The Pitfalls of Managing Your Own Money – Published in Noozhawk on Monday, November 5, 2012

With the Securities and Exchange Commission’s deregulation of the financial services industry in the mid-1970s, which allowed for negotiated commissions, discount brokerage firms rapidly entered the market. Prior to deregulation, commissions were fixed, so that all firms charged the same amount. While investors generally hailed deregulation for lowering trading costs, there were significant negative consequences that we still face today.

Discount commissions, and the firms that sprang up in the wake of deregulation, have caused a slow, steady deterioration in the quality of professionals in the industry. While there are still quality and qualified professions, the reality is that the industry has been permanently changed — and, in my opinion, changed for the worse.

In the “old days,” a stock broker was a highly respected professional, much like a doctor or an attorney. To enter the profession, one would have to apprentice with an established broker, sometimes for many years, before establishing one’s own practice. In most cases, only those with family, and/or significant professional and personal connections, would be able to build a successful business.

Today, and as a direct result of deregulation, just about anyone who can pass theSeries 7 exam can enter the industry and immediately begin “advising” clients on their investments. While there are key credentials — such as the CFA (Chartered Financial Analyst), CFP (Certified Financial Planner), and other designations and certifications that industry professionals can secure to separate those with expertise from the rest — it is still very difficult for the average investors to know if those they’re working with really know what they’re doing.

As a direct result of these industry changes, investors have increasingly chosen to “manage” their own assets. For the small number of investors with sufficient skill, time, knowledge and expertise, lower trading costs are certainly an advantage. But for the vast majority of investors, these changes have hurt far more than they have helped.

Investors today face a number of significant challenges when attempting to manage their own assets. Some of these have developed as a result of the changes in the industry mentioned above, while others have come as a result of the improved access to information through the Internet and other sources. And still others have always been there and will never go away.

Discounted Commissions

Discounted commissions may seem on the surface to be a pure positive for investors. However, even beyond the changes they have caused within the industry, discounted commissions have caused other changes that negatively affect the individual investor. First, because trading is so inexpensive, there is no deterrent to active trading. In the past, with fixed commissions, investors were reluctant to trade because of the expense. Today, with trades costing as little as a few dollars, investors are free to jump in and out with great frequency. This not only promotes snap judgments, but in the larger picture causes much higher overall market volatility. Higher volatility frightens and confuses investors, making them more likely to jump out of investments that may be sound for the longer term. Markets tend to trend up or down for more sustained periods of time, and for larger percentage moves. The net result is a greater focus on short-term trading rather than long-term investing. (Short-term trading is inappropriate for almost every individual investor despite what the discount brokerage firms and the media would have you believe.)

The reality is that individual investors are usually wrong (sorry). Increasingly, smaller investors, in large part due to cheap commissions, are driving the action in the market. Not unlike a self-fulfilling prophesy, the ability to trade with low transactional costs has increased the likelihood that small investors will be wrong, because they are more likely to trade based on market volatility, rumors or news reports. Their thought process is that, because trading costs are low, they can easily sell an investment if it turns out to be a loser, or buy one back that they sold, if it turns out to be a winner. The result often is that the investor makes the wrong call and loses money.


Another pitfall for those attempting to invest their own money is access to information. In the past, before the Internet, access to information was restricted and professionals, for the most part, had better access; today, we have almost unlimited access to information. In fact, there is so much information that the challenge today is not accessing it, it is disregarding the mountain of irrelevant information (white noise), and identifying what is left that is important. The combination of too much information and cheap commissions can drive investors to jump in and out of investments, resulting in substantial losses.


Probably the most important reason for an investor to hire a professional is time; most people simply don’t have enough time to manage their own investments. Discount brokerages, the financial media, mutual-fund companies and many others have spent billions of dollars over the years trying to convince investors that they can invest their own money just as well, if not better, than a professional. While this can certainly be the case, especially with some of the less that skilled industry participants out there, the reality is that very few people have the time required to research their investment choices well. More time is required to monitor and adjust portfolios on an ongoing basis, once a portfolio has been fully invested. Even if the investor has everything else required — expertise, knowledge, the ability to sift through all of the irrelevant information to find those key facts and figures that matter, etc. — if they don’t have the time, they cannot manage their portfolio effectively.


Evaluating investments, individually and as a component part of an investment portfolio, is difficult. A wide array of skills is needed, including a working knowledge of financial analysis, forecasting, accounting, valuation methodologies and economic variables, just to name a few. Although, as I mentioned above, there are some industry “professionals” who do not have these skills, the overwhelming majority of investors lack a comprehensive understanding of the tools necessary to properly evaluate investments.

The clients with whom I work are highly successful. They have accumulated significant assets, have built successful and profitable businesses, have secured their futures as well as the futures of their family members, and are highly skilled at many things. The point I always make to those who believe they should manage their own assets is that whatever they have done to become successful wasn’t easy! It likely took a lifetime of hard work, sacrifice, long hours, and probably a little luck. No one guesses their way to a fortune, especially working at it part-time.

If someone unfamiliar with, and inexperienced in, a business were to think they could enter that business with no prior training, education, skills, experience or expertise, and then only invest a little of their time in it, and expect to be successful, a person who has been successful in the same business would think that person a fool. They certainly would not expect this person to have a high likelihood of success.

Investing is one of the most complex endeavors possible. There are multiple variables, each of which is constantly changing. The degree to which each of these variables affects the financial markets and individual investments is also constantly changing. New variables are constantly appearing, while established variables are losing relevance. It is a moving target with many dimensions. The idea that anyone could effectively invest without a total commitment to the process is unrealistic and dangerous to his or her financial future.

My focus is not to insult anyone. It is to underscore the difficulty involved in the proper management of assets, to help the reader make a more logical, informed and realistic decision regarding the management of their assets. While it is not easy to find a qualified professional who meets the exact needs of each investor, the reality is that hiring the right professional can substantially increase the likelihood that the investor will reach his or her objectives over the long term.

Discount brokerage firms will probably always exist, and the media will continue to promote the idea that anyone can manage their own investments. But, just as it would be unwise for a person to represent themselves in a murder case, or operate on themselves, it is equally unwise for investors to attempt to manage their own portfolios. It is each investor’s responsibility to understand their limitations, and to be realistic about their strengths and weaknesses regarding managing assets. While hiring a qualified professional will be more expensive than managing a portfolio oneself, the benefits should far outweigh the costs, especially over the long term.



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