Why would anyone manage their own stock portfolio? Why would you want to? You want a better net return. There are two parts to a better return, gross return and investing expense. Investing expense is simply the gap between gross return and net return.
Investing expense, the expense of having a stock portfolio, includes commissions, management fees, annual fees, quarterly fees, inactivity fees, planning fees and slippage. The most tangible argument for self-directed portfolio management is lower investing expense. Doing it yourself predictably reduces future investing expense. Switching from a full price broker to an online broker reduces commission cost. Making your own buy/sell decisions eliminates management fees. The lower you drive investing expense the smaller the gap between gross return and net returns.
Slippage is the price change from decision to buy/sell to execution of a trade. Fast online discount brokers have less slippage than full service trade-by-phone brokers. Some slippage may come from brokers skimming or trading their own accounts. Most slippage comes as prices move in the time between decision and trade. Faster execution reduces slippage.
Few pros charge based on how much your account has grown. Fewer pay you if your account shrinks. Mutual fund managers may even increase their fee rate if their fund’s asset base is falling
and they can’t cut their costs. Ask you account manager if you get a refund if the net asset value of your account falls.
Gross return is the increase in an investment. Net return is the bottom line, the amount your account has grown. Net return is gross return less investment expenses. Future gross return is less certain than future expense. Return goals are often stated relative to the markets. This takes market variance out of performance measures. Some strategies ‘beat the market’. Some pro money managers ‘beat the market.’ Some self-directed investors ‘beat the market.’
Pro money manager returns and self-directed returns overlap. Some pros beat some do-it-yourselfers, and vice-versa. There is little consistency from year to year. A pro with a stellar 2004, may not have a good 2005. On average about 1 in 5 pros beat the market. On average about 1 in 5 do-it-yourselfers beat the market. How is it easier to find the 1 in 5 pro who will beat the market than to find a stock that will beat the market?
If a switch is being assessed based on past performance, try to get details on the performance calculations. The best simple measure is to divide current net asset value by starting net asset value. Getting the annual return requires solving the compound interest rate formula. True annual performance numbers are always less than or equal to the average of annual returns.
Individuals can self manage portfolios to ‘beat the professionals’ and to ‘beat the market’. However, lowering investing expense is more predictable than increasing gross return. Getting a better gross return is not the slam-dunk reducing investing expense is. Getting a better return
requires effort to learn, to pick strategies, and to trade with discipline. Some investors reduce the effort by subscribing to a stock guru newsletter. It takes some time and effort to find
a newsletter that will work for you.
Some of the reasons for being a self-directed investor go beyond financial.
With self-directed portfolios no one has to know your financial status. No one needs to know enough to want to share your wins or laugh at your mistakes. In money matters, privacy is good.
With self-directed portfolios no one stands between you and your money. The self-directed investor doesn’t hesitate to pull out $100,000 for the down payment on a house, when he knows he isn’t reducing his portfolio manager’s income by the 2% annual management fees ($2,000).
The self-directed investor doesn’t get sold on buying stories (stocks) when they don’t fit his portfolio strategy. He/she doesn’t get or act on hot tips. He takes pride in having a plan and working the plan.
The self-directed investor doesn’t have to follow the crowd. This investor has a plan. His plan is not swayed by mutual fund managers or by other investors.
Self-directed investing has some of the features of gambling, with a smaller house advantage and less travel expense. But be careful; don’t let the excitement of making big bets overwhelm you. Manage your portfolio.
Self-directed investors want to do it themselves to reduce expense, increase net return, protect anonymity, keep control, enhance autonomy, and have fun.
ABOUT THE AUTHOR: Lyle Wilkinson, investor, trader, author, MBA Helps individuals learn to self direct their stock portfolios. Book, e-book, PowerPoint ‘DIY Portfolio Management’