Friday, October 30, 2015

Fire Your Broker

A brief word about portfolio management:

You have a broker. Or a portfolio manager. Or a money manager, or an account manager or an investment specialist or a personal banker at Chase or at Schwab, or wherever. It is this person's job to oversee, protect, and grow your stock investments: allocate, buy, sell, and generally ensure you own the right things in the right amounts at the right times.

Chances are good that you don't need him.

You can go it without him. I have. I am untrained, and I've been successfully buying stocks since 1992, with an average annual return around 20%. I've beaten the S&P 500 almost every year and I've blown the doors off the brokers I've hired over the years to race me. I've done it buying mainstream companies, brand names you already know like Apple, Netflix, Starbucks, Amazon, Ford, Google, and Under Armour. What's so hard that you can't do it too?

Chances are your broker or portfolio manager costs you around 1% of your assets per year. Some special ones charge close to 2%. Which doesn't seem like a lot of money, unless you have millions under management. But here's the thing: you pay every year, regardless of performance. You pay when he makes you less than the S&P 500 index made. You pay even when your portfolio loses money-- as in negative growth. Let's say the market crashed, you feel lousy, your portfolio looks like it's spiraling the bowl. Don't fret: your manager gets paid anyway.

Untrained, I have been successfully buying stocks since 1992. I see an average annual return around 20%

Because that manager's compensation is screwy, her incentives are screwy. It's in her best interest to make you happy enough so you commit more money to her care, not to make high returns on your investment portfolio. And perhaps surprisingly, those are not the same.

A happy customer might be one who is listened to. A happy customer in many cases is one who doesn't lose sleep worrying about being ripped off, or about the next big down cycle or even a recession. But the most likely scenario is this: a happy customer is one who can be lazy and do essentially nothing. Just gets a statement every month which shows the money is still there, plugging along, and that's it. So what if it's down a point from last year, or up two points? I worked hard to put it there and it's right where I left it.

Inflation in the U.S. historically averages a little over 3%. And if investment management fees average about 1%, then your portfolio has to clear 4% just to keep even with the economy. Is yours doing that, year in and year out?

Don't even get me started about mutual funds, which as an investment class have a terrible track record. They rarely even keep up with their own costs plus inflation. Bill Barker of The Motley Fool does a nice overview of the problem in a recent column: click here.

Index funds and ETFs are great, with extremely low investor costs-- usually around .25%. But because the baskets are so big, the standout performance of any one stock you own in that basket is going to make little difference to your total return.

It's about observation of the marketplace, attention to the news, focus on the industries/companies that interest you, and most of all, patience with the money you've placed

You've been told for years that investing is too complex, too difficult, that it takes years of study and hard-won experience. You've been told that individual investors in the stock market are about as safe as toddlers jaywalking. That the big banks and funds and other institutional investors hold all the cards and have rigged the game against you. That you need a seasoned pro to fight them. But you've been told this because it serves the community of financial managers for you to believe this. The more people give them money to manage, the more they make. Regardless of performance.

Successful investing is not nearly as hard as they've been telling you. It is far from rocket science. It's about observation of the marketplace, attention to the news, focus on the industries/companies that interest you, and most of all, patience with the money you've placed. I've detailed the path and many other topics to help you get going:
You'll likely bet wrong a few times, just the like the pro you hired. But if you pay attention and follow your passions, your wins will outnumber your losses and your gains will more than pay for everything.

So fire your portfolio manager, and get out there and do it yourself. At the very least, scale her back and take over some of your own stock management. Use her for a little of the money but mostly to ask questions, to bounce ideas around. You'll learn, stretch yourself, do better and will earn the pride of your own triumph. 

What are you waiting for? 

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