My musings on the economy, life, technology, business and things I find interesting.

Wednesday, June 4, 2008

Going It Alone

I think investing on your own is a thoroughly scary proposition. I think this for a simple reason, the amount of knowledge, time and resources necessary to be successful is daunting. The alternative to going it alone is using an advisor, but unfortunately the bar for becoming an "advisor" is so incredibly low that most people are just left with two really bad choices.

Problems with Going it Alone

A little caveat, when you buy mutual funds or segregated funds you can have an advisor for free, if you choose not to have one your bank is just taking the commission so going it alone means using a discount brokerage and buying equities or ETFs to avoid the advisor fees.

  • You'll most likely be bad at budgeting and keeping tabs on your personal finances, it's just hard without someone bugging you about it
  • You won't understand tax law and you won't have anyone actively arranging your assets and investments to leverage it, if you do have someone good it will be expensive.
  • You likely won't be ready for major macro trends: for example if you're a Canadian and you dollar cost averaged into the S&P 500 for the last 10 years in inflation adjusted, Canadian dollar terms you lost money.
  • In an effort to re-balance and diversify constantly you'll eat up a lot of money in brokerage fees
  • You'll likely not have the discipline to stay focused on doing what makes sense or the time to constantly review what makes sense
  • If you take a simple route of a "balanced" portfolio you'll need to understand the ratios in a balanced portfolio are meant to shift with time based on market conditions and if they aren't you'll be throwing money out the window, just talk to some bond holders who saw their fixed income assets crash as price inflation sky-rocketed in the 70s.
  • You'll loose money on crappy exchange rates because you won't have an FX account.
  • It will be difficult to avoid currency risk, hedging will be expensive or unavailable.
  • Market neutral strategies will be difficult to implement due to the expense or unavailability of certain instruments
  • You wont have a framework for understanding when its time to buy and sell bonds, equities, currencies or real estate.
  • Your options for where you put your money man be limited, for instance will you know where and how to invest your money in second mortgages at 12-15%?
  • You likely wont be the best at running financial scenarios but you'll need to be the one looking at the entire big picture: analyzing how you pay your self, structure your debt, decide on insurance, structure your affairs for tax purposes, decide what kinds of debt to use and the options to choose, how to reduce expenses, how to maximize income, etc.
  • Your time is worth money

The Problems with An Advisor
  • They likely won't be exceedingly better then you at the above
  • They likely don't practice what they preach
  • They'll likely peddle a single asset class from a single company - this isn't bad per se but it could be
  • They'll take a cut, but so will your brokerage and the ETFs
  • Overall it's a difficult choice, I touched on this in Where Do I put My Money.
Ultimately you're trusting someone. The person you trust and how you go about making that decision is up to you, but I implore you to make it an informed one.
In the end pick the best person for the job, if that is you and its something you want to dedicate a LOT of time to, then go ahead. Otherwise get an incredible advisor who is good with money themselves, makes you comfortable and helps you understand why they make the choices they do.

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