Any advisor or bank executive would love nothing more than for you to hand over your hard-earned assets to one of their managed account programs. While it does seem convenient -- and smart -- to have your money "actively managed by a team of professionals," it turns out that there are far more subtle, effective, and efficient ways for you to invest. In this article, we'll explore some of the main reasons you should consider managing your portfolio.
1. It's significantly cheaper
Many of the large discount brokerages -- Vanguard, Fidelity, and Charles Schwab, among others -- offer free online stock and exchange traded fund (ETF) trading. Access to the financial markets has, quite literally, never been easier or cheaper -- anyone with internet access has the power to enter trades at zero cost. Now that transaction costs have effectively been eliminated, it's hard to understand how any large institution is able to charge commission -- but all of the large wirehouses (think Merrill Lynch, a subsidiary of Bank of America) and Morgan Stanley still do.
Managed investment programs at large banks or investment firms -- pooled funds that trade in and out of stocks according to market conditions and an investment mandate -- can cost anywhere from 1% to 3% of assets invested. While they may not sound deleterious (what's 1% anyway?), these fees can take a tremendous toll on an investment portfolio and eat up a significant part of your after-tax return.
As a minimalist investor, I've found that it's best to avoid these programs and opt for passively managed, low-cost index funds that you can purchase for free. The most heralded of all low-fee funds is Vanguard's Total Stock Market Index Fund, which is not only extremely cheap at 0.04%, but also provides exposure to a diversified mix of America's best companies.
2. It will not take a lot of time
A common misconception about managing your own investments is the belief that you don't have enough time to manage them effectively. In reality, managing money doesn't need to be time-consuming, especially if you are of the belief that passive investing -- or buy-and-hold investing -- triumphs over time. Most active managers fail to beat the performance of passively managed index funds after expenses, despite significant time and money spent in the pursuit.
In most cases, setting up your investments typically takes no more than a few hours of your time. Assuming your portfolio contains low-fee investments within a pre-determined asset allocation, constant intervention is simply unnecessary. Even periodic additions to your portfolio can be set to autopilot, so you can have fixed deposits transferred to your investment account without touching a single button. The key here is ensuring that you maintain proper investment discipline and do not frequently change your long-term investments once they have been initiated.
3. You don't need overly complicated products
One of the main selling points you'll hear from private banks and investment firms is that they have access to hedge funds, private equity funds, complex derivatives, inverse ETFs, and a slew of other expensive products. Hedge funds and private equity funds are alternative investments that charge a significant management fee and another on profits earned (an "incentive fee"). These are often sold to high net worth individuals who seek uncorrelated returns to the S&P 500.
Complex derivatives and inverse ETFs are speculative investments that perform well in the event of specific market outcomes. The truth is, if you want a craps table or a roulette wheel, it's not difficult to find one -- but you wouldn't want to gamble with core investment money. If you're just getting started with investing or in the process of building a nest egg, I strongly urge you to look into maintaining an extremely basic portfolio comprised of low-fee index funds while consciously avoiding the noise.
A common thread throughout this article is that investing is now free or close to it -- please take advantage! There is no reason to spend tens of thousands of dollars on investment management or high-fee products in the current investment climate. If you are seeking advice, the best option is to find a fiduciary, fee-only financial planner that will help guide you to self-managing your portfolio. This ensures that you do not fall victim to high and recurring fees, and that you, the rightful owner of your investment returns, actually get to keep them.