Should You Manage Your Own Portfolio? Ask yourself these 5 questions before deciding to go it alone.
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Tired of money managers who cook the books and stockbrokers who profit whether you hit it big or lose your shirt? And, even if your broker does have your best interests at heart, wouldn't it be nice to save a couple of bucks on those fees and sales charges that chip away at your returns?
Then maybe it's time to consider managing your own investment portfolio--and stop giving Wall Street a free ride at your expense.
There are many advantages to running your own money. For starters, you can save the typical 1 percent asset management fee that most money managers charge whether or not your portfolio goes up, down or sideways. While a 1 percent fee doesn't sound like a big deal, it means you're paying $10,000 for every $1 million under management--and you're paying that fee every year for as long as the firm manages your money. Furthermore, the 1 percent you pay to your money manager doesn't always cover the costs of buying and selling the stocks and bonds in your portfolio or the sales charges (also known as loads) and administrative fees charged by the mutual funds your manager puts you into.
Thanks to the internet, there's a wealth of information available online that gives you the same real-time access to the markets as any broker at Merrill Lynch or J.P. Morgan Chase. By opening an account with a discount broker such as Charles Schwab & Co., Inc., you'll not only save money on commissions but you'll also get access to online tools that help you assess your risk tolerance, set asset allocation targets, access research reports and track your portfolio's performance.
But, despite the many benefits of managing your own investment portfolio, there are also risks involved. The biggest risk for most business owners is that they'll be so busy running their companies they'll take their eye off the road--and end up in a head-on financial collision before they ever knew what hit them. And, because entrepreneurs tend to be risk takers in growing their businesses, their aggressive personalities sometimes get them into trouble when they apply the same get-big-or-go-home mentality to managing their money.
Todd McWhirter, a Charles Schwab financial consultant in Charlotte, N.C., recalls an entrepreneur he worked with who, against McWhirter's advice, bought $60,000 worth of options and made $700,000 in six months. Gambling that his winning streak would continue, McWhirter's client proceeded to drain $1 million out of his 401k. When the market turned against him, he ended up with $5 in his account.
"When you're an entrepreneur, you're either investing in your own company and trying to hit it out of the park or else you've made money and now you're trying to figure out what to do," says McWhirter, who has spent his career working with entrepreneurs and small business owners. "That's why I always advise my clients to think about the value of their time. Do you really have time to watch the market every day?"
McWhirter also understands that his clients are the kind of people who'd rather drive their own investment strategy than sit back passively and trust an investment advisor to do it for them. That's why McWhirter believes even the savviest entrepreneur can benefit from an advisor who acts as a coach to make sure that his investment strategy stays on track. "You have to decide if it's worth paying 1 percent to know that someone you trust is going to be there for you when you can't," he says.
So, just because you can manage your own portfolio, does it mean you should?
Here are five questions to ask yourself before you take the plunge:
- How big is my portfolio? A fledgling entrepreneur with $50,000 can probably manage his own money by carefully choosing a couple of well-diversified mutual funds. However, a seasoned business owner with a portfolio of more than $500,000 in assets would probably be better off getting some sort of professional investment help, McWhirter says.
- How much risk do I feel comfortable taking? While entrepreneurs often make big bets to build their businesses, they're usually better off pursuing a more conservative course in growing their investment portfolios. While hedge funds and private equity funds can sometimes produce better short-term results, banks prefer liquid assets like stocks and bonds as collateral for business loans and credit lines.
- Is my portfolio diverse enough to protect me from market volatility? Unless your name is Warren Buffet, it's difficult as a solo investor to assemble a portfolio of stocks, bonds and mutual funds diverse enough to protect you from market fluctuations--and Buffet had a pretty tough year last year, too. Even though you can save some money by purchasing individual stocks or bonds on your own, it may be worth paying a mutual fund's administrative fees and charges to spread out your risk and have your money managed by a professional. (There are lots of great no-load funds, too.)
- Can I stick to my investment plan? Because entrepreneurs are busy people who often jump from deal to deal, it's not always easy for them to stick to an investment strategy that involves socking away a certain amount of money every month or rebalancing their portfolio at the end of the year. If you're the kind of investor who likes to take a flyer on a hot stock or IPO, it may be better to set aside some "mad money" to play with and leave the rest of your portfolio in the hands of an experienced money manager.
- How long do I plan to hold onto the securities in my portfolio? While some investors like to trade their own stocks in hopes of beating the market, others would rather park their money in an S&P 500 index fund and not even look at it for the next 10 years. "Unless you're retired and really dedicated to it, you're better off not trading your own stocks," McWhirter says. "You can trade all day and do anything you want, but the time-tested way to build a portfolio is through asset allocation."
Whatever route you choose to go, it's important to do your homework first. A little research and soul searching now can spare you some heartache and investment losses later.
Rosalind Resnick, the founder and CEO of Axxess Business Consulting, a New York consulting firm that advises start-ups and small businesses, is the author of Getting Rich Without Going Broke: How to Use Luck, Logic and Leverage to Build Your Own Successful Business. She can be reached by email at email@example.com.