You Are A Better Investment Manager Than Your Investment Manager
If the low returns and high fees of mutual funds haven't already convinced you to manage your own money, here are three more reasons you don't need a professional to invest for you:
1. Their results are evaluated quarterly. If they try to ride out a downturn they will have angry investors on their hands - or they might be out of a job. In a bear market, their smartest move is to move into less volatile investments such as bonds, which means they can end up selling low. In other words, they don't have the luxury of taking the long view.
2. Their interests may not align with yours. The Expense Ratio for any fund includes both a management fee and fund expenses, which includes the costs of buying and selling stocks. These expenses come out of your returns, not the fund manager's pay. The fund managers have no incentive to minimize turnover (buying and selling equities), but you do. High turnover is both expensive and associated with poorer returns over time.
3. Big funds aren’t nimble. Funds that own a significant stake in individual companies have to buy and sell incrementally or risk changing the price of the very equity they are trying to move. Warren Buffett isn’t a fund manager but owns enough stocks to essentially be one. He famously held on to shares of Coca-Cola when the company was underperforming because, as the owner of 9% of Coke’s stock, if he had sold he would have caused the company and maybe the entire market to tank. As an individual investor, you are nothing if not nimble. You can rebalance, change asset allocations and tax-loss harvest at will. (Which are not the same as turnover. And if you don’t know what these terms mean, don’t worry. You will get there.)
Next time you read an article on why professionals make the best investors, employ a healthy skepticism and remember that you are the best manager of your own money. (And if you don’t believe that yet, you will get there too.)