We've been traveling throughout Ireland, and spent the last few nights in Dublin. We ate dinner the other night with an Irish friend of ours who has lived and worked in Dublin for most of her life. We asked her opinion about what are some of the greatest challenges for people who work in Ireland, what she expressed frustration about was the very high level of fees that she is forced to pay on her pension account. By law, I understand, she must contribute a certain amount each year towards her “PRSA” - the acronym for a personal retirement savings account. Only certain companies are registered to offer PRSAs to the public, so competition (and competitive pricing) is strictly limited. Moreover, fee levels are set by law - most companies that offer PRSAs charge their clients a mind-boggling 5% right off the top, and then to make matters more interesting, they charge an annual fee equal to 1% of the assets under management. Regulations limit investment options mainly to mutual funds that may or may not also charge separate fees. In a nutshell, the PRSA scheme appears to be the legal equivalent of reverse force feeding the collective wallet of the entire working population of Ireland.
It strikes me that the PRSA regime is relevant to all of us, whether or not we happen to work and save for retirement in Ireland. It's simply an extreme example of a much broader disease that infects a wide swathe of the global capital markets. That disease is a widely held belief engendered by (or foisted upon) individual investors that they simply lack the skills and temperament to manage their own money, and would be better off paying experts (or multiple layers of experts) to invest the money for them. We see symptoms in the United States all the time. Asset managers trot out various studies that purport to prove that individuals routinely underperform the broader market. Even the best known luminaries in the investment world recommend that individuals avoid trying to pick stocks and simply invest in low cost index funds, instead. In Ireland, the case is simply a bit more extreme, in that they bring the force of law to bear on the investment choices available to pension-savers (and cram usurious management fees down savers' throats).
You can't do it yourself, so pay someone else to do it for you.
When you stop to think about it, this is a completely bizarre notion. Why would anyone ever believe they lack the capacity to invest their own money? You mow your own lawn, after all. You know how to change your own socks all on your own. You can probably even manage to scoop out your cat's litter box without the able assistance of investment bankers or cat litter experts (although I concede there might be some redundancy there - not that redundant fees upon fees are unusual in the investment business). From your point of view, why isn’t the activity of investing your own money utterly indistinguishable from any other domestic chore?
Do you want to know what I think the answer to that riddle is? Simple: it's because most individuals believe that they are actually losing money when stock prices go down. Whenever the stock market belches, red arrows crop up on your brokerage homepage and the number at the bottom of your account becomes smaller than it was the last time you logged on. It sure looks like and feels like you’re losing money (or worse - that you're not making as much of it as your gym buddies and neighbors). What's the rational response? Hire an expert (or more) to pick out mutual funds managed on your behalf by another expert (or more).
But what most of us don’t grasp is that while capital may earn money, it is not, in itself, the same thing as money. Think of it this way. When you own a publicly traded share of stock, it is exactly the same as owning a share of a private company or even owning your own business: you make money whenever the business produces at least one penny’s worth of earnings. You neither make nor lose money when someone randomly walks by and offers to buy your business - not unless you decide to accept that offer. You make money when your company sell products and services at a profit. Simple as that.
If we really believed in this notion, then the apparition of red arrows materializing on our brokerage statements would scarcely merit so much as a shrug of boredom. As long as your capital is earning money for you, who cares what someone else is willing to pay for it on any given day, month or year? Adopting this sort of framework might remove some of the terror and dismay that would otherwise accompany falling stock prices (or watching your neighbors earn higher returns than you), which in turn might just remove some of the investing self doubt that many individuals seem to harbor. It could even render the act of investing as dramatic and exciting as sweeping dust kittens from under your couch. And would any sane person ever pay a housekeeper 5% of the value of their home just to sweep out dust kittens?
It would be ridiculous for anyone to even make an offhand suggestion that you can’t handle investing your own money, or that you would necessarily be better off paying someone else to do it for you. In fact, just between you and me, I think that most of us would earn far more money by doing our own investing. I say this not only because we'd save money on fees, but also because individual investors like you and me have a huge edge over any professional investor: we are accountable only to ourselves and therefore don't need to do things that professional investment managers must do. In fact, we don't need to do much of anything at all besides picking a diversified portfolio of stocks (doing that can be as simple as just taking the top 50 or 70 companies off the list of fund holdings for a typical S&P500 ETF) and then sitting on our hands from that day forward while the dividends grow to the point where they outstripe our spending.
Not that there's anything wrong with owning ETFs and mutual funds, but I choose to invest the bulk of my assets in individual shares. Why? Because I know that even if an ETF owned the exact same shares as I do, it would underperform my portfolio… and that’s without even taking the ETF fees into account. What makes me so sure about that? Simple. Whenever you own a diversified portfolio of individual stocks, you can be fairly certain that a couple companies will go bankrupt, a couple will soar in value, and the majority will deliver exactly average results. Thanks to the fact that stocks have limited downside but unlimited upside, the money you make on those few hyper-performing shares will probably far exceed the money you lose on the companies that go bankrupt. The only thing that could prevent that outcome is if you rebalance to maintain your portfolio allocations, because that would mean that you’d be selling off shares of the top performers (limiting your upside gains) and allocating money into the losers (magnifying your downside losses). Since virtually all ETFs rebalance, it's logically quite simple to outperform them even if you own the exact same underlying portfolio - just don't rebalance.
Once you've picked out a broad basket of companies (or funds) to own, I suspect that the job of investing can be more or less viewed as completed. About the most worthwhile activity I can think of is to reinvest dividends. This is why I adore those little red arrows on my brokerage statements - they often point the way directly towards where I might want to reinvest dividends. Last Friday, for example, I bought more shares of 3M (MMM) which has fallen by roughly 25% since the start of 2018 (even though earnings and dividends have grown by a reasonably healthy clip over the company's history).
The fees that Irish people must pay for their PRSAs really bother me, but what's more troubling is the overall attitude that individual savers are so inept at investing their own money that being forced to pay these absurd and usurious fees is somehow justifiable. I wonder whether Ireland learned precisely the wrong lesson from the financial crisis. Individuals really ought to be able to pick their own pension investments if they want to, or hire whomever they want to do so for them... and at competitive prices. Perhaps if more individuals there believed in their own investment abilities, the PRSA regime would have to change and open up to more (and cheaper) investment options for individuals to choose from. Including the option of paying zero management fees and picking their own companies to invest in, which can be the single most profitable way to invest if you avoid selling, focus on the power of compounding, buy stocks of great companies whenever prices are low, and keep doing those things repetitiously for years and decades on end.
Disclosure: I am/we are long MMM, BLK.
Additional disclosure: I am not an investment advisor and nothing in this article can be relied upon as investment advice (or advice about anything, to be perfectly honest). It is meant to be informative entertainment only.