Investing – Do It Yourself?

by Kent E. Irwin

Until recent times, few people used do-it-yourself investment management. With the advent of increased sources of information, no-load mutual funds, and low-transaction-cost brokerage accounts, more people choose to forgo using an investment advisor and manage their investments themselves. Let’s discuss the pro’s and con’s of this pursuit, so that you can make the decision that’s best for you.

This is the third in a series of three articles on Investment Management; please read all three articles:

Fundamentals of Investing, Understanding Investment Accounts, and Investing – Do it Yourself?

Investment Management

Before reading this article, please read the first article in the series on investing, “Investment Management: Simplified”. In that article, we reviewed the three investment methods that exist today.     

Asset Classes

As a review from the first article, “Investment Management: Part 1,” an asset classification (table 1) indicates the investments that you place your money into, so that they will appreciate. A ‘bucket’’ (table 2) is the holding label of your investment. The ‘bucket’’ label is important, because it may provide certain ownership or tax status; therefore, it is important for you to understand the difference.

Self Assessment

If you are reading this article, hopefully you have made an informed decision about which investment method you feel is best. Now you are faced with the question: ‘Would I be better off doing-it-myself or hiring someone do it for me?’ There may be several reasons you are asking yourself this question:

n

I have had a bad experience with an investment advisor in the past

n

I feel investment advisors charge too much for their services

n

I feel I can do it better myself

Before we address these issues lets do some self assessment about whether the role of investment manager is a good one for you.

If you don’t answer all of these questions True, then you should probably hire an investment manager. However, either way, it is good for all people to expand their knowledge and awareness of investments and investing. Better-informed people are able to avoid bad investments and investment advisors. They also make better-educated investment decisions.

Finding a Good Investment Advisor

Many people have had a bad experience with investments or investment advisors, but the same could be said for car repair and medicine. However, you probably have found a good doctor and auto service provider. Believe that you can also find a good investment advisor.

There are good and bad investment advisors in the investment universe; however, if you look for one by asking your friends and other professional advisors, you will more than likely locate a good one. If you ask them to provide you with the following information, you should be able to identify a very good one, and one that you think would be a good fit for you:

n

Philosophy of investing: Security Selection, Market Timing, or Asset Allocation

n

Investment Profiling: Methods to determine how they construct a portfolio for you

n

Investment Policy Statement (IPS): Some investment advisors will construct an IPS for every client

n

Investment Selection Process: Policy, methodology and systems for selecting investments

n

Investment Performance: They may or may not be able to provide this for you. It depends on how they construct portfolios and how the security regulatory agencies permit reporting

n

Client Review Process: Your investment advisor should regularly provide you with up-to-date information about:

°

Overall performance

°

How your performance relates to their respective index

°

Underlying fund information

°

Current asset allocation balances compared to your prescribed asset allocation

Investment Advisor’s Charges

Investment advisors charge anywhere from .25% (25 basis points {bp’s}) up to 2.00% (200 bp’s) to manage your investments. The term “Basis points” is investment lingo equivalent to “percentage”. Usually the more money you have to invest, the lower the fee percentage.

For example, let’s assume you have $1,000,000 to invest, and the fee is 1.00% (or 100 bp’s). Your annual fee would be 1.00% x 1,000,000 (.01 x 1,000,000) = $10,000.

Investment Schedule Example

This fee percentage may seem large to some people, but if the services provided by the investment management firm justify the expense, then you may consider it to be a very small price to pay if they are able to provide above-average returns with less risk. Consider: over the long term, would you prefer to earn a 9% rate-of-return after fees with less market volatility, compared to a market average of 8% after costs to self manage? Also consider the cost of your time and piece of mind, especially if you have anxiety over financial decisions.

In addition to these fees, there may be other costs. Some investment advisors and firms may also charge fees for other expenses, such as for IRAs and trading of securities. Mutual fund companies also have fees; see their prospectus for full disclosure including 12(b)1 fees. Some mutual funds charge 12(b)1 fees to cover other costs. 12(b)1 charging funds sometimes pass that back to the investor, and some pay it to the investment advisor. 12(b)1’s represent a form of additional compensation, also called a trail commission. Some investment advisors reduce their fee by the 12(b)1’s they receive.

Doing It Yourself

If you are thinking about doing it yourself, or continuing to do it yourself, consider:

1.

Auditing your investment performance, both past and present, and monitoring it going forward so that you can assess if you have done, or are doing, a good job. Would you fire yourself if your results are sub-par?

2.

If your investments have grown to a large amount and are you growing uncomfortable managing them yourself, you may need an investment advisor.

3.

Expand your knowledge

-

Books:

Modern Portfolio Theory and Investment Analysis, John Wiley & Sons. Edwin J. Elton, Martin J. Gruber, Stephen J. Brown, William N.  Goetzmann. This 700-page book lists for $119.95, but may be available for less at Amazon.com.

Investments (6th Edition), Prentice Hall. William Sharpe, Gordon J. Alexander, Jeffrey W Bailey. This 1,000-page book lists for $124.31, but may be available for less at Amazon.com

Just about any basic Economics 101 or Economics for Dummies book can be obtained from your local library or from Amazon.com.

Mutual Funds For Dummies, 4th Edition by Eric Tyson, MBA, James C. Collins, Wiley Publishing

-

Subscribe to MorningStar software: Mutual Funds, Screeners and Portfolio Analysis for about $450.00 per year

-

Take an evening course at your local college about investing.

Summary

Remember, all good investment decisions start with a complete financial plan (like an eFinplan financial plan) to determine your overall goals. Decide the investment method that best fits you, then decide whether you want to do-it-yourself or hire an investment advisor. Either way, expand your knowledge so you can be more in control of your financial future.

Kent E. Irwin is CEO and founder of eFinplan, LLC. He is also a Chartered Financial Consultant (ChFC), a Chartered Advisor in Philanthropy (CAP) and a Chartered Life Underwriter (CLU). He can be reached at This e-mail address is being protected from spam bots, you need JavaScript enabled to view it . For more information about eFinplan, go to the website efinplan.com.

Copyright © 2007 eFinplan, LLC. All Rights Reserved.