Should You Hire An Investment Manager?

I think I can be objective about this.

I think the basics of building and maintaining a portfolio can be learned by a lot of people. This can be done without individual stocks and allow an investor to stay close to the market and perhaps manage the risk effectively, for example using a dividend ETF for a portion of large cap exposure.

One of the biggest obstacles for do-it-yourself is emotion. There are studies from various financial institutions that show mutual fund holders lag the funds they hold due to poor timing of purchases and sales. This can be reasonably attributed to buying high and selling low.

I can tell from conversations I have with some clients, neighbors and friends that getting a handle on the emotional aspect of portfolio management is a much tougher skill to learn.

History shows that stock market crashes come at bottoms not tops. I don't know how many times I have said and written that. Yet I know that the next time there is a crash I will get comments left on the blog about selling, clients will also ask about selling. People can process crashes come at bottoms today, when there is no crash. It is tougher to do when a crash comes.

A successful do-it-yourselfer needs to really embrace the history of something like this to be a good money manager. This is just one example there are many others.

If you plan to go it alone, I would urge you to learn as much as you an about stock market history. There are plenty of books that tell the stories of the market and I would also advise getting something like the Stock Trader's Almanac to see the actual numbers. Everyone knows what a terrible stock market we had from 1968 to 1981, right? It was awful!

Well not exactly.

1972 SPX up 15.6%
1975 SPX up 31.5%
1976 SPX up 19.1%
1980 SPX up 25.8%

So during that 14-year period there were four years unambiguously better than the long-term average. There were five other years during that time period that were up slightly. So nine out of 14 years in this "awful" period were actually up.

The remaining years were absolute stinkers.

1969 SPX down 11.4%
1973 SPX down 17.4%
1974 SPX down 29.7%
1977 SPX down 11.5%
1981 SPX down 9.7%

Most of the damage of this time period was done in 1973 and 1974. I would note that the index went below its 200 DMA (my trigger to start getting defensive) in the spring of 1973 only about 10% from the high set in January of 1973. The SPX went back above the 200 DMA early in 1975, about 15% from the bottom.

Being faithful to this exit strategy then would have allowed you miss most, not all, of down a lot. This would have added dramatically to returns for that time period. This will happen again in the future.

This is all about numbers not sentiment. Understanding how numbers have worked in the past can build a foundation for you to begin to assess how numbers might work in the future.

Only you can really know whether you can do this. Coming up with the right answer requires introspection.