How to Cut Costs and Reduce Performance
The media is awash with the revelation that professional investment advice is the single greatest threat to personal wealth. Social media and self-anointed financial gurus eagerly encourage do-it-yourself investors to dramatically improved returns by using low cost, management-free investments. The message is clear... low cost investments enable anyone to become a proper portfolio manager! You do not need to know how to manage risk or diversity a portfolio. You do not need to know the difference between a stock or a bond. You do not even need to know how to monitor your results. You just need to own the cheapest investments available... everything else is trivial.
Or is it?
While it is obviously prudent to be cost-conscious, the idea that "less management is always more" perpetuates financial devastation. This is because investment performance is a function of effective management, and the greatest threat to performance is the lack of effective management. Anyone can invest money, but very very few investors have the requisite time, temperament, or training to effectively manage a portfolio. The DIY investment movement ignores this fact and the consequences. The whole truth is that any savings one might realize by eliminating proper advice pales in comparison to the losses resulting from personal disorganization, immature strategy development, haphazard investment selection, and inadequate monitoring.
Bottom line... You can not become a surgeon by buying a scalpel. You are not a dentist because you own a drill. You are not a plumber because you bought a nice wrench. You are not a portfolio manager because you own cheap index funds.
Citations
1. http://www.dalbar.com/Portals/dalbar/cache/News/PressReleases/2014QAIBHi...
2. The buck stops here: Putting a value on your value: Vanguard money market funds Quantifying Vanguard Advisor’s Alpha, Vanguard Research May 2014
3. Advice seekers retire with 79% more money, Wall Street Journal, Market Watch May 22, 2014
4. Help in Defined Contribution Plans: 2006 through 2012, Aeon-Hewitt, May 2014