[Editor’s note: I wrote this post more than two years back in response to a Globe and Mail column questioning whether DIY investors have the skills to invest on their own. I still think almost anyone can learn to invest on their own. It is not always easy but it is definitely simple.]
In his latest column in Report on Business, sleuth investor Avner Mandelman asks DIY investors: “you don’t wear suits you sewed yourself, or shoes you cobbled yourself, or feed your family bread you baked yourself, so why would you try to invest your family’s assets by yourself?” and somewhat self-servingly suggests hiring a professional:
So once again, how much of your investing should you do yourself? I had better step carefully here because it would sound self-serving – I am, after all, in the biz of managing OPM (other people’s money) – but I’ll say it plain: Just as you occasionally can bake your own bread for fun but would not think of doing it on a regular basis (not if you want to have time for work), so you should not think of investing all your funds yourself.
Let’s assume you can earn 2 to 3 per cent a year better than the pros, long term. It is very difficult, but let’s assume. On a $100,000 investment, that’s $2,000 to $3,000 a year. For the same amount of time you put in, couldn’t you make more in your own business?
While you can easily counter that with – you brush your own teeth, take out your own garbage or pay your own bills, so why not invest your own money – there is an excellent reason: the consistent failure of professional money management in providing market beating returns to retail investors. A 2000 paper titled How well have taxable investors been served in the 1980s and 1990s? shows the magnitude of this failure – over the ten-year period ending in 1998, only 14% of mutual funds outperformed the Vanguard 500 before taxes. Only 5% outperformed over fifteen years and a more respectable 22% beat the index fund over twenty years. These figures do not reflect survivorship bias.
Canadian fans of active funds contend that the U.S. market is “more efficient” and the Canadian experience is different (without any studies to back their claim). The S&P Indices versus Active Fund Scorecard (SPIVA) record shows how flimsy the claim is: the percentage of mutual funds beating the TSX Composite index over a 5-year period was 42% in 2004, 31% in 2005, 11% in 2006 and 8.5% in 2007. The early record looks better than it actually is due to the massive weighting of Nortel. Compared to the TSX Capped Composite index (which an investor can easily track using XIC) the record over the same time periods is 23%, 26%, 10% and 8.5% respectively.
A more apt question a DIY investor could ask a professional money manager would be: if I visited my barber, asked for a haircut and came away with a shaved head and lost my shirt in the process and paid for the privilege nonetheless, why wouldn’t I cut my own hair?