Having a professional invest your money is not about beating the market. It’s about beating what you’d do on your own.
I was struck by this (paraphrased) comment as I listened to an interview of a financial advisor recently. It describes so simply the real, but quite boring, value a professional can provide.
How I Approach Investing
As part of my work with my clients, I manage their money (if there’s money to manage outside their 401(k)). And in my work, I subscribe to the passive investing philosophy: “Own the market, and inexpensively.”
In practice this amounts to owning index funds or exchange-traded funds that track a large, well-known index, and you simply end up owning a tiny fraction in more or less all the publicly traded companies in the US (or in foreign countries). You figure out how much of each fund you should own based on your own attitudes towards risk and your timeframe for investing, and nothing else.
You don’t try to beat the market, either through timing your ins and outs from the market, or by choosing individual stocks or individual sectors that will do better than the market on average. You are not more (or less!) aggressive than your timeframe indicates. If you need the money in 5 years, say, don’t put it all in stocks. If you need it in 30 years, don’t put it in cash.
I think we can all agree that my approach to investing isn’t intellectually difficult. You could be all over this all by yourself, intellectually.
Why Should You Hire a Professional to Manage Your Money?
Good question. And I have a few answers for you.
Answer #1: Maybe you shouldn’t. You should DIY.
The challenge in investing reasonably isn’t mental horsepower, it’s:
- Time. You’ll need to spend time learning about investing. Here are a couple books that are easy and to the point:How a Second Grader Beats Wall Street
The Little Book of Common Sense Investing
Judging from experience, once you understand the basics and get your investment portfolio initially set up, it probably only takes you a few hours each year, to check what you’re doing and make adjustments.
- Interest. Let’s say you don’t like to exercise. You know you’re supposed to. And all your friends who love exercise and find it easy to do constantly tell you, “But it only takes 30 minutes a few times a week! It’s so easy!” And you know they’re right. But you just. don’t. give. a. rip. about. exercise. So you don’t do it. Even though it’s good for you, and even though it doesn’t take much time.
Well, ditto investing. If you don’t have enough interest, you’re not just going to spend the even minimal time it takes to do it reasonably.
- Discipline. The exercise analogy really breaks down here. Because in investing, the discipline required is not about doing something regularly (which is what you want for exercise). It’s about not doing something regularly. You don’t want to touch your investments (other than saving to them) except maybe once a year.
But consistently not doing something is sooooo much harder than doing something. (Think about living a healthy life by not eating a brownie that’s right in front of you. To me, that’s a lot harder than taking the active step to eat the broccoli crudite right next to it.)
Answer #2: Maybe you shouldn’t, but you should use a roboadvisor.
A roboadvisor or an all-in-one fund (like a balanced fund or target-date retirement fund) answers two of your three challenges above. You don’t have to understand much about how it works and how to set it up (though you should know something about how the investing works), and it’ll still get invested reasonably.
But Discipline remains (at least somewhat of) a challenge. Even with these “set it and forget it” tools, you can still screw yourself up by taking money out or putting money in or changing how aggressively you invest.
Additionally, the reason roboadvisors and all-in-one funds can be so cheap is because they’re not particularly personalized. For most people most of the time, you don’t need much personalization.
But if you’ve got that concentration in company stock, or some other oddity, you’d likely be better off building your investments around that instead of ignoring it. Which leads me to:
Answer #3: Maybe you should.
So, let’s go through our checklist of challenges:
- Do you have the time to do it right (especially at the front end, when you’re doing all that larnin’)?
- Are you interested in learning how to invest your own money?
- Do you have the discipline to Stick To The Plan, Woman!? Can you avoid temptation when markets go way up or way down, and you’re tempted follow the herd into or out of the market or a particular stock <cough> bitcoin <cough>?
Even if you say yes to #1 and #2, hiring a professional could still be the right answer for you because of #3.
Because, in investing, it’s more important to avoid boneheaded decisions than it is to make great decisions.
Consistent, reasonable investment decisions are the key to growing wealth. That is boring and not sexy and certainly doesn’t stand up well conversationally when friends are bragging about how their bitcoin investment went up 1000% (pretend I’m writing this 3 months or so ago, before bitcoin tanked).
Now, I don’t want this to paint investment professionals in too rosy a light. They aren’t hyper-rational automatons. And there’s research showing human advisors harboring some of the same irrational behaviors around investing that their human clients do. But the more we can set up processes and policies ahead of time, the more we’ll be governed by that rational framework, not our in-the-moment emotions, when markets go nuts.
In the academic world of investing, there’s this notion of the “efficient market.” Which is to say, the price of a stock already reflects all known information about the stock, so there is no way to “beat” the market. Because you don’t know anything that the market doesn’t already know about that stock.
Which means that possibly the biggest benefit of hiring a professional to manage your money is not that they’ll beat the market. It’s that they’ll beat what you could do, left to your own devices.
Do you know the good you ought to do to invest for your future, but lack the time, interest, or discipline? Consider hiring a professional and reach out to me at firstname.lastname@example.org or schedule a free consultation.
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Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Meg Bartelt, and all rights are reserved. Read the full Disclaimer.