“Unless you build a habit of making money on your own, standalone, you will find yourself, at some point, depending on the whims of someone else who will run your life when it’s too late” Nassim Nicholas Taleb
One flaw in most investment advice I believe lies in the fact that it is not sufficiently tailored to the individual. A majority of investment advice recommends the same investment approach for you as they make to other clients. This is based predominately on your age, your risk profile or tolerance and how much you have to invest.
However, none of us are in the same position regarding our finances and our stage in life so it is sensible that we should have a personal investment map to guide us in our investing.
Here are three good reasons to manage your own investments.
When it comes to investing money, many people seek advice from a financial adviser. This is not unusual and financial adviser can add value to enhance your long term wealth. The cost of investing your money is best described as scaled, but asymmetrical. The more you make, the more you lose in fees. And the incentives are such that it is better for the manager to invest all of your money rather than just some of it with a store of cash.
Now if they add value that is fine however most managers underperform the wider market and so you are paying fees to lose money (politely referred to as underperformance). That does not make sense.
Advisers can charge a flat annual fee or in some cases a percentage of your assets that they manage – for example 1%. In most cases these advisers will recommend that you place your money in a fund that also charges fees. So in some cases, you can be hit with two sets of fees – one from the adviser and one from the recommended fund.
There are various fees and charges when you invest in a managed fund and funds don’t all charge fees in the same way. Active fund managers (who buy and sell a lot of stocks during the year) incur higher taxes due to the large number of transactions. This in turn reduces the investment returns of the fund. Over a 25 year period, an investor would hand over a shocking 30.5% of his/her income just to receive the average long term return.
All funds have an established asset allocation. For example, a balanced fund will look something like this:
* Equities includes Australian Shares (6.4%), International Shares (20.1%) and Private Equity (4.9%).
Asset allocations incorporate a range of asset classes with invest in a range. One major drawback with these types of funds is that they are required to stay within the established ranges for the asset classes. So as above, cash can vary between 0-25%. However if the market declines considerable then they cannot go any higher than 25% cash.
This can be restricting if you wish to, for example, increase your allocation to the market if it declines so you can buy low. Or reduce your allocation if you believe the market is overvalued sell high. Managing your own money allows you to move your asset allocation to levels that you consider appropriate. As Taleb states above, you are at the behest of others if you do not control your own money.
Managing your own money gives you greater choice in where to invest. Many funds and advisers have a home bias – a situation where for example, Australia is only approximately 2% of global stock markets but most invest their money at “home” in the Australian market. However all market ebbs and flow and sometimes it is prudent and more profitable to invest in overseas markets. Have a look at the following chart. Notice how countries take turns at outperforming their counterparts.
There is really no reason for holding a home bias. Most markets work on the same principles and so it can be very prudent to spread your investments. There is no proven higher level of risk in overseas markets and it is actually prudent to ensure that you have some investments overseas in order to reduce your risk.
With the advent of ETF’s, investing overseas is no longer prohibitively expensive. And it can increase your returns. Notice above that seldom does one single market outperform over either the long term or the short term. In many cases, last year’s losers becomes next year’s winners. But in many cases, fund managers are reluctant to invest in “losers” because they increase their chances of looking stupid. It is often much easier to follow the crowd.
All markets suffer periods of underperformance. With an appropriate asset allocation and rebalancing map, this underperformance can be your advantage by allowing you to take advantage of investment opportunities as they arise in overseas markets.