How much control should you keep over your investments?

The buoyant markets of the past few years have made investment look easy – investors have only needed an S&P 500 tracker to generate handsome returns. Unusually, bond markets have performed well at the same time as stock markets. It has been tough to lose money wherever one chooses to invest. So why bother paying an expert to do the job? The current crisis gives us a painful answer!

If we forget the last three months, keeping personal control of over one’s investments has some appeal. In theory, you could save the cost of a brokerage or an active fund manager – and even a 1% additional cost can add up over time – while still ensuring that your investments are positioned exactly as you want them to be. Information is readily available and there is plenty of advice online for free.

However, with or without pandemic, there are a number of questions you always need to ask before deciding on how much control to exert over your investments.

How much do you know?

Investment can seem superficially simple: find an investment, stick with it over the long term, collect the dividends and watch it grow. This is all very well in good times, but there will be times when the process is significantly more complicated.

For example, the recent rise in the S&P 500 has been driven largely by a very small number of top-performing technology companies. These companies are now facing increasing regulatory risk, as well as a backlash over their use of data. Should the tide turn, investors exposed solely or mostly to this very narrow part of the market could experience significant volatility.

With this in mind, it is worth asking yourself how much you understand the technical elements of investing – concepts such as cash flow, correlation and diversification? Equally, are you comfortable identifying the risks and biases in your portfolio? Most investment platforms provide tools for this, offering insight into the regional and sector weightings of a portfolio. 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, considered as the “father of value investing”, the central difficulty in investing is that we are all 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 just when we are most likely to be wrong.

Investment is not simply about deciding a portfolio allocation and sticking with it. You will need to do regular reviews and rebalance the portfolio 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 will need to do regular reviews and rebalance the portfolio from time to time. To do otherwise risks your portfolio becoming unbalanced and vulnerable to 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? At the same time, 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, then managing your portfolio will seem less of a chore. If it bores you or simply does not inspire you, paying a little extra to have 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. US consultancy Dalbar has found that investors don’t tend to achieve the performance of the market as a whole because they buy and sell at the wrong time. A recent study demonstrated that the average equity fund investor lost twice as much as the S&P in 2018. They tend to sell up when markets are weak, believing that they won’t recover, and they are prone to increase their exposure when markets are strong, believing they will continue to rise indefinitely. These instincts are what leads to herd behaviour.

At the same time, everyone has idiosyncrasies that are liable to cloud their investment judgement. For example, entrepreneurs tend to be risk-takers – which may makes them very good at their job, but doesn’t necessarily mean they are 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 on the type of investor you are. Will you look at active or passive portfolios? Are there certain sectors or thematics on which you would like to focus, for instance one in which you have a good understanding or a particular interest. Do you want to look at growth companies, or would you rather uncover neglected gems?

Investors need to the understand the “illusion of control” principle. For illustration, many people keep on pressing the elevator call button despite the light clearly indicating that it was previously pressed, and the knowledge that such action will have no effect. We have a ridiculous amount of information at our fingertips, the majority of which is useless noise. The media would have you believe that every single one of these information’s is of the utmost importance to your portfolio every second of the day. you should be able to identify what you really need to focus on. Forget about all of this other non-sense. Let’s 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 options. For example, you might choose to 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 you may have. That way, if it goes wrong, it doesn’t compromise your current lifestyle or your future ambitions.

Even if you do decide to relinquish day-to-day decision-making to an investment manager, you cannot completely abandon control anyway. You need to hold your investment manager to account and ensure that 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 a very small portion of it only. The rules governing investment management are strict, but you should always keep an eye on what’s happening to your portfolio.

Ultimately, a professional investment manager should have a broader range of resources and expertise to manage your investments in line with your long-term financial priorities that you can muster on your own. In that sense, a portfolio manager or a portfolio advisor could act as a coach. Exercises can be offered from the internet for free, but a coach will help you to get the inspiration, the enjoyment and the 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.

It is worth asking yourself how much you understand the technical elements of investing – concepts such as cash flow, correlation and diversification? Equally, are you comfortable identifying the risks and biases in your portfolio?