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Summary

  • Do investors need an "ETF Strategist?".
  • Should you manage your own money?
  • An active manager will typically offer some sort of expectation, like trying to generate alpha.

By Roger Nusbaum AdvisorShares ETF Strategist

The Wall Street Journal had a couple of related articles over the weekend: Should You Manage Your Own Money? and Do Investors Need an "ETF Strategist?"

The first article on hiring a manager or going it alone rightly noted that investing does not have to be rocket science (although some strategies do involve something close to rocket science). A new investor could spend a Saturday reading related content and figure out something for themselves along the lines of a target date fund, or a domestic equity fund/foreign equity fund/bond fund combo, or maybe some sort of balanced fund and in the long run, come out okay.

"Coming out okay" has nothing to do with investment performance, and "coming out okay" also requires having an adequate savings rate.

A big checkmark in the plus column for hiring an advisor, as pointed out in the article, is eliminating emotion. The part above about coming out okay also assumes not panicking along the way. The above new investor who spends a day learning about index funds won't be able to learn what it felt like as the market was cutting in half, and will not know how they would react in the face of that sort of decline until they are exposed to it.

Some portion of the investing population always panics when the market goes down a lot. An advisor can help with these issues but ultimately, if a client says "I don't care, just sell," the advisor will need to follow the directive (or say no and fire the client, and then the client is likely going to then go ahead and sell themselves out), so the end user still has responsibility here.

Not discussed is the dynamic that the 85-year-old version of you may not have the interest or ability that the 60- or 65-year-old version of you has to invest in the stock market.

Secondly, the ETF Strategist article is about a managed account consisting of ETFs where the client's financial advisor outsources the management of the portfolio to a firm that specializes in some sort of investment strategy, in this case, ETF portfolio construction.

An active manager will typically offer some sort of expectation, like trying to generate alpha, smooth out the ride or something else, and should logically be judged against whatever expectation they set. Of course, the person who hires that active manager needs to be on board with whatever expectation is set. It would not make sense for someone with a low tolerance for volatility to hire a manger whose primary objective is alpha generation no matter what.

Tying in to the first article, many of these ETF portfolios are not rocket science (some are), but they will free up the client from needing to make investment decisions. They also free up the advisor to devote more time to client financial plans and other related needs.

That combination will not appeal to every investor or every advisor, but of course, no single path appeals to everyone. Obviously, ETFs can play a big role in the most active of trading strategies, the most passive indexed strategies and everything in between.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Source: Hire Someone Or Go It Alone? Yes!