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Should Average Investors Do It Themselves?

My friend Bill Bernstein is one of the best personal finance writers around. If he has written it, it's a must read, and his latest book The Investor's Manifesto is no exception. There are very few times over the years that I've disagreed with Bill (which is good, since he's rarely wrong). Thus, I was pleased to see that he no longer believes average investors can do it themselves.

Bill used to think most people could handle their investments with little or no assistance, since "After all, the flesh was willing, the vehicles were available, and the math wasn't that hard." But there's simply more to investing than that. I agreed with his post on his Web site Efficient Frontier that there are four requirements to be a successful investor:

  • "An interest in investing. It's no different from cooking, gardening, or parenting. If you don't enjoy it, you'll do a lousy job. Most people enjoy finance about as much as Carmela Soprano enjoys her husband's concept of marital fidelity."
  • "The horsepower to do the math ... The Discounted Dividend Model, or at least the Gordon Equation? Geometric versus arithmetic return? Standard deviation? Correlation,for God's sake? Fuggedaboudit!"
  • "The knowledge base -- Fama, French, Malkiel, Thaler, Bogle, Shiller -- seven decades of evidence-based finance back to Cowles. Plus, the 'database' itself -- a working knowledge of financial history, from the South Sea Bubble to Yahoo!."
  • "The emotional discipline to execute faithfully, come hell, high water, or Bob Prechter. Mr. Bogle makes it sound almost easy: 'Stay the course.' Alas, it is not."
Bill noted: "Even if you optimistically believe that there is a 30 percent success rate on each count, if each is independent only 1 percent of the population can make all four. However, that may be too pessimistic since these four abilities are not entirely independent -- if you're smart enough, it's more likely you'll be interested in finance and be driven to delve into the appropriate finance literature. But even if true, more than a little luck is involved. Head down to the personal-finance section of your local Barnes and Noble, and you're more likely to run into Suze Orman than Jack Bogle. You'll need a telescope to find the really important stuff." Bill concluded the article: "I wish I had a nickel for every smart, savvy and motivated financial type I've met who simply could not execute."

While there are individuals who can do it themselves, they're few and far between. Unfortunately, as the academic research demonstrates, far too many are overconfident of their abilities. A good financial advisor adds value by:

  • Developing an investment plan that provides the greatest chance of achieving your financial goals without exceeding your ability, willingness or need to take risk.
  • Integrating your investment plan into an overall estate, tax and risk management plan.
  • Helping you act like a postage stamp -- sticking to your plan until you reach your financial goal.
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