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The Real Reasons NOT to Manage Your Own Portfolio

The Real Reason Not to Manage Your Own Portfolio
Do more with what you’ve earned.

Financial advisors for successful professionals, executives, and business owners.

In 1996, Warren Buffett said, “If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes.” While the truism is as valid today as ever, unfortunately, we’re seeing investors collectively contract investment impatience in a bid to optimize or maximize portfolio gains. Unfortunately, that meddling often has the opposite effect, and today’s investors underperform “buy and hold” advocates of days past (like Buffett). 

But that doesn’t have to be the case. Instead, taking a step back to consider your allocations strategically, unemotionally, and with a long-term perspective can drive major gains over time, while doing the opposite puts your retirement and financial future directly at risk. 

Watch our video on the topic.

How We Got Here

Bridging the gap between Buffett’s ethos and today’s investor tendencies demands a brief and objective look back at what happened in the interim to change how we think about money. Still, three major factors stand out:

Free and Accessible Trading Platforms

No one is arguing that stock investing should be relegated to a privileged few, with the masses relying on distant brokers charging steep fees to grow and access your hard-earned cash. But, when we look at the ways in which free and accessible investment platforms like Fidelity, Schwab, and Robinhood affect today’s investors’ investment journey, some clear benefits stick out when compared to the “old ways.” 

To refresh your memory (depending on your age), the old way was marked by long lead times. Multiple days may elapse between deciding to invest in a stock and actually owning shares. You’d call your broker for a quote and to place an order, and, in many cases, your share count would be packaged into a larger broker buy order that executed at the end of the day. Moreover, friction – including the call itself, a range of trading fees and commissions, and the general inaccessibility of reliable financial analysis – was omnipresent throughout the investment cycle. 

Today? We can roll out of bed (or not), grab our phones, and execute complex options strategies to our heart’s content. After all, Robinhood and its ilk are democratizing trading and offering financial freedom to retail investors, the middle class, and a whole range of potential millionaires who, in times past, would have been beholden to a money-hungry and inefficient bureaucratic brokerage. 

But that freedom to trade comes at a cost, which, far too often, is the price of gains you’re leaving on the table. 

By making trading as easy as checking Instagram, we massively increase the likelihood of fiddling. By constantly tweaking, optimizing, and otherwise messing with our portfolio’s stock allocations, we’re sacrificing gains by missing out on the “forced patience” practiced under the old regime. Study after study and report after report validate one thing: the oft-quote saying that Time in the market beats timing the market. In this case, being forced to wait on the sidelines because of structural inefficiencies was to the collective investors’ benefit by saving them from themselves and limiting active trading. 

The Never-ending News Cycle

  • 2015: This is ‘more damaging…than the Great Recession’ 
  • 2018: As fear rises on Wall Street, strategists warn the worst is yet to come
  • 2020: Hell is coming
  • 2022: An often-overlooked economic measure is signaling serious trouble ahead

The S&P 500’s performance since each of those headlines hit your inbox? 

  • 2015: +204.67%
  • 2018: +124.52%
  • 2020: +112.35%
  • 2022: +36.49%

If the numbers aren’t enough, the lesson here is that financial publications and reporters’ incentives are the same as any other major media player: to drive traffic, which, in turn, drives profit. Note that fiduciary responsibilities or care for your wealth management journey aren’t key drivers for these publications. Instead, to maximize traffic and keep your attention, they tap into primal feelings of fear and greed.

Combine those deep-seated feelings with accessible, instant trading, and we have a recipe for portfolio management meddling and endless tweaking in reaction to the news. But we know, intellectually, what happens when you overreact and “sell the news” when it comes to doomsayers – just look to anyone sitting on the sidelines, in cash, in the pandemic’s immediate impact. They missed out on a Fed-fueled bull market and “lost” untold amounts of potential gains by taking headlines and news at face value. 

Fear is a huge psychological barrier to effective portfolio management, and the 24/7 news cycle puts us into a constant fight-or-flight state. Unfortunately, far too often, flight takes priority as we fearfully sell into bad news and ultimately miss the rebounds that turn into 10x (or more) gains. 

Sacrificing Financial Security for Short-Term Trading

A graph showing a number of different colored squares

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A picture says a thousand words, and this one says it all. In short, the briefer your holding period, the more subject you are to extremes in either direction – though you may eke out a 40%+ gain after holding the S&P 500 for a year, you’re just as likely to lose 39%. Expand that holding period further, though, and the peaks and valleys smooth themselves out to substantial, consistently positive returns as you approach the 20-year mark.

How long do you think today’s average investor holds a position? In the 1970s, the stat stood around five years but fell to around one year by the 2000s. Today? The average investor maintains a position for just ten months. At that point, even if selling for a profit, you aren’t even eligible for preferential long-term capital gains treatment! 

Across all these variables, a clear trendline emerges. In the past, when you wanted to place a trade, you needed high conviction because of general friction and steep costs – forcing us to take a long-term view and run as much due diligence as possible. Today, we’re trapped in a vicious cycle of short holding periods, driven by impatience, fear, and even boredom that creates constant portfolio churn while reducing potential gains and ramping up volatility. 

How Can I Maximize My Self-Directed Portfolio Management?

But that isn’t to say you’re stuck with that fate. With just a few key steps, you can reorient your investment path toward long-term growth with minimal volatility in the meantime:

Do More By Doing Less

Understanding fat tails is key to understanding why, in general, playing stock jockey chasing individual companies is a losing proposition. Instead of a normal return distribution – with most stocks returning staying flat or returning single-digit gains, a slim minority going to zero, and a minority becoming 10x winners – individual stock distributions skew to either extreme. That is, on a historical basis, most stocks go to zero while a handful of super-winners drive market gains. 

For a simple example, look to the recent Magnificent Seven performance. Seven stocks within the S&P 500 drove more than 60% of the index’s gains through January 2024. Now expand outward to even less stable companies than the “other 493” within the index, and fat tail theory becomes self-evident. 

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Financial advisors for successful professionals, executives, and business owners.

To mitigate fat tail risk, simply focus on index funds and ETFs. While you may pick the next Nvidia, you’re just as likely to pick the next Long Island Blockchain Corp, barring any special sector knowledge. You can capture the fat tails on the right side, i.e., Magnificent Seven-style stocks while smoothing out the massive losses on the left side by simply focusing on funds. 

To that end, don’t micromanage your holdings, either. Creating constant churn, even if switching between funds (for whatever reason), creates a slew of taxable events and ramps up the likelihood you trade based on boredom or emotion. That holds doubly true if you’re a news junkie. If that’s the case (and, really, applicable to all), it’s likely best to ditch financial news altogether. 

Either way, set periodic reminders to check your portfolio and stick to them. You don’t check your home value on Zillow daily or your car’s value on Kelly Blue Book once a week, right? The same ethos applies to your portfolio and stock investments. Quarterly or even twice a year tends to be the most efficient “check-in” sequence – while acknowledging that being disciplined is tough when you have the means to check at any time in your pocket.  

Give Each Dollar a Job

If raw discipline isn’t enough, an easy hack to prevent portfolio meddling is to write out the goals you have for investing, then tie dollar amounts to the plan. For example, if your goal is retirement, your investment horizon is 20+ years. It’s easier to let your wealth grow, untouched, when you assign a retirement role to the allocation itself. 

Likewise, if your money’s current job is to save for a home down payment with a one-year investment horizon, deliberately assigning that role to your allocation can help reduce FOMO and needless risk when you consider its job. 

Alternatives to Self-Managing a Portfolio

You’d be forgiven if emotional trading and innumerable other factors make detached and distant investing a fool’s errand. It’s human nature, after all, and few things spike our adrenaline as much as money and trying to make more of it. That’s why many see stepping back as the best way to ensure compliance with long-term investing best practices and surrender day-to-day portfolio management to trusted wealth managers.

Better yet, you’ll usually be able to find effective financial advisors offering a range of solutions across budgeting, tax management, forecasting, and more – effectively hiring a suite of financial experts for the cost of one. If you lack the patience, time, energy, or pure confidence to build your financial future and generational wealth through portfolio management, outsourcing to a trusted professional may be the right path. 

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