I knew you were going to come for this. After all, you simply want to know the sharpest tools to deploy for excellent market results. I wish it was easy to put a finger to it and just tell you which option is best for you. But you know what, there is no best option, because each option is capable of producing outstandingly brilliant results or dismally poor ones and of course a lot of possibilities in between. Besides, these investment strategies are hardly incompatible or mutually exclusive. Ideally, you need to spread out into a number of investment options and strategies as this rather fortifies your position the more. Mistakes in one area can be absorbed by successes in others. All the same, let us still see how direct personal (self-managed portfolio) approach pans out against the unit trust (professionally-managed fund) approach.
Self-Management of Portfolio
First, what this entails. When you self-manage your portfolio, it squarely puts the responsibility for success or failure on you. You may get advice when you need and seek it, but ultimately, you carry the can. That means that you have to research the market and evaluate stocks to choose what to buy or alternatively gamble buy just buying what you think others are buying. You could still search out and buy research services, but as stated, the buck stops with you. Tracking the performance of your portfolio (even those dizzying and at once exciting price swings) lies with you, just as the very important, though often neglected, business of keeping your portfolio records, monitoring receipt of returns in dividends and bonuses, etc. Then the challenge of timing your sales, since, at some points it would be important to realise your gains or simply exit for safety. Self-management demands structuring your portfolio, as this is important in the serious business of investing - you don't just buy stocks, you buy to meet a set of objectives, which, at the minimum, will consider returns and safety. This demands skill, effort and resources too: a good portfolio reflects a careful spread of assets which it takes money to put together.
How does that sound to you? I'm sure the answer will depend on your level of investing knowledge, resource base, time availability, stress absorption capacity and even interest in the market dynamics. So, for one person, this could all be exciting, prompting a desire to take the bull by the horns. For one, there is obviously the benefit of experience that comes from a do-it-yourself approach. You might toddle initially, but that's tuition for a lot of practical exposure. Then, that sense of being in control and running your show. Nobody will love you more than yourself, which simply reads that you are best-placed to work in your best interest. Barring errors, you are the one to pursue the best courses of action for yourself, because you want the best for you, isn't it? Add the fact that in reality, professional managers are not known to be that super. Many times, they can under-perform. They do misjudge the market too; after all, they're human. That has been one of the strong admonitions of Mr Peter Lynch, renowned American mutual funds manager. He has argued strongly that the individual investor, by just being conscious to observe what happens about companies, has the flexibility for decision-making to outperform institutional fund managers. Their fat salaries, which get translated into costs for you, one way or another, will also not be your 'portion', if you run your show.
All that however, depends on if you can and want to get into the saddle and pilot things yourself. Do you have the skill? The time? The temperament? The resources?. If you don't, let's see how it works with a managed fund.
Managed Portfolio Investment
With a managed fund, your principal responsibility will be in choosing a fund that you are satisfied that it meets your investment objectives and other selection criteria. If you are comfortable with the fund manager - and why would you choose one that leaves you on the cliff-hanger? - you can literally go to sleep. Why? Because that is how it is designed to work. The fund manager has that odd job of tracking the market, evaluating companies and securities, choosing where to invest and when and even providing regular updates on the value of your investment. More importantly, the job of turning in goods returns, practically beating the market and even out-performing other funds is his responsibility. Yours is to get the returns, after all, that's why you invested. Then that need for portfolio diversification. That's the fund manager's headache too, but fortunately, he has a pool of funds from various investors to enable him effectively spread the portfolio, to the benefit of the investors. He has the skill too, it is expected.
Sounds so rosy, so why should I bother my head trying to pick stocks? That's it, but it's not that simple. The above are expectations from the fund manager. Nothing guarantees that he'll deliver them, though that applies too when you do it yourself. But you definitely lose control when someone else is managing. Much as it relieves some work and grit, it leaves your fate in the hands of someone, who could, for whatever reason, make wrong decisions that badly affect your investment. Nothing says that in such circumstances it couldn't have been possible for you to personally make a better judgement. Simply put, it's a knife of two edges which could cut either way: experience and skills bring you good returns, or even avoidable errors cost you money. There are also costs of management of the portfolio, both in direct charges and the administrative expenses which the fund has to absorb and which could deeply eat into earnings. Then think of the limitation that is inherent in the management of a fund: there is a circumscribed investment scope. Though this is protective, preventing reckless selection of assets, it takes the power of intervention off you. Think of an opportunity where you would like to switch stocks because of an identified profit potential. You can't act, because you're not in charge and heaven knows whether the manager thinks in the same direction or is even permitted by the fund to move into that asset. Here, you're fully at their mercy. Meanwhile, you lose that aura of shareholding, even if your money is invested in stocks. Have you seen shareholders at their AGM, especially if a major company? That pride of ownership, that right to vote and even the gifts shareholders often receive. Then the price discounts that come with rights issues. These are only available to direct shareholders and can only be enjoyed by the fund manager, not you. So, you become an anonynous investor. Okay, not really a problem, if you are earning good returns from the fund.
Putting All Together
No arrangement in life is perfect, but it's clear that managed funds do have a lot of benefit to offer. In the developed economies where the populace has above-average investment exposure, people are grabbing these vehicles to build wealth and gain financial muscle. It obviously helps to have someone who is knowledgeable to apply professional competence to your advantage. The catch is that it's not all who claim to have that professional skill that really have it. The onus is on you to select carefully and our guide on this could be helpful. Besides, you must accept that even the best-rated fund managers do make mistakes. You must keep your eyes open and nothing stops you from exiting a fund if you see its performance trending down, against the trend of the market. If under-performance cannot be explained by general market conditions, you don't have to pay a price for somebody's incompetence. So switch. Above all, if you have the resources, I will suggest you combine these approaches. Some self-management allows you engage the market, possibly make mistakes, but grow in experience, confidence and maturity. If you are in the market for the long haul, this will definitely pay back in due course. You need to know that it's not rocket-science to buy stocks and other securities, so, you need a feel of the action to get used to it. At the same time, use the results and activities of funds you deal with to benchmark your performance and also gain more insight. Your overall results are likely to ultimately get better with such diversified strategy. Whichever option you choose, the important thing, as we always say, is to take action and getting going.
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