Why You Need
There is only one logical reason why someone would utilize professional investment management—the risk-adjusted returns (net of all taxes and fees) will likely be higher than if the investments were self-managed. In fact, Vanguard recently published a research report indicating that long-term annual returns could potentially be 3% higher for investors who work with an investment advisor.
In order to successfully manage your own investments, you would need all of the following:
- time (many hours applied on a consistent basis with no gaps in attention);
- interest (passion and enthusiasm for financial analysis);
- expertise (thorough understanding of finance, statistics, and tax law); and
- resources (access to software, analytical research, and expert analysis).
Even if you possess all of those attributes, the most important additional quality necessary to successfully invest is the ability to successfully control your emotions. In practice, most people lack the emotional disposition necessary to execute their planned strategy faithfully and without undue stress or anxiety no matter what is happening in the world.
The problem is simple. As human beings, our emotions frequently prevent us from exercising detached, rational judgment when making investment decisions. Our brains also tend to overemphasize the importance of recent events. Thus, when a bear market occurs, investors often worry about whether the good times will ever return again.
Behavioral scientists believe these actions are instinctive and thus hard-wired into our brains over countless generations. In a sense, when we experience a rapidly falling stock market, we experience the same fear and impulsive reaction as would a cave dweller who comes across a dangerous animal. This involuntary “fight or flight” response is naturally occurring and thus can rarely be overcome by rational thought. Worse for investors, this chemical reaction in our brains is increased when we see and hear others also beginning to panic.
As a result of these behaviors, investors as a group usually buy when the market is rising and sell when the market is falling. In other words, they sell “low” and buy “high”—exactly the opposite of what it takes to be a successful investor. This phenomenon is reinforced as financial news networks and televised “experts” consistently hype the latest investment fads or gloomy predictions (most of which is contradictory to the “advice” they had given weeks or months earlier).
Successful investing requires a dispassionate, disciplined strategy applied consistently over time. When the market is falling, this will require going against the “wisdom” hyped at the time by the financial media and, not only stay the course, but buy additional shares at discounted prices. Unfortunately, as behavioral science has shown, most human beings are not able to overcome their instincts and invest in such a fashion.
While the stock market has demonstrated an ability to persevere through many tumultuous events, one thing you can count on is that new storms are bound to blow in and create instability. Unless a financial advisor helps reinforce the logical proposition of staying true to a long-term financial plan based upon investment objectives and time horizon, most investors will let emotions guide their decisions during periods of market turmoil and sell their positions at the worst possible time and when it is most harmful to do so. This is especially true during retirement when anxiety regarding potential stock market losses increases tremendously.
Titanium Advisors can help you reach your retirement goals by consistently maintaining a diversified asset allocation strategy. We cannot accurately predict whether or not our strategy will outperform any other investment methodology over the short term. However, utilizing our disciplined approach, you should end up with far better results than if you tried to manage your investments alone.