Why You Do Not Need A Professional Money Manager

A couple weeks ago, the Wall Street Journal published an article that explained why the gap between professional and amateur-ish players is narrowing: the proliferation of information about every possible minutia and technique associated with poker playing gets debated endlessly on online forums accessible to everyone that the information asymmetry between the pros and the aspirational is quite small compared to what it once was.

That general trajectory applies to investing as well. The free, easily accessible information that we take for granted today—how much profit each Johnson & Johnson brand makes, IBM’s dividend history over the past century, profit reports from Chevron, are all easily available through a Google search. If you have a question about a company’s business model, you can find the answer in a couple mouse clicks in a second or two. Up until twenty or so years ago, that kind of information was only in the hands of the stock brokers and professionals that wanted to take 1-2% of your hard-earned wealth each year in exchange for managing your assets.

Take something like Fidelity’s Blue-Chip Growth Fund.

The fund charges 0.90% annually, and invests in Google, Apple, Visa, Coca-Cola, Pepsi, Wells Fargo, JP Morgan, Procter & Gamble, and so on. Those are companies I’m perfectly capable of figuring out on my own whether I want to buy or not. There’s no particular craftsmanship there, yet the fund has almost $13 billion in assets. You have to give Fidelity $900 every year (for every $100,000 you invest) in exchange for the privilege of owning those companies. A $100,000 investment would cost at least $9,000 in fees over the course of ten years, and probably much more so as the amount goes up.

The only time a fund manager is necessary is if you think there is any realistic chance that you would sell low. That’s what screws people up, and is the reason why the average investor has achieved only 3.8% annual returns over the past twenty years while the S&P 500 has returned between 8% and 9% each year on average (see the Dalbar studies for more information on the disparity between the performance of indices like the S&P 500 and what individual investors actually earn). If you think that’s a potential problem, then get an advisor—it’s a lot better to pay out 1-2% of your wealth each year if you do not have to sell stocks at 30-40% during a market low.

If I were a financial advisor for someone, I would do everything in my power to make stock ownership seem real. I would get Coca-Cola stock certificates. I would point out that those 100 shares of Coca-Cola are generating $190 in profits, $112 of which gets sent to shareholders each year as a dividend. And if that wasn’t real enough, I’d take the client to Wal-Mart, sit on the bench, and spend fifteen minutes during prime-time traffic pointing out the Coca-Cola products that are in each person’s cart. I’d rather look like a weirdo for fifteen minutes than destroy thousands and thousands of dollars in wealth.

But if you have the gumption to avoid selling low, there is no reason why you can’t self-educate yourself to a point where you don’t need an advisor. The common holdings in most of the top mutual funds are the kinds of companies that are the obvious profit generators. We know Pepsi, Coca-Cola, and Dr. Pepper rule the soda scene in the United States. You don’t have to pay someone 1-2% to figure that out for you. The free information is there and easily accessible. That wasn’t always the case. All you have to do is put in the time (I’d guess 7-10 hours per week ought to be enough to do it right).

If you restrict yourself to modest investments in tech and bank stocks (because the management of each company is crucial), only own companies that have raised their dividends for two decades straight, and insist on owning stocks that have an average annual growth rate over 5% since 2003, and split up your wealth across 25-30 different companies, you’re a fortress. You can’t screw up. The tools to execute that kind of strategy are all over the internet, and you can save yourself a lot of money in frictional costs over the course of your lifetime if put in the time. 

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9 thoughts on “Why You Do Not Need A Professional Money Manager

  1. Steven of Chicago says:

    Of course we don't need a professional money manager. All we have to do is read The Conservative Income Investor every morning and we'll be fine.

    Patience, common sense, and a little research goes a long way when you're investing in the stock market. I purchased my first stock, Disney, in 1974, and still own it. Because my resources were very limited in the seventies, I used to call mutual fund companies and ask them to mail me a prospectus. I would find out what companies the fund owned. If I was familiar with the company, I would add them to my portfolio. Eventually, I figured it out: Buy what you know.

    Nice post and great advice!

  2. sdb says:

    If you restrict yourself to modest investments in tech and bank stocks (because the management of each company is crucial), only own companies that have raised their dividends for two decades straight, and insist on owning stocks that have an average annual growth rate over 5% since 2003, and split up your wealth across 25-30 different companies, you’re a fortress. You can’t screw up.

    Please post that on SA. I cannot wait to see the push back you get!

    But it is very true. When was the last time a company was growing over 5% annually, and raising their dividend every year, and went under? I expect never. And if one did, and it was 1/30 of your capital, your pain is minimal.

  3. Brendan says:

    "The only time a fund manager is necessary is if you think there is any realistic chance that you would sell low. That’s what screws people up, and is the reason why the average investor has achieved only 3.8% annual returns over the past twenty years while the S&P 500 has returned between 8% and 9% each year"

    Every time I read this it doesn't make much sense when you think about it.

    Every share of every company is owned by someone. Thus by definition is it not true that the "average" investor must achieve the same return as the market? If someone sold low then by definition someone else bought low.

    Maybe this is an issue of median vs. mean? The mean return of all investors must be 8 to 9%. Perhaps the return of the investor at the median can still be 3.8%.

    1. sdb says:

      The "average investor" does receive the "average stock market return" if you include EVERY investor (including institutional) and exclude all their assets which are not in the stock market.

      The statistics Tim included by reference are typically only for individual investors, and are typically derived from 401(k) or similar accounts where assets come into the stock market and go out of the stock market at the whim of the investor. Unfortunately those whims tend to be driven by fear and greed which leads to buying what is "hot" (high) and selling when all hope is lost (low).

      If you only invest for 1/2 of the time and you get most of the down and little of the up, then your return will be considerably less than the market average. Take the results from a few thousand others like you, and the average return of your group will be pretty poor.

      Further subtract fund, account and manager fees, and the picture is dismal.

  4. Gerrat says:

    While I completely agree with your thesis, this argument:

    "All you have to do is put in the time (I’d guess 7-10 hours per week ought to be enough to do it right)." isn't very convincing. If one could instead earn even a minimum wage of $7.25/hour instead of putting in those 7hrs /week, that would amount to $2639/year…so with any porfolio of less than $132K, one would be further ahead with a financial advisor (assuming a massive 2% fee). …so even with the minimum hours, at minimum wage vs a maximum fee, the vast majority of people would still be better off with a financial advisor (according to your argument).

    1. Brendan says:

      The thing is you don't even have to do that.

      If you don't want to, there is no reason at all to purchase individual stocks. Just put your money in VTI – Vanguard's total stock market index fund. The expense ratio is 0.05% annually.

      It takes a fair amount of understanding and patience to outperform the market, but no work at all to benchmark your returns to it. The amazing part about the market is even the best investors on average probably only beat it by a few percent a year. In a game of chess a grandmaster will beat a beginner every time and by a wide margin. In investing a beginner can generate returns close to most professionals with zero work and zero concentration risk.

    2. sdb says:

      Except your $2639/year is a very cheap education, that if you plan beyond the moment will save you far more than that before you retire.

      And since everyone makes mistakes while learning, it is better to get your education and take your lumps while your portfolio is small so the mistakes are cheap.

      In addition, most people cannot turn an additional 7-10 hours per week into additional dollars very easily. Especially if that time comes in 1-2 hour chunks that must fit wherever they can. So the cost of time argument isn't very convincing.

      What would be convincing is "I just don't want to manage my own money." That's fine. It is your choice. This article was "Why You Do Not Need", not "How you will save money tomorrow" or even "you should want to manage your own portfolio."

  5. Dividend Collector says:

    Tim- I have read the vast majority of your articles over the past years and at your suggestion I am now reading books by or about Graham, Munger, and Buffet. This is my first post.

    You said "The only time a fund manager is necessary is if you think there is any realistic chance that you would sell low." I respectfully disagree.

    Many individual investors buy stocks or add money to mutual funds when the overall stock market approaches new highs. This requires mutual fund managers to buy stock when it is near the high point (some may hold cash). Many individual investors sell stocks or remove money from mutual funds when the overall market approaches new lows. This requires mutual fund managers to sell stock when it is near the low point.

    I think that many mutual fund managers are "forced" to buy when stock prices are high and they are "forced" to sell when stock prices are low. Add to that the mutual fund fees, trading costs, high turnover within many funds- and it is easier to see why a buy and hold strategy for dividend paying stocks beats most mutual funds.

  6. Tim McAleenan says:

    Gerrat, I think possessing investment skill is something that has a low payoff at first, but becomes more worthwhile as your portfolio grows. You're right–if you are 25 with $1,000 to invest, there's practically no difference between a 10% and 9% return in terms of its effect on your standard of living. Same thing when that amount hits $10,000. Once you hit $100,000, any advantage you can create is probably only worth minimum wage when you adjust for the time spent studying and monitoring your positions.

    But…

    (1) Most people who are good at this stuff are generally interested in investing. It's a passion. The financial side of life is a lot more fun when owning 0.0000000000000000000000000000001% of Coca-Cola excites you than if you go through life thinking "I need $2,500,000 to live off so I guess I'm going to force myself to learn this stuff." If learning about stocks is as enjoyable as a dentist visit, then you should probably index and spend your energy doing something you love, and maybe some of that additional time will give you the opportunity to make even more money to invest. A doctor with $100,000 in investable income that doesn't care about stocks could create a great portfolio using Vanguard and then go through life having his needs taken care off without worrying about any of the stuff I talk about here on a daily basis. But if you got the fire for it, you're doing something you love, then it's easier to ride out the early days when it doesn't seem to have much payoff.

    (2) In some ways, it's a good thing that the consequences are small when you're starting out. If you have a $10,000 portfolio, the mistakes are small if you're only posting 5% annual gains when the S&P 500 is going up 8.5%. You're not ruining decades of work if you mess up. But if you reach a seven digit portfolio, you want to know what you're doing at that point. That's where the lessons learned during the $10,000 net worth days becomes useful.

    (20

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