How do you buy shares? Should you be managing stocks by yourself or hiring a professional to invest for you?
What’s covered in this tutorial?
In this tutorial we look at the differences between hiring a professional to invest your money versus investing on your own.
Table of contents
We’ll be covering 3 topics:
- We’ll start by exploring the two ways you can buy stocks
- Then we’ll look at each of them, firstly, you can pay someone to do it for you
- Or you can do it yourself
Part 1. Let’s compare the two ways
Firstly, you can hire someone to do it for you.
- They should be an expert
- You’ll have limited control or input
- You’ll pay high fees and
- Sadly, they’ll probably perform poorly
Sounds negative of me to say that, but we’ll come on to the evidence in little bit.
Next, you can do it yourself:
- In this scenario, it’ll take you more time
- It’ll cost you a lot less, and
- If things go wrong, you have no one to blame other than yourself.
Part 2. So let’s look at the case where you hire a professional
Firstly you can get a financial advisor. There are lots of them and many with big brand names behind them.
- Morgan Stanley
- Wells Fargo
Secondly, you can buy an investment fund. For example, a mutual fund that is actively managed by a highly paid professional. Again, there are lots of very big and profitable businesses that offer these services.
- Franklin Templeton
But be warned, these are not necessarily the best options for you, as there are typically high fees and they typically deliver poor performance.
Let’s think about the fees first
Here’s a calculation direct from the US government. Say you save 25,000 dollars and you manage to grow it by 7% a year for 35 years. That’s pretty good. It’ll compound nicely. And let’s assume you pay fees of half a percent. Well, you’ll grow your savings 9 fold.
But let’s be more realistic on the fees. And increase it to one and half percent. They there is a dramatic decline in your savings. In fact a 28% decline. Wow that’s a big loss of savings.
Next let’s look at the performance of the professionals
- If we look at the 2,900 US funds only 1 out of every 9 managed to beat the market
- In Europe it’s one in 5 that outperforms
- And for global funds only 1 in 10 that outperforms.
So there is a really high chance that whoever you pick to be your manager will actually deliver you some pretty poor performance.
Part 3. Now let’s move on the the option of managing your money yourself
Well, you have to start with the right mindset
Firstly, investing starts with saving
- the more you save, the bigger your savings
- the sooner you save the larger they’ll grow
Secondly, investing is a long term game.
- There aren’t any quick wins.
And thirdly, there really is only one skill you need to have:
- And that’s common sense.
- Simple as sounds, it’s not always easy to keep your head.
They you have it, just 3 things to get right.
Next let’s look at the toolkit
First, you’ll need a brokerage account.
- It’s a bit like a banks account, but instead of putting your cash in it, you put your stocks.
- Probably the single most important thing to think about with your account is to make sure you minimise the fees you pay. It should be a small single digit dollar a trade account. Never a percentage of the transaction.
Second, you should make sure you only invest in companies you know and understand.
- Make sure they are businesses you want to own for the long term.
- If you do this, you’ll avoid nasty surprises, as you’ll understand what’s going on with the business you’ve invested it.
- And if you are investing for the long term you’ll be minimising the trading costs.
And finally, never put all your eggs in 1 basket.
- That means never putting 100% of your money in stocks
- And never having too concentrated a portfolio.
So what next?
If you decide that you are going to manage your money yourself, we are here to help.