Do you ever entertain the thought of getting out of mutual funds or exchange traded funds (ETF’s) to manage your own investments? That would mean picking your own stocks, creating your own portfolio allocations, and deciding when to buy and sell your investment positions.
There are all kinds of books, programs, websites and investment experts telling us how we can “beat the market.” Are the claims true? It may not be impossible, but what price will you have to pay in order to gain that ability? And what will be the opportunity costs if you do?
How much expertise do you have?
In order to successfully manage your own investments, you would have to have expertise in investing in general. That would mean understanding portfolio theory, security analysis, valuations and even timing. Having these skills in combination is virtually a career unto itself. But it gets even more complicated.
You have to have specific knowledge of certain industries. In order to buy stocks in any industry you would have to understand competition, regulation, labor issues, international risks, and business cycles unique to each industry. You would also have to know how an industry performs in different economic conditions.
It’s not just a matter of buying “a good stock.” You have to know the factors that will affect a company, and that will require at least some knowledge of its industry. Very few people have sufficient knowledge of a large enough number of industries to be able to put together a well diversified portfolio successfully.
To be able to do this, you would almost certainly have to have working experience in the investment community, to say nothing of the individual industry sectors. Most of us don’t have that kind of experience.
How much time do you have?
This is another factor most of us underestimate when it comes to investing. Trying to build and manage your own investment portfolio will take more time than most of us realize. In addition to finding the best investments, you would also need to continually monitor the financial markets, the individual stocks you hold, and each of the industries that they operate in.
At a minimum, this would be a part-time job! And if the task is that significant (it will be), your mind will never be far from your investments. That will be a difficult position to be in if you have a demanding job that’s unrelated to investing, if you have significant family responsibilities, or if you have hobbies and activities that you enjoy spending time in.
Even if you could outperform funds with your investments you always have to consider if it will be worth the time that you’re giving up to make it happen. Fund managers do this as a full-time venture–do you think you will do a better job with a part-time effort?
There’s close to zero chance you’ll beat the market over the long run
There are fund managers who beat the market averages, but when they do it’s only temporary. Very few outperform the market in the very long term. These people are investment professionals; they study investing in college, they work in the industry full-time, they keep company with other investment geniuses, and they still rarely do much better than market averages.
As an individual investor, your best chance of beating the market would come by taking extraordinary risks. For example, you might invest in a very small number of high-performing stocks and ride the trend up for a while. But once the trend reverses you can give up your gains and more. Or you might invest all or most of your money in a single sector that will follow the same path.
But that’s not really investing so much as it is it is speculating. You may do well for a while – maybe even very well – but when your stocks or your sector lose steam it will be a hard trip back down that hill.
ETF’s and mutual funds to the rescue
The great advantages ETF’s and mutual funds have are that they are easy to buy and sell, they’re relatively inexpensive to trade, and you don’t have to get into the details of individual stock selection. Each fund is also professionally managed by people for whom investing is a full-time job. Those managers not only bring considerable investment expertise, but they also have access to people and resources that the rest of us don’t have.
Each fund is its own portfolio, and because of that your investment job is limited to deciding what combination of funds to buy and when to buy and sell them. In a complicated world that makes a lot of demands on our time, efforts and energy, funds work much better for most people.
“Do what you do best – and let others do the rest”
Most of us have careers, businesses and occupations that have little or nothing to do with investing. These are fields that we are experts in. Rather than putting time and effort into becoming investment experts, we would be better off using that time to become better at whatever it is that we do.
As much as we may believe that it would be great to be able to manage our own investments, and that we may even be able to do a better job than the investment experts, there’s an overlooked part of the investment equation that’s even more important for us. That’s funding our investments! We do that through our primary occupations, and it’s at least as important as the management side.
Since there are people out there who are experts in investing, and whom we can pay a very small fee to use, we’re better off taking advantage of their knowledge rather than opening up a second career as our own investment manager. Our job is to get better at what it is we do, so that we can earn more money and have more to invest.
That’s a big enough job without taking on the investment side too.
Do you ever feel that you want to get out the funds and manage your own investments?