Many people wonder if it would be worth it to hire a professional money manager. Managing your own money isn’t exactly rocket science, but there are many pitfalls that can get you into trouble. Working with a professional can help you avoid many of these dangers. Here’s a couple of the big ones, and then a short test that everyone should take:
Investing according to your gut is one of the most dangerous things you can do. When the market it way up and you see double or triple digit returns, your gut tells you to buy. When the market is tanking into the abyss and you’re losing lots of money, your guts tells you to sell. So if you follow your gut, you’re buying HIGH and selling LOW! I can’t tell you how many hundreds of people have told me they do just that! A money manager can take some of the emotions out of the process, or talk you away from the ledge, and hopefully avoid this common trap.
This is really related to emotional investing, but it happens more often. You look at your holdings and the Morningstar reports on the funds you own. You see that you have some dogs (1, 2, or 3-star funds), and you decide it would be better to buy some 5-star funds. So you sell your dogs and buy some hot funds that have been way up in the last year. Seems like the right thing to do, right? Wrong. What you’re really doing here is once again, selling LOW and buying HIGH. You’re selling something that has underperformed the market, and buying something that is already way up and has been outperforming the market. Things go in cylces. A money manager can help you construct an all-weather portfolio.
I call this the money management T-I-R-E-D test, to help you decide if you’re tired of managing your own money.
T – Time. Do you have the time it takes to properly manage your money? Doing investment research, evaluating your holdings, calculating rebalancing changes, making the changes, keeping up with tax law changes, updating beneficiaries and account information, reviewing your insurance holdings…it all takes a lot of time, and time is money.
I – Inclination. Do you really enjoy managing your investments? Most people would rather eat shards of broken glass than read a mutual fund prospectus. You really can’t blame them, they are written by attorneys. But even if you do enjoy researching and reading about investment products, trends and strategies, is it really what you want to do with your free time? Or would you rather be playing golf, working in the garden, watching your kid play a sport, or spending time with the grandkids? No matter what it is, if you don’t like doing it, you probably won’t do it. And your investments are something you really should not ignore.
R – Research. Do you feel that you have access to the kinds of research that you need to manage your money most effectively? Reports from Morningstar, Lipper, Standard & Poors can be costly and not easy to come by. Professional money managers also have access get on conference calls with best mutual fund managers and ask them questions about thier funds. Having all the right information can make a world of difference.
E – Expertise. Do you have enough expertise in the investment world to effectively manage your money? Everyone has an area of expertise, and it makes sense to leverage your own, and others areas of expertise. You wouldn’t hire a plumber to fix your car. Nor would you pay your dentist to put a pool in your backyard. A good professional money manager will easily pay for himself with the money he can save you in taxes, fees, penalties, not to mention the extra returns he can put in your portfolio.
D – Discipline. Do you have the discipline it takes to strategically manage your own money and stick to a plan? This one relates in part to the emotional investing discussed earlier. It’s easy to stick to a plan when the market it up. But when things are crazy, having a level-headed money manager to stand by you and help you makes all the difference. To become financially independant, it takes time and the dedication to follow a disciplined strategy. Having someone to keep you accountable and make sure you stick to your plan can really help.
If you answered NO to any of these questions, then it would be good idea for you to find a money manager whom you could work well with. The annual fee that you would pay them to help you with this most important task will be well worth it. I have found in my 15+ years of doing personal financial planning, that I can usually increase a clients returns by at least 2-3% even after my fee comes out. But the best part for the client is that they no longer have to worry about it at all.