So you wanna invest some money . . .

  • Subtitle: Financial Adviser
Written by  Posted Date: October 8, 2012

Would you suggest that a client walk into a courtroom without legal representation? Probably not. The same applies to financial advice. As a financial adviser, I want my clients to use my counsel for any and every financial decision they make. Many people manage their own money, and some even do OK; it depends on the circumstances. I recently came across an interesting article called “The Probability of Success.” In it, the author, William Bernstein, gives an interesting perspective for people who want to manage their own investments. In this article I briefly summarize the four “ingredients” Bernstein suggests the do-it-yourself investor needs to be a successful at managing their own money.


The first component they need to have is an interest in investing. It is like anything else — if you like what you do, you will do a better job at it. If you loathe it, you will probably be lousy at it. Most people enjoy studying finance about as much as taking the bar exam. In addition, many people don’t have the patience to do the research and acquire the knowledge to make informed decisions for their own benefit.

The second ingredient for investment success is having the skills to do the math associated with investing. As Bernstein’s article states, fractions are a challenge for 90 per cent of the population, not to mention understanding complex statistics. The needed equations — like the “Dividend Discount Model,” the ‘Sharpe Ratio,” and similar concepts like standard deviation and correlation — are mostly beyond the do-it-yourself investor’s knowledge base.

The third building block is having the proficiency to make informed decisions about an investment portfolio as a whole. How would the masters manage a similar portfolio? What would Fama and French, Burton Malkiel, or John Bogle do in the same situation? It is so important to have perspective and expertise when making portfolio decisions. Like anything, having a truckload of experience helps one to learn from past challenges and mistakes and make the correct current decision.

Lastly, and perhaps most importantly, is having the emotional discipline to stick to a long-term plan, and not panic when the waters are rough. It is easy to say to one’s self “stay the course” when things are going well. But, when a financial crisis hits and everyone is abandoning the financial ship, it is not as easy to stay invested. The tendency for most do-it-yourselfers is to move a portfolio from equities to cash exactly at the wrong time — oftentimes at the lowest point in the market.

In conclusion, Bernstein expects no more than 10 per cent of people would pass the above tests. The devastating part of it all is that in order to actually succeed at long-term investing, the individual needs to string all four of the above skills together. Come to think of it, it is difficult to find an investment professional who has all four skills, as well as the ability to string them all together.

The most challenging ingredient — even for professionals — is the last: the emotional control to execute a disciplined investment strategy.

Individual do-it-yourself investors may on occasion be successful, however, in my opinion, the odds are stacked against them. It is like the layperson going up against the Queen’s counsel in court: It will be a tough uphill battle, with minimal chance of success in the long-run.

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Alan Acton

Alan Acton is a financial adviser in Ottawa and can be reached at alanacton@polarisfinancial.ca.

Column: Financial Adviser

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