Sunday Morning Quick Hits #3
Are you a "do-it-yourselfer"? Research shows that you are better at home improvements than investing.
There are significant differences in retirement outcomes for investors who are do-it-yourselfers (DIYs) versus investors who hire a professional account manager. Morningstar, a leading retirement research provider, studied nearly 21,000 retirement plan participants who had access to managed account options or could DIY their own retirement portfolio.
Why you ask? To start, managed account participants save 1.9% more per year on average than DIY participants. Having a manager helps participants focus on saving not investing. It’s a serious partnership between a money manager and a retirement plan participant to achieve better financial outcomes.
Portfolios in professionally managed accounts are typically better constructed with more appropriate asset allocations and higher returns, with disciplined, planned investment strategies. What did the studies show for DIY underperformance each year? About 1.2% annually (or $1,200 for every $100,000 invested). Over 30 years, assuming a 7% rate of return that is NOT earned on investments suffering from a 1.2% annual underperformance level, the DIY investor will have about $113,000 less money over that timeframe.
DIY investors too often don’t have the right asset allocation given their risk tolerance. They use higher cost, actively-managed mutual funds, which we know over time don’t statistically perform as well as lower cost, indexed-based fund options. Even worse, some DIYs try to pick individual stocks or bonds, almost always in futilely trying to beat the market. And DIYs are more likely to engage in market-timing, selling when markets are down and buying when markets are rising, missing out on critical investment gains versus focused, disciplined long-term buy-and-hold strategies, which mathematically are just the right way to invest capital.
Better expected retirement plan results are the ultimate end outcome, with the Morningstar research supporting the fact that overall, managed account participants have an 85% probability of success, with younger workers having even better success odds of 90% when it comes to reaching their retirement goals.
Those are the facts. It’s an expensive, unfortunate reality for many DIY investors who falsely claim they have a crystal ball when it comes to investments.