How much control should you keep over your investments?

The buoyant stock markets of recent years have made investment look easy – at times investors needed only an S&P 500 tracker to generate handsome returns – and, unusually, bond markets performed well at the same time. More recently, in 2022, the mainstream asset classes moved down in tandem – a difficult experience for investors faced by the risk of losing money wherever they chose to invest. Does it make sense to pay an expert to do the job?

Keeping personal control over the management of one’s investments can be appealing, although it can also be daunting. In theory, it could save the cost of brokerage fees or the charges of an active fund manager – and even a 1% additional cost can add up over time – while ensuring that your investments are positioned exactly as you want them. Information is readily available and there is plenty of advice online for free.

However, there are a number of questions you should always ask before deciding how much control you can or should exert over your investments.

How much do you know?

Superficially, investment can seem simple: find an investment, stick with it over the long term, collect any dividends and watch its value grow. This is all very well in times of economic boom and soaring stock markets, but there are also times when the process of making money – or even minimising losses – becomes significantly more complicated.

One example in recent years is provided by the way the rise in the US S&P 500 index has been driven largely by a very small number of highly-performing technology-related groups, now dubbed the ‘Magnificent Seven’. Some of these companies are now facing increasing regulatory risk, as well as a backlash over their restriction of third-party competition on their platforms or use of personal data, especially in Europe. Should their valuations shrink significantly, investors exposed solely or mostly to this very narrow part of the market could experience appreciable losses.

So it’s worth asking yourself how much you understand the technical elements of investing – concepts such as cash flow, correlation and diversification? Are you comfortable identifying the risks and biases in your portfolio? Most investment platforms provide tools for this, offering analysis of a portfolio’s regional and sector weightings.

The danger for many private investors is that they take excessively big bets based on their own previous success or the past performance of particular assets. According to Benjamin Graham, known as the ‘father of value investing’, the central difficulty in investing is that all of us are our own worst enemy. We buy high, we sell low. We do the worst possible thing at the worst possible time because we are most certain that we are right exactly when we are most likely to be wrong.

Investment is not simply about deciding a portfolio allocation and sticking with it. You need to do regular reviews and rebalance from time to time.

How much time can you devote to it?

Investment is not simply about deciding a portfolio allocation and sticking with it. You need to do regular reviews and rebalance from time to time. Not to do so risks your portfolio becoming unbalanced and vulnerable to newly emerging risks.

If you are also running a business, or managing a hectic job, you should ask yourself whether you will really have the time to devote to research. Will you be able to keep on top of market movements, or be responsive to changes in the investment climate? Also, will you be able to adjust the portfolio to your own changing needs? Your investment priorities may alter if you change jobs, for example, or have children and grandchildren.

Wrapped up with this is the question of whether you actively enjoy the investment process. If you are genuinely fascinated by the cut and thrust of markets and getting to grips with the minutiae of investing, managing your portfolio will seem less of a chore. If it seems boring or simply does not inspire you, hiring someone to manage it on your behalf may be a price worth paying.

What is your investment personality?

Investors make mistakes. Primarily, they tend to be too emotional in the way they invest. Massachusetts-based financial services market research firm Dalbar says investors don’t tend to achieve the performance of the market as a whole because they buy and sell at the wrong time.

Its 2024 Quantitative Analysis of Investor Behavior Study says that in the stock market boom year of 2023, the average US equity fund investor enjoyed a return of 20.79%, but the S&P 500 index gained 26.29%. The 5.5% underperformance was the third largest investor gap in the previous 10 years.

According to Dalbar, the typical equity fund investor enjoyed an annual return of 8.01% over the 30 years to the end of 2023, compared with 10.15% for the S&P 500, the closest representation available of the US stock market. Inflation over the period averaged 2.52% a year.

This sounds like a decent return, until you take into account the effect of compounding. The investment of $100,000 on January 1, 1994 would have earned the typical equity investor $1,009,064, whereas the same $100,000 invested in the S&P 500 and left to grow would have returned $1,817,754.

Herd behaviour

The firm’s analysts say investors tend to sell up when markets are weak, fearing that they won’t recover, while they are prone to increase their exposure when markets are strong, believing they will continue to rise indefinitely. These instincts lead to herd behaviour.

Meanwhile, everyone has their own idiosyncrasies that are liable to cloud their investment judgement. For example, entrepreneurs tend to be risk-takers – which may make them very good at their job, but doesn’t necessarily equip them to be great investors. Individuals that are highly detail-oriented may find themselves tinkering with their portfolios all the time, adding trading costs for little gain.

Everyone has their individual investment personality, but it is important to work with it rather than pretending it doesn’t exist.

The extent to which you exert control over your portfolio will depend on these traits and whether you can identify and manage them effectively. Everyone has their individual investment personality, but it is important to work with it rather than pretending it doesn’t exist. And investors should never forget that confidence rises faster than ability.

Where do you want to invest?

If you are going to exert greater control over your portfolio, you will need to decide what type of investor you are. Will you look at active or passive portfolios? Are there certain sectors or themes on which you would like to focus – for instance, one in which you have a good understanding or a particular interest. Do you prefer to look at growth companies, or would you rather unearth neglected gems?

Investors need to the understand the illusion of control principle. An illustration is that many people keep on pressing the elevator call button despite the light clearly indicating that it has already been activated, and the knowledge that the action will have no effect. Although we have a large and increasing amount of information at our fingertips, the majority is just distracting noise.

The media, and the internet, would have you believe that every piece of information is of the utmost importance to your portfolio every second of the day. However, you need to be able to identify what your priorities really are and pay attention to what’s within your control, mainly your time horizon and how relevant information will impact your portfolio.

Split responsibilities

If you decide the requirements are likely to be too onerous, there are hybrid alternatives. You could appoint an investment manager to oversee the majority of your portfolio, particularly if you are reliant on it for an income, but keep a pool of speculative money to indulge any investment instinct of your own. That way, if it goes wrong, it won’t compromise your current lifestyle or future ambitions.

Even if you decide to relinquish day-to-day decision-making to an investment manager, you cannot completely abandon responsibility for overseeing the portfolio. You must be able to hold your investment manager to account and ensure they are managing your wealth in line with your financial goals and the parameters agreed at the start of the relationship.

If you have made it clear that your target is steady long-term returns, your investment manager shouldn’t be putting your money into highly speculative investments, or at least no more than a very small portion. The rules governing investment managers’ conduct are strict, but you should also be keeping an eye on what’s happening to your portfolio.

Ultimately, a professional investment manager will in most cases have a broader range of resources and expertise to manage your investments in line with your long-term financial priorities than you can muster on your own. In that sense, a portfolio manager or advisor could act as a coach. Exercises can be provided by the internet free of charge, but a coach can help you obtain inspiration, enjoyment and attention to things that matter. Taking control is a seductive idea, but unless you have plenty of time, experience and enthusiasm, leaving it to the experts will most probably bring better results in the end.