I am a engineer/scientist by training, and also have an MBA in Finance. Although both fields can be complicated in some cases, I am a firm believer in making sure they aren’t viewed as more complicated than they really are. Hence this blog’s tagline: Personal investing simplified
My personal journey has lead me to believe that many financial advisors have a vested interest in making investing sound way to complicated for anyone to ever try on their own. That can be a good starting point to re-assure you that you will be able to sleep better at night if they do it for you – often in exchange for 1-3% of total portfolio value each and every year.
My personal investing started over 30 years ago. Initially I used Canadian GICs (like CDs in the US) for retirement savings. I then bought my first risky investment (an equity mutual fund) a few years later. Coincidentally it was just before a market correction and when that happened I quickly sold it off and returned to my GIC comfort zone. The market fully recovered within months and and then went higher. If I had stayed invested in equity, I would definitely have been better off. I lost money on that initial forey into the stock market because my actions were driven by market sentiment and not by a simple set of predefined rules.
But why invest on your own if you can give 1-3% a year in fees to someone who say says they can do much much better than you could, even if you know enough not to follow market sentiment? The short answer is: Because they cannot actually do better. That is one of the most important things I learned from my MBA Finance classes. There is plenty of scholarly research that confirms few paid fund managers are able to beat the overall market return in any given year, and it is unlikely that any of them can done it for more than 3 years.
If it is extremely hard to get a better return than the overall market, then isn’t is hard as well for a DIY investor to even match the market return? No, it isn’t. A few decades ago the only way you could get the overall market return was to buy each and ever stock yourself, and in the right proportions. Now you can do that with a single Exchange Traded Fund (ETF) charging a minimal annual fee in the 0.03-0.25% range.
Suppose instead of DIY investing you go with a fund manager you really trust and they are lucky enough to exceed the market return by 0.03% on average over the next 10 years. Isn’t that just as good a deal as buying an ETF and doing it yourself? No, not unless they are willing to limit their annual fee to 0.03% per year. Trust me, few of them are.
I am a big fan of paying for good service. However I am very reluctant to pay for service that, over a 10 year period, doesn’t produce a investment return greater than what I could get on my own. However I might be willing to pay for that service if it lets me avoid learning how to do something that is scary or really complicated. Despite what some financial advisors may want to be believe, DIY investing isn’t scary or complicated. It does require occasional attention and adherence to a few simple predefined rules.
Personal investing simplified