Becoming Your Own Portfolio Manager
By Ron DeLegge, Editor
June 18, 2010
SAN DIEGO (ETFguide.com) – Everyday more and more people are making a choice they never thought they would make: To become the manager of their own investments.
Among the top reasons for self-directing one’s investments are greater control and flexibility. But there’s one other very good reason for becoming your own portfolio manager: The potential for better performance.
Many academic studies show that during both good and bad times the vast majority of Wall Street’s portfolio managers consistently underperform versus corresponding benchmark indexes. However, making the decision to supervise your own investments won’t necessarily guarantee better results. To avoid the same type of market underperformance that characterizes most of Wall Street, you’ll need to build your investments on the right foundation.
Constructing Your Portfolio
How can you build a rock solid investment portfolio that matches your risk tolerance and unique financial goals?
First, you must begin with an unobstructed view of the entire asset class universe. This is where you begin. No discussion of securities or investments should happen until you first determine which asset classes you want exposure to and what precise percentage amounts they should be.
The key asset classes include stocks, bonds, commodities, real estate, collectibles and cash. Within each one of these areas there are sub-divisions too. For example, within stocks there’s foreign equities and U.S. equities.
Select the Appropriate Vehicles
To get accurate exposure to each of the important asset classes you’ll need to select investments that best represent each of these respective areas. For example, the SPDR Dow Jones Total Market ETF (NYSEArca: TMW) provides an accurate representation for the performance and yield of all U.S. stocks. What about foreign stocks? The Vanguard FTSE All-World ex-US ETF (NYSEArca: VEU) provides a good representation of the foreign equity market minus the U.S.
What investment vehicles should you choose?
Index mutual funds and exchange-traded funds (ETFs) continue to be a popular choice for both institutional and individual investors. Index funds avoid many of the risks associated with actively managed mutual funds. Among these risks are, job hopping portfolio managers, excessive portfolio turnover, high fees, out-of-control tax liabilities, persistent market underperformance, closet indexing, style drift, and window dressing.
The Periodic Tune-up
Once you’ve chosen your asset allocation mix and which specific index funds or ETFs you’ll use, the next part of your job as portfolio manager involves the maintenance of your investments.
Due to a constant variation in market conditions, your investments will need to be re-aligned with your original or target asset allocation mix. As portfolio holdings fluctuate, they will alter your original allocation. Because of a large runup, some investments may become over-concentrated. Rebalancing keeps a portfolio within the risk/return profile you desire.
Be sure to avoid the two extremes of rebalancing. The first extreme is a negligent approach, where a rebalancing policy is either lacking or nonexistent. The second extreme is hyperactive rebalancing, which often adds unwanted trading costs and tax liabilities.
Also, try rotating into underperforming asset classes (buying low) and rotating away from outperforming asset classes (selling high). This will help you to maximize your periodic tune-up.
Managing your own money is an important responsibility that requires financial maturity and education. Reading books by individuals that know about the truth of successful investing is a step in the right direction. Also, portfolio building tools like the Ready-to-Go ETF Portfolios can help you.
Becoming your own portfolio manager, if done right, should not become a daily chore that requires you to be in front of a computer 24/7. Once your portfolio’s allocation has been determined (with your risk tolerance and goals in mind), stick with it and periodically tweak it. Much like a growing a garden, you’ll need patience and discipline. Trust me, pulling up the plants every single day to check the roots won’t do you much good!