Do, Do It Yourself ...

Introduction

Some investors want to do it themselves because they feel they can manage their money more cheaply or achieve higher returns than fund managers. This is a natural reaction to a low inflation environment and a period of volatile and poorly performing financial markets.

It would be arrogant for an institutional fund manager to deny that there are in fact some do it yourself investors who are very capable of managing their own portfolios.

Investors do, however, need to be realistic about what managing their own money really entails.

Diversification

Most DIY investors confine their investing to local shares, real estate and cash. They are generally unable to directly access commercial/industrial or CBD property, international stock markets, or fixed interest securities, and thus cannot realistically manage a fully diversified portfolio.

While some personal investors are confident in the use of derivative instruments to mange portfolio risk, most are unfamiliar with these tools and their strategic use. Thus many do it yourselfers are not using all the instruments available to them.

Additionally, of course, smaller investors usually do not have enough investments to diversify their portfolio across a wide enough band of shares, or different types of real estate holdings. These restrictions are NOT a reason to avoid do it yourself but they do support the argument that going it alone is difficult and that managed funds still have a real role to play even for the most determined do it yourselfer.

Time

Beyond diversification, continued (and selective) use of managed funds provides a benchmark for personal investment performance, and a safety net to ensure the portfolio continues to perform even when the investor is unable to devote his or her full attention to it.

Many investors underestimate the time and attention that portfolio management can take in researching markets and securities, evaluating opportunities, picking the right timing for buying and selling and implementing and administering their investment decisions.

While some investors will be very good at making asset allocation and strategic investment decisions, they may simply not have the time for day to day tactical management of their portfolio.

Costs

Is do it yourself cheaper? To some investors the front end fees of managed funds are a price shock. Of course, this fee needs to be spread over the life of the investments and investors with a 12 month time horizon probably should not go into longer term growth funds expecting a short term payback.

Equally, not all investors pay these fees: nearly half the sales of managed fund products have the front end fees rebated by planners and advisers who work with their clients on a fee for service basis.

On an ongoing basis, investors in managed funds incur annual management fees and other expenses which taken together form the Management Expense Ratio. While this annual expense on the surface might appear significant, most do it yourself investors forget to cost their own time in investing or add up their own Management Expense Ratio including transaction costs like stamp duty, brokerage, trading costs, and research or information.

Compliance

Nor do DIY investors necessarily factor in the time it takes to make the self managed fund comply with legislative and regulatory requirements. This is particularly so in super where prudential requirements (while not as onerous as those on large employer sponsored super funds) are now quite extensive.

Performance

What about better investment performance? Recently a manager has introduced performance fees where investors pay higher fees for higher returns. The unanswered question is: should investors pay for manager skill or market volatility? Costs and value in managing money are not really related to good or bad financial markets and managers should not be rewarded for taking risks when investors want risks controlled.

When share or bond markets are performing poorly, as will happen at points in the economic cycle, investors often cite their "high" bank account returns as "proof" that they could do better. The records shows that even DIY investors are unlikely to outperform their bank account when the shares market is off. Some might even say self managed portfolios are less likely to do better as individual investors invariably lag the institutions.

Equally, investors may believe their real estate is performing better that it is, simply because the worth of the family home is not quoted in the daily press and its value fluctuations are obscured until it is sold.

Conclusion

In conclusion, DIY is a good way for individuals to achieve more control and involvement with their investments, and that such active participation should be encouraged. But we would also emphasise the important ongoing role of managed funds in DIY portfolios for diversification of assets and securities, as a risk and performance benchmark and as a safety-net.

Where investors pursue self management for cheaper costs or higher returns they should do their sums carefully to avoid disappointment.