Do You Need a Professional Money Manager to Invest in Stocks?


Investing is sort of like working on your car.  It really isn’t all that difficult and most people can learn how to do it.  It does take some amount of time, however, and investing in some special “tools,” including various subscriptions to get data on stocks can make it easier and productive.

Like working on your car you can also make mistakes from inexperience that will result in losing some money.  Even when you do everything right, however, you will also suffer losses from time to time.  The trick is to learn from those mistakes and keep investing since future gains will make up for present losses if one keeps adding money and investing.


Join us in reading our Book-of-the-Month: The Bogleheads’ Guide to Investing

People who invest for the long-term will win out in the stock market.  Those who try to jump in and out usually end up treading water or even losing money, mainly to fees (my father always joked that you know you’re trading too much when your broker starts sending you a Christmas card).  Perhaps the most difficult situation for professional money managers are the years when the market just doesn’t perform or their picks don’t work out.  They know that there will be great years in the future that will more than make up for recent losses, but it can be difficult to assuage the fears of the client who just lost 30% of his money.  That client may want to pull the money out right then, which usually is the exact wrong thing to do since after years where there are big declines the market often rebounds.  Witness the huge gains in 2009 after the losses in 2008, or the gains in late 1987-1988 that completely erased the unbelievable one-day 25% drop in 1987.

Going back to the car analogy, people who work on their cars generally do it for three reasons.  1)They want to save money, 2) They want it done a certain way, or 3)They enjoy working on cars.  With cars the first reason is false for many repairs.  One can make generally make more money working extra hours with the time spent on fixing a car, particularly since it may take the home mechanic a whole weekend to do a repair that a shop could do in a few hours using the right tools.  The second reason, making sure the repair is done right, is more valid since the best way to ensure the right oil is used or care is taken in assembling a transmission is to do it yourself.  The final reason, that one enjoys it, is probably the best since for many working on cars is a hobby they enjoy.

Investing is much the same way.  You can save some money since you aren’t paying a professional advisor, although you need to weigh the value of your time against the savings.  Having control of your money means that you can avoid over-trading of stocks (called churning) which can reduce returns due to increased taxes and fees.  Finally, many enjoy investing.  Some even do what money manager JD Spooner calls, “playing around,” since their goal is really to trade for entertainment rather than make money.


Do You Want to Make Money or Would You Rather Fool Around?

 

On the time issue, investing really can require much less time than many expect.  One can do just fine investing in a set of mutual funds and ignoring them, spending just a few minutes once in a while performing maintenance and spending a little more time preparing tax forms.  One can do even better if they take an hour or two each year to rebalance the funds (many mutual fund companies even have tools to make this very easy).  Readers are advised to go to Vanguard’s website for information on setting up an account and getting started – it really isn’t that hard.

Long-term investing in stocks directly also does not require that much time.   Once one has the knowledge it may only require a few hours each week to read annual reports, find new stocks to invest in, and trim stocks that aren’t performing well.  Time must be spent learning how to pick stocks, however, and if one does not enjoy it there is nothing wrong with going the mutual fund route or hiring a professional to manage the accounts.

Have a question?  Please leave it in a comment.  Follow me on Twitter to get news about new articles and find out what I’m investing in. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

How Do You Measure Up Against the Markets?


When you’re investing, it is easy to fool yourself into thinking that you’re doing great, when really you would have been better off just investing in an index fund.  Or maybe you have someone investing for you and you’re wondering if it is worth the extra cost.   Or maybe you are invested in a managed mutual fund and you want to know how the return of that fund compares with the rest of the market.

Shop for a new tablet

Time to replace that old laptop?

What I typically do to check my performance is to compare against a set of appropriate indexes.  For large stocks, I compare against the S&P 500 or the S&P 100.  For small stocks, I compare against the Russell 2000.  I sometimes also just compare against an index fund, such as those offered by Vanguard, that invests in large or small stocks, as appropriate.  I sometimes also compare against a total market fund, since that basically compares my returns to what I would have if I just bought everything.

For example, my IRA increased by about 13.2% since the start of the year.  (To find your return, just take the current value and subtract the value at the start of the year, then divide that difference by the value at the start of the year and multiply by 100%).  Looking at the returns of the S&P500, I see that it has returned 9.12%, so I am doing fairly well.  The Russell 2000 has returned 1.50% year-to-date, so that makes me feel like I am doing well against both large and small stocks.  My IRA is mainly larger stocks, so comparing against the S&P 500 makes sense, but still maybe I would have invested in a spit between a large cap and a small cap index fund if I had not invested in individual stocks.

Be sure to check out this month’s book, The Bogleheads’ Guide to Investing.  We’ll be discussing this book at the end of the month.

Looking at 1-year and year-to-date returns is nice, since it shows if you are positioned well for the current time, but really if you’re investing for long periods of time, which is really the only thing to do if you’re picking individual stocks like me, such short-term returns don’t matter that much.  If you only have ten stocks and one of them is having a really bad year, you might lag the markets for the year.  This does not mean, however, that the company you invested in hasn’t done (or won’t do) well compared to the markets over long periods of time.  Perhaps it had a huge growth period where the price grew rapidly, so now the share price has been sitting idle while earnings catch up to the price, so year-to-date returns are lacking even though the stock has been a good performer.

Game of Thrones: The Complete 6th Season

Picking a ten-year period is a better comparison since that should give plenty of time for your picks to pay off (or not).  You can still compare your returns against indexes, using historical data.  One way of making the comparison is to calculate your annualized rate-of-return.  This can be done using a formula:

APY = ((principal + gain) / principal) ^ (365/days) – 1,

if you’re mathematically inclined, or by simply plugging your starting value and contributions into an investment calculator (you can find a good one on the sidebar of this blog, or just search the web) and adjusting the rate-of-return until the end value matches what you have.  Using this method, I found that my son’s college account has returned a disappointing 5% annualized for the last 16 years that we’ve had it, compared with 6.3% annualized for the S&P 500 over the same period.  Unfortunately, a couple of bad investments (Pier One and Chico’s come to mind) hurt that account.

 

Note, a great site to determine the return of the S&P 500 for any given period is at: https://dqydj.com/sp-500-return-calculator/ .  The nice thing about this calculator is that you can pick any period you want, and it also includes the effect of reinvesting dividends.  If that is included, my returns look even worse since the S&P 500 return with dividends reinvested is 8.3%.

An easier way is to compare over long periods of time is to simply calculate the total percent change in the index over the period compared with the total percent change in your portfolio.  Note that this only works if you have an investment account where you have not added or taken away money.  For example, the S&P went up 78% over the last five years, where one of my accounts has gone up about 52%, so I am lagging behind the S&P 500 somewhat.

Have a question?  Please leave it in a comment.  Follow me on Twitter to get news about new articles and find out what I’m investing in. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.