While there are plenty of reasons to hire an advisor to manage your portfolio, one of the most important reasons was the subject of a recent study. And the end result: most investors would be better off hiring a money manager, because a professional will do what most investors won’t. It’s that simple.
A managing partner at an institutional management firm in New York by the name of Jeremy Greenbladt, had an idea a couple of years ago. He decided to offer retail investors the opportunity to put his investment strategy to work on their own, or they could have their portfolios managed professionally using his system.
If investors wanted to follow the strategy on their own, their “self-managed” account would let them pick stocks from a pre-approved list of securities that were chosen based on the strategy. Investors would get reminders when it was time to make trades.
Or investors could choose to have their portfolio “professionally managed”. These accounts would also follow the formula, and make trades at pre-determined intervals.
Both types of accounts chose investments from the same list, and followed the same basic strategy. Once everything was set up, Greenbaldt watched. And what he saw is a lesson in what not to do if you want to manage your own portfolio.
Over the course of two years, the “self-managed” accounts underperformed the “professionally managed” accounts…by almost 25%.
The lesson here is simple, according to Greenbladt: “On average the people who ‘self-managed’ their accounts took a winning system and used their judgment to unintentionally eliminate all the outperformance and then some!”
There were a few critical mistakes that “self-managed” investors made.
First, they managed to avoid the biggest winners: more often than not, individual investors avoid stocks that are out of favor. And more often than not, following the news media and popular opinion contributed to missing out on winners. A security that is out of favor today could very well be tomorrow’s winner.
Second, “self-managed” investors stopped following the strategy after a short period of underperformance. One of the most important parts of an investment strategy is following it…even when it looks like its not working for a time. That’s not easy to do, but changing course mid-stream is a sure way to underperform.
Third, investors typically moved to cash and, again, stopped following the plan when their portfolio declined. But this wasn’t about underperformance. Investors sold off even though the market had declined more than their portfolio. So they were technically outperforming the market…but they still changed course.
And fourth, a lot of “self-managed” investors bought securities after periods of solid performance. This is a common problem: it is ‘investor nature’ to sell right after poor performance, and buy following outperformance. But buying yesterday’s winners is usually a good way to lower your returns in the long run.
The conclusion here is obvious. For many investors, hiring a professional is worth it…if for no other reason, a professional will stick to the plan, and stay the course…even when it’s not easy. And even when you might not.