Posts filed under “Asset Allocation”

The Amateur Advantage

How you, the amateur investor, can beat the pros
Barry Ritholtz
Washington Post, November 8, 2015



Since I started writing this column five years ago, I have consistently discussed how challenging managing your money can be. It shouldn’t be this difficult, but you humans tend to make things much more complicated than they need to be. Complexity, confusion, costs and lack of clarity — no wonder so many people are so unsatisfied with their portfolios’ performance.

I have pointed out all the innumerable advantages the pros have over Main Street investors. Charles Ellis, when he was overseeing the endowment fund at Yale University (now almost $24 billion!) made this observation about those advantages:

“Watch a pro football game, and it’s obvious the guys on the field are far faster, stronger and more willing to bear and inflict pain than you are. Surely you would say, ‘I don’t want to play against those guys!’

“Well, 90 percent of stock market volume is done by institutions, and half of that is done by the world’s 50 largest investment firms, deeply committed, vastly well prepared — the smartest sons of bitches in the world working their tails off all day long. You know what? I don’t want to play against those guys either.”

Ellis is surely correct in suggesting you don’t want to get on the field with either group of pros. They have the tools, the manpower, the capital, political connections, inside information — everything goes their way. If you try to compete against them on their own field, playing their game by their rules, the outcome is very likely to be what they want: You and your portfolio are toast.

But here is the thing: People who are not professional investors — those Mom and Pop investors I refer to all the time — have enormous advantages of their own.

Today’s column will help you recognize what you don’t have to do, deal with, pay for or worry about. Add all of these things together and you not only neutralize the disadvantages, but you can jiujitsu them to your favor. Let’s see if we can help you beat the pros by looking at five key areas: benchmarks, costs and fees, time, size, and career risk:

Benchmarks: Everyone who manages money for other people is measured against some benchmark. It doesn’t matter if you run a portfolio of stocks or bonds, domestic or overseas. There is an official index against which everything you do is judged, measured and compared.

If you run big cap stocks, then it’s the Standard & Poor’s 500-stock index. Emerging market equities? MSCI EAFE Market Index. Bonds? Barclays U.S. Aggregate Bond Index. The list goes on and on, and each is updated in real time. Literally, you can see how you are performing — or more likely underperforming — second by second, tick by tick.

You, the individual? You have no benchmark to meet or beat on a quarterly or annual basis; meanwhile, the Street is rife with stories of investors calling to complain about monthly and even weekly underperformance. You can feast on Beta instead of starving on Alpha.

That’s another thing: You have no outside investors. You don’t have to spend a lot of time thinking about how you are going to market yourself. You don’t need a pitch book or a PowerPoint presentation of any kind. Skip the quarterly conference calls with angry investors and blow off the withering media glare and cruel criticism from your peers at other funds.

Costs and fees: We have long discussed that many of the fees charged in finance are an egregious drag on returns. There is an argument to be made that some hedge funds (perhaps more than a few) are merely a wealth transfer mechanism for moving money from the gullible wealthy to the savvy manager.

The issue of costs is quite simple: You can keep yours cheap, while the pros cannot. You don’t have to fly around the world to meet prospective clients, or be seen schmoozing at pricey conferences. You don’t need an expensive office (spectacular views required), filled with modern furniture and pricey art. You don’t have to build an impressive research department, along with legal and compliance personnel. You don’t need a multinational accounting team to deal with your tax headaches.

Your execution costs are practically zero, certainly under $10 anytime you need an order executed. Your cost structure, fees and taxes are within your control.

Time: Being able to think long term and have patience is a luxury the professionals do not enjoy. You can have much, much longer-term time horizons. That last 15 percent correction? The pros were pulling their remaining hairs out over either missing the initial drop or not being positioned to take advantage of the recovery. And that happens every time the market moves more than 5 percent in either direction. You don’t have to worry about every zig and zag. It is a huge advantage to the amateur over the pro that a quarter is merely one fourth of the year, not a measuring stick that will soon lead to your first cardiac event. Time is on your side, compounding your returns in your favor.

Size: If you decide you want to own something, well, then, you just buy it. You can enter or exit a position without impacting markets; you don’t have to limit yourself to just the largest stocks or worry about position size (this is a huge thing). No high-frequency traders are trying to pick off your orders, no worrying about dark pools and other such stuff.

And there is no public scrutiny of your holdings and no disclosures required. You don’t have to file with the SEC every time you decide to add or subtract from a position.

Career risk: There is a tendency for agents — that’s the economist’s term for people who operate on behalf of others — to manage risk very conservatively. Take fewer chances. Don’t do anything that might make you look foolish or get you fired.This turns out to be a prudent way to manage your career but a poor way to run money. Gains require some risk, which is why agents’ own interests may not be those of their clients.You don’t have any such conflicts. You won’t get fired for admitting a mistake. You don’t have to care about drawdowns, or buying something that runs into a hiccup soon after. You can do unpopular things that look dumb short term but are money-makers long term. Pros don’t want to risk their careers by doing what makes sense eventually. (Buy emerging markets when they are cheap? Sell expensive stocks?)The pros have a very specific set of measurements by which their performance gets judged. Usually, these involve alpha, or assets under management or gross revenue. Unlike the pros, you get to set your own metrics for assessing how well you are doing. That means you first must figure out what your long-term financial goals are, then create a plan to achieve your objectives. You get to measure your success by seeing if you are on track to achieve those goals. This is another enormous advantage you have over the professional stock jockeys.You can beat the pros — but instead of playing their game, with all of the home field advantages they have, try playing a game of your own choosing.


Ritholtz is chairman and chief investment officer of Ritholtz Wealth Management. He is the author of “Bailout Nation” and runs a finance blog,The Big Picture. On Twitter: @Ritholtz.


Category: Apprenticed Investor, Asset Allocation, Investing, Philosophy

Defining Your Investment Philosophy

Fantastic in depth discussion by my colleague Ben Carlson looking at defining your investment philosophy:   Source: AAII

Category: Asset Allocation, Investing, Philosophy

The Amateur Investing Advantage

    My Sunday Washington Post Business Section column is out. This morning, we look at the advantages that the Mom & Pop investor have over the professional. Its titled How you, the amateur investor, can beat the pros – and its not about what you might think. Here’s an excerpt from the column: “The pros have…Read More

Category: Apprenticed Investor, Asset Allocation, Investing, Philosophy

Meet Ben Carlson of RWM Institutional Asset Management in NYC

Earlier this year, RWM announced that we were adding Ben Carlson to our team, to develop our Institutional Asset Management division. We have been working hard to bring our vision of a lower cost investment process of reduced complexity to the institutional world. And we have been making terrific progress. Towards that end, next month, Ben will be…Read More

Category: Asset Allocation, ETFs, Hedge Funds, Investing

No Free Lunch

    My Sunday Washington Post Business Section column is out. This morning, we look at the very human habit of seeking something for nothing. Its a suckers play that leaves investors vulnerable to sharpies and clever salesmen. There are numerous examples where pursuing a free lunch (not unlike Alpha) leads to losses. Here’s an excerpt from…Read More

Category: Asset Allocation, Investing, Psychology, Really, really bad calls

Returns per Asset Class 2015 YTD

Recent rally has wiped out equity losses and limited FX and commodity downside; credit, rates resilient despite sharp swings   Source: Deutsche Bank  

Category: Asset Allocation, Markets

Portfolio Managers vs. Portfolio Management

This morning’s must read comes from Ben Carlson, who coincidentally runs our institutional practice. In a longer analysis, Ben dives deep into the differences between managers and management. The differences are simultaneously nuanced yet pronounced: Portfolio Managers: The ability to process investment ideas from a number of different sources. Attention to detail. Knowing when to admit that you’re…Read More

Category: Asset Allocation, Hedge Funds, Inflation, Mutual Funds

Nudge? More Savings, Less Choice

Firms are boosting automatic retirement-savings rate, but there is some pushback from employees:   Click for ginormous graphic Source: WSJ

Category: 401(k), Asset Allocation, Digital Media, Investing

Meet with Ben and Josh in Arizona in December!

    My colleagues Ben Carlson and Josh Brown will both be speaking at the IMN Global Indexing and ETF Conference at the Hyatt Regency Scottsdale Resort & Spa at Gainey Ranch from December 6-8, 2015. We will be meeting with clients and prospective clients in area who want to learn about our approach to investing, and how we can help them…Read More

Category: Asset Allocation, Investing

Ben Carlson Discusses Correction on CNBC

Ben Carlson, author of “A Wealth of Common Sense,” discusses keeping your cool during this correction.

Author Carlson: Keep cool during correction

Category: Asset Allocation, Investing, Video