Fair & Balanced

Paul B. Farrell: Save money in retirement by self-managing portfolio - Financial - Financial Services - Mutual Funds - Personal Finance

The Big Picture: (Why) You Suck at Investing

Read both of the above links.

Paul's article says to fire your advisor. Barry's article says most humans are not equipped to succeed as investors.

Both articles have points that I agree with and points with which I disagree. Paul advocates getting rid of a fee-only manager that puts you in mutual funds and employing his lazy portfolio which is a diverse blend of index funds and bond funds. He never mentions separate account managers (what I do for a living) so I don't know what he thinks about them. Perhaps he lumps them all together.

Barry cites several knowledgeable sources and reasons for why people tend to have poor results. There are multiple studies that show mutual fund holders do poorer than the funds they own due to succumbing to emotion at the wrong time.

There are plenty of people that can manage their own portfolios. A couple of big mistakes can cause long lasting damage for these people. Mind you I am not saying financially ruin, just cause damage. A flaw in Paul's article is that it assumes anyone can manage their own money. Whether you can do this, though, calls for some introspection. Will you succumb to the emotions of fear and greed? Putting together a lazy portfolio is much easier than managing it around all the things that effect capital markets and human emotion. I also think that Paul's article does not respect the effort to accumulate your money. A 55 year old who has put together a $1 million portfolio did something over his lifetime to create this nest egg. It is not clear to me that putting all your money into a half dozen funds is the absolute best course of action. It may not be bad but it may not be the best plan.

Barry lays out a compelling argument that points out most (or maybe all) of the human flaws that can get in the way of successful results. I think people can overcome a lot of the flaws. I write a lot about this sort of thing trying to help people learn how to overcome their investing flaws. I have trained myself to be very unemotional and I try to convey that. I try not to be short term oriented and I try to convey that as well. There are going to be bad months, quarters and years over the course of our investing lifetimes. There is no getting away from that. How many people do you think have been shaken out of stocks this month that will not be back in time for the next move up? I preach about have a simple exit strategy and sticking with it. This will ensure that sometimes you will beat the market and sometimes you will lag but will give yourself a good shot of getting where you need to be.

I don't think the advice model will shut down but it will evolve (I've written this sort of stuff before). I expect that I, as a typical investment manager, will add less assets under management but have more growth in consulting and investment coaching (for lack of a better term). People want help but are leery, for good reason, of most types of planners or other types of agents.