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Posted by on May 7, 2014 in ETF Strategist

Hire Someone Or Go It Alone? Yes!

Hire Someone Or Go It Alone? Yes!

By Roger Nusbaum AdvisorShares ETF Strategist

 
The Wall Street Journal had a couple of related articles over the weekend; Should You Manage Your Own Money and the other was Do Investors Need an “ETF Strategist?

The first article on hiring a manager or going it alone rightly noted that investing does not have to be rocket science (although in some strategies do involve something close to rocket science). A new investor could spend a Saturday reading related content and figure out something for themselves along the lines of a target date fund or a domestic equity fund/foreign equity fund/bond fund combo or maybe some sort of balanced fund and in the long run come out ok.

“Coming out ok” has nothing to do with investment performance and “coming out ok” also requires having an adequate savings rate.

A big checkmark in the plus column for hiring an advisor as pointed out in the article is eliminating emotion. The part above about coming out ok also assumes not panicking along the way. The above new investor who spends a day learning about index funds won’t be able to learn what it felt like as the market was cutting in half and will not know how they would react in the face of that sort of decline until they are exposed to it.

Some portion of the investing population always panics when the market goes down a lot. An advisor can help with these issues but ultimately if a client says “I don’t care, just sell” the advisor will need to follow the directive (or say no and fire the client and then the client is likely going then go ahead and sell themselves out) so the end user still has responsibility here.

Not discussed is the dynamic that the 85 year old version of you may not have the interest or ability that the 60 or 65 year old version of you has to invest in the stock market.

The ETF Strategist article is about a managed account consisting of ETFs where the client’s financial advisor outsources the management of the portfolio to a firm that specializes in some sort of investment strategy, in this case ETF portfolio construction.

An active manager will typically offer some sort of expectation like trying to generate alpha, smooth out the ride or something else and should logically be judged against whatever expectation they set and of course the person who hires that active manager needs to be on board with whatever expectation is set. It would not make sense for someone with a low tolerance for volatility to hire a manger whose primary objective is alpha generation no matter what.

Tying in to the first article, many of these ETF portfolios are not rocket science (some are) but they will free up the client from needing to make investment decisions and free up the advisor to devote more time to client financial plans and other related needs.

That combination will not appeal to every investor or every advisor but of course no single path does appeal to everyone but obviously ETFs can play a big role in the most active of trading strategies, the most passive indexed strategies and everything in between.

david@mediaworksllc.com

The AlphaBaskets blog provides frequent market insight and commentary by AdvisorShares Investments, LLC, created by AdvisorShares and other leading active managers.  AdvisorShares Investments is an SEC-registered investment adviser and the investment adviser to the AdvisorShares actively managed ETFs. The views expressed on AlphaBaskets should not be taken as investment advice or a recommendation for any of the actively managed ETFs advised by AdvisorShares.

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