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Become Your Own Portfolio Manager

Take the leap and become your own portfolio managerThe idea of investing freaks me out.

So why did I decide to start self-managing my investment portfolio and why should you become your own portfolio manager?

In my day job, I have literally managed billions in capital for large companies. I have acquired businesses spending millions of dollars in the process. I have been responsible for business units employing hundreds of employees.

But in those roles, I never felt the same magnitude of pressure as I feel when it comes to managing my own personal finances.

I have worked very hard for many years scraping together my savings. And then to just dump that money into the stock market and hope for the best. It goes against everything I believe. That is, invest in what you know and invest in what you can control.

I have bought stock in the companies I worked for. I knew what they were all about. I knew where they were strong and where they were weak. I knew the management team. I knew the competition. It didn’t seem like investing to me because I was comfortable.

I have invested in my company 401K plans. This was also comfortable. The money came out of my paycheck without my having to do anything. I never saw that money. It’s essentially as if the money didn’t exist – at least for spending purposes. And right or wrong, I had comfort in knowing that the owners and executives of the company were investing in the same place. As I’ve gotten older and moved up the company ladder, I now realize that I may have been a little naïve about that last assumption. But that will wait for another day.

Then I changed jobs. And changed again. Ms. Financial Slacker changed jobs. And then she changed again. Suddenly, our investments became more complicated. We had 401Ks at multiple companies. We had after-tax brokerage accounts.

Then we had kids and started 529s. More complications.


Do You Know Enough to Become Your Own Portfolio Manager?

What to do?

I am a finance person. I have an MBA in Finance. I have a CFA. Ms. Financial Slacker is a finance person. We deal in multi-million dollar deals all day. Surely, we could handle our own personal finances.

But it’s different when it’s your own money. If you screw up at work, you get fired. Hopefully, you can find another job. If you screw up your own money, you have wasted years and years of saving. And now you will never be able to retire. The fear of loss is so much greater than the desire for success.


I hate to lose more than I love to win.”
Jimmy Connors


This is an especially true sentiment for us perfectionists (a polite way to describe us procrastinators).

Investing is complicated. At least that’s what we’re led to believe. What’s our goal? Is it capital appreciation or income? Are we growth investors or value investors? What’s the best allocation?

If I had to label my investing style, I would say I am a value investor with a goal of capital appreciation. I consider P/E and dividend yield (value components) as well as long-term earnings growth (a growth component).

Anecdotally, this seems like a reasonable approach. Quantitatively, in the long run, value has outperformed both growth and the stock market as a whole. From its 1979 inception through 6/30/15, the Russell 1000 Value Index outperformed the market – in this case, the Russell 1000 Index – by 0.4% per year, and outperformed the Russell 1000 Growth index by 1.2% per year.

But just because I have a preferred investing style (which by the way, I am changing in my thinking from a capital appreciation goal to an investment income goal), doesn’t mean I am comfortable risking my hard-earned savings.


To Become Your Own Portfolio Manager You Need to Get Comfortable Investing Your Own Money

Years ago, after I had been working for a while, Ms. Financial Slacker and I decided we needed to get serious about our financial future and hire an investment advisor. Our advisor was actually a family member which again felt more comfortable than just throwing darts and picking someone at random.

But before our advisor would let us start investing, she made us review our expenses. Spending has always been our Achilles heel. If we had better expense management, we could have retired years earlier considering the income we have generated.

But once we got started investing, things went well. We each consolidated our multiple 401K accounts into a single IRA. We had our legal documents (wills, advanced directives) prepared. We set up life insurance policies. We started acting like responsible adults.

We kept a small cash balance and invested the rest of our funds into a low cost diversified portfolio and essentially that was it. We didn’t need to do much monitoring. We didn’t need to study the market. We paid a small flat fee to our advisor and a small percentage to the portfolio manager and we generated decent returns.


Don’t Take Your Eye Off the Ball

Then our advisor retired. We left our original investments alone, but as we saved more, we needed somewhere to put the new money. The funds where we had originally invested were limited to institutional investors and since we were now self-managing, we couldn’t put new money into those funds.

So we found a new advisor. This one charged a percentage of the invested assets. This advisor used in-house active portfolio managers who proceeded to invest in 30 plus mutual funds charging up to 1.5% in fees.

At year-end, we had 26 pages of taxable transactions. The performance was not what we were hoping for.

We knew that we had to make a change, but the fear of making a mistake held us back.


I am Taking the Leap

After hovering in a state of limbo for over a year, we have decided to go back to self-managing our portfolio. But this time, we will be taking a more proactive approach. I haven’t finalized things yet, but the plan is to buy index ETFs and allocate our portfolio as follows:

• Cash – 5%
• Large cap US equities – 25%
• Small cap US equities – 15%
• US bonds – 10%
• International – 25%
• Real estate – 20%

This allocation is only for our managed investment accounts. It excludes the cash on hand that we have set aside for our ongoing education expenses for our children. This is a high priority and we want to make sure those funds are available when needed. I also want to have some cash available for investment opportunities as they come up.

This allocation also doesn’t include our 401Ks or 529s as they are managed separately.

Everything will probably get tweaked before it’s finalized, but it’s a starting point. For the perfectionist (procrastinator), getting something going is better than waiting until everything is perfected – because it will never be perfect.

As for the specific ETFs, as I mentioned before, I have historically focused on capital appreciation, but I am beginning to come around to the idea that investment income may be a better goal than capital appreciation. When I had steady income from a day job, investment income didn’t seem to make much sense. After all, I was contributing money to my savings not pulling it out. Why would I want more that just needed to be reinvested?

But investment income tends to be more stable and predictable over time whereas you can have long periods of a down market causing capital to drop in value. In this case, I am referring to dividend stocks for investment income. There are other sources of investment income (bonds, preferred stock, real estate) and those also have a place in our portfolio, but as far as our US large cap equities allocation, I am leaning towards dividend stocks.

Investment income is real money. It can be used to pay for things without diluting your principal (unlike capital gains). A dividend stock also provides two sources of gain – the dividend payment and potential capital appreciation. And I’m a big believer in diversifying your income. In the case of dividend stocks, even if we found ourselves in a down market for many years, hopefully the dividend payments keep coming.

That’s my plan to become my own portfolio manager. I would love to hear feedback from others who have gone down this path.


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