In today’s world there is a lot of noise regarding do-it-yourself investing. If you Google “Do-it Yourself-Investing”, over 44.8 million search results are generated. The internet has built a mentality in us that we can figure out everything on our own in an instant. This is extremely unwise especially for investors trying to manage their own investment portfolio. Why? – Human Nature!
Greed and fear drive us as we manage our money and the results are not in our favor.
Greed (or excessive desire) is damaging to growing your own investment portfolio. The internet boom in the late 1990s is a great example. From 1997- 2000 internet related stocks, hit a market high and investors got greedy. This greed lead to stocks being extremely overpriced, which created a bubble. The bubble burst in mid-2000 and major indexes were depressed through 2001. This get-rich quick mentality is difficult to maintain long-term and former Federal Reserve chairman; Alan Greenspan addressed this mindset as “irrational exuberance”.
Greed tells us to hold on as the market is trending upward. However, markets do not always go up. So investors hold on and ride the loss down hoping the market will turn around quickly and bailout once they break even.
Fear is equally harmful to growing your own investment portfolio. For example, fear tells us to sit in cash during the United States bear market of 2007-09 when the S&P 500 lost approximately 50% and the Dow Jones Industrial Average (DJIA) in June 2008 lost 20% of its value. In other words, the pain during 2007 through 2009 got so severe investors got out of the market and ran for cover. They stand on the sidelines and invest into cash (investments with no earning potential) and as the market rebounds miss out on any chance to make back the losses they suffered as the market recovers. Greed and fear drive investors to make irrational decisions that hold back growth within their investment portfolios.
The solution is to have an investment management based system that is based on time tested evidence and analysis and not emotions. In my previous article, There is a Better Way! – Why No One Talks About the Stock Market the Right Way discusses in more detail my approach to investment management through tactical portfolio management. This type of investment process takes emotions out of the investment management process in order to minimize your risk and grow your investment portfolio over time. Your portfolio will be positioned to provide growth in a bear market (when prices are falling) and/or a bull market (when prices are rising).
Can you Effectively Manage your own Investment Portfolio?
Recently, Vanguard which is the world’s largest mutual fund company is known for catering to “Do It Yourself Investors” admits that working with a financial advisor pays off. The conclusion of Vanguard’s study, “Quantifying Vanguard Advisor’s Alpha” working with an advisor increases client’s investment returns by 3%! To put it in perspective, 3% of $200,000 is $6,000 and compounded over 5 years is $231,854.81. However, if you were working with an advisor providing 7% in net return your total value would be over $280,510 in 5 years!
Therefore, I am a strong proponent in working with well-trained, experienced and fully licensed financial professionals.
Guidelines to help you determine what type of financial professional to work with:
- The client’s best interest should always come first and investors can protect themselves by working with an independent Registered Investment Advisor (RIA) who is not affiliated with a broker/dealer. This type of professional is legally required to uphold the fiduciary standard, fee transparency must be practiced and clients can avoid confusion about potential conflicts of interest. Hiring a Certified Financial Planner®, is extremely important because he/she must additionally uphold the CFP Board of Standards professional conduct and code of ethics.
- Working with a financial professional who is required to be on your side is the best course of action for your financial plan. Aside from knowing exactly how much you are paying for your investments, you will also be able to see the value of the financial-planning advice your advisor provides. With fee transparency, you can determine if the benefits outweigh the costs.
- The following guidelines were originally published on Nerdwallet.com – “Why Fees and the Fiduciary Standard Matter to Investors.”
To learn more about Blake Fambrough, CFP® and how he works with clients based on a time-tested evidenced based investment management program and not emotions view his Paladin Registry research report.
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