Many youngsters are great baseball players. They practice every day with contagious enthusiasm. Yet even though they are extremely good at the sport, they are a long way from being a major leaguer. In fact, chances are that at some point in the next 10 years they will lose interest in baseball altogether.
Most people tend to look at investing just like those youngsters look at baseball. They may like choosing stocks and actually be pretty good at it. But they are still miles away from being a professional manager. That doesn't mean parents shouldn't support their children's baseball dreams, but parents also want to be realistic. Just like you should be realistic about investing your own money.
Here are three reasons why you should not manage your own money:
First, the financial world has changed. The practice of buying stock in a company you like, or one that manufactures the products you use, doesn't work like it used to. The markets move too quickly. Today, information is abundant, readily available, and often acted upon immediately. As a result, it's harder to make money by buying and selling at the right time. Alternatively, it's easier to lose money, as a stock's price often changes in an instant. Remember the May 6 "flash crash," the day the Dow Jones Industrial Average dropped more than 1,000 points in just a few minutes? That happened because one mutual fund company made a move to get out of a position too quickly, which set off a flurry of program trading and caused the markets (and your portfolio) to drop precipitously. The electronic and institutional trading that occurs today makes the markets extremely volatile.
Secondly, the average investor and/or the above-average investor does not have the necessary time, tools, or inclination to research and monitor their portfolio accurately. At present, investments must be carefully chosen and monitored. Not only does the investment require analysis, but the market also calls for inspection. The downturn of the economy and stock market in 2008-2009 brought everything down. It took no prisoners. If you were in any position other than cash, you lost money. Some even lost in cash because of troubled money market funds.
[Also see 5 Things Your Broker Won't Tell You.]
Even though many investment advisors lost money for their clients during that time, their clients typically fared better than those investing solo. There are many investors who sold their stocks in early 2009 and waited six months to reenter the market. Some investors are still not back in. Those investors truly lost their shirts on paper and in their pockets.
Third, the average investor does not have access to certain investments that could significantly improve their returns and lessen their risk. There are a variety of top-tiered investments that are only available to investment managers. Unless you eat, breathe, and live in the investment world, you may never hear about these paramount portfolio offerings.
Several of the investments available today were not available a few years ago. For instance, numerous investors have not heard of exchange traded funds (ETFs), which can offer significant tax benefits over mutual funds and greater diversification over individual stocks. Furthermore, investments like long/short, absolute return, market neutral, and quantitative analysis funds only existed in the hedge fund world two years ago, but are now set up in the form of mutual funds. The unfortunate fact is that these types of investments could significantly improve an investor's performance, but only if that investor is aware of them.
If investing is a hobby for you, take a small piece of your portfolio, open an online trading account, and have fun. But unless you are committed to being a full-time financial manager, leave the majority of your portfolio to the advice of a professional.
Kelly Campbell, Certified Financial Planner and Accredited Investment Fiduciary, is founder of Campbell Wealth Management, A Registered Investment Advisor in Fairfax, Va. Campbell is also the author of " Fire Your Broker ," a controversial look at the broker industry written as an empathetic response to the trials and tribulations that many investors have faced as the stock market cratered and their advisors abandoned their responsibilities to help them weather the storm.