time to be a stock market wheeler or dealer, you almost certainly have the time to sit down once a year, design an asset-allocation plan, and build a portfolio composed entirely of low-cost indexes. Why? Because no one will serve your interests like you will.

But where do you start? That’s another question we get a lot. And getting started is a lot easier than you think. You just have to sit down, take stock of what you have, and figure out your timeline and risk tolerance. If you’re already retired, for instance, you’ll probably want to stash the bulk of your savings in low-volatility vehicles such as REITS, TIPS (Treasury inflation-protection securities), bonds or the likes. If you have a longer time horizon, you might be better served to put your money in some index fund, but consider the cost.

Of course, there is more to investing than that – which I’m happy to discuss further – but the basics can be fairly simple.

And then you’re on your way. The same principles that apply to do-it-yourself home improvement apply to do-it-yourself investing. You could hire a professional and pay that person a lot of money to do a job that may or may not be up to your standards or what was initially promised. Or you could do it yourself, take your time, and know it will be done right.

And just as some home improvements require a trusty guide, I hope this article could do you some favor on this. While there’re many well-intentioned money-managers out there who genuinely care about their clients, they can be difficult to find. If you do it yourself, on the other hand, you know exactly what you’re getting.


musicwhiz said...

Yes, true. I have many friends who tell me that they trust their investment or fund manager with their money. Worse, some even trust a friend or business associate to invest for them, and the worst part is they don't even question what and how their money is invested. They just sit and wait for the returns.

When I probed further, the usual reasons would be: not enough time, I don't understand accounting/finance/stocks or even "I can't be bothered" ! But as your article said, it's YOUR money at stake here ! Most people fail to realize that if you are "lazy" with your money, then how can you expect good and decent returns ?

Since I started investing in late 2004, I have been managing my own personal finances (including my wife's) and also my portfolio of quoted equities on SGX. All research is done by myself without the advice of any wealth or fund managers. It's not that I don't trust them but I find it silly to pay someone else to manage my own money ! After all, I dare say I probably know more about the companies I invest in because they are MY investments after all; someone else may not give a hoot about it cos it does not impact them financially.

Of course, performance should be benchmarked to the average returns for any index on a longer-term basis, but so far so good and I hope to be able to continue practising value investing into the future as it has worked for me for the past 1.5 years.

Sofiya Lim said...

Awesome article for the traders who want some tips for getting Best SGX stock picks and intelligent and successful investing in the stock market.