Manage Your Own Money
by John M. Grund
Here's a question to start out your New Year: Who should manage your money, you or a professional?
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Seems like an ordinary question, but in some ways it turns out to be a religious matter sort of like whether a pinch hitter should replace the pitcher in the batting order.
At the risk of angering a group of financial advisers, money managers and certified planners nearly as large as all the fans of the National League put together, my answer is that you should try to manage your money yourself.
Why? Simply because no one else will care as much or do the job for as little.
Buying money management services may be unique in that you don't get more by paying more. Time and time again research has shown that professional money managers rarely outperform the markets by a margin as large as their fees cause you to underperform the markets. In other words, when you pay for a manager, you start the 100-yard dash 10 yards behind the rest of the field, and even above-average managers usually can make up only three or four yards of the handicap. Indeed, most managers seem to lose ground on the field.
How can that be? As with all things religious, it is a mystery. You might respond that despite the costs, you'd rather pay someone else to manage your money because the financial world is so complex, and you have neither the time nor inclination to sort it out. Fair enough, but you have another choice. You can choose to keep your portfolio simple enough for you to understand, perhaps just a middle-of-the-road stock index fund and a government bond fund to start.
Simplicity in investing, as in religion, seems to have great benefits. A simple approach often captures more of the return of a particular asset class than a complicated approach does, because the complex plan involves more trading and constant rejiggering, which increases costs and reduces returns over time.
Paying someone else to manage your money can be more convenient, of course. Just remember that like all conveniences, it has a price, and sometimes the price is steep.
John M. Grund is senior editor of RedChip.com, a Web site with news, research and tools for investors in small-cap stocks.
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