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Is it time to fire your investment adviser, or yourself?

Special to The Globe and Mail

By: DIANNE MALEY

Date: December 11, 2014

As the year draws to a close, it’s time to gather your monthly statements to see how your investments have performed. Stock markets are looking shaky. Is it time to fire your adviser, or yourself?

As a group, individual investors are terrible at investing, a recent study by Richard Bernstein Advisors shows. The study, based on 20 years of data from the United States, showed individual investors underperforming in nearly every asset class, including three-month treasury bills.

“They bought high and sold low,” Mr. Bernstein said at the time.

Sometimes, investors don’t know how poorly they are doing because they don’t measure their performance against the market, said Warren MacKenzie, a principal at HighView Financial Group in Toronto, an investment counselling firm.

“It’s impossible to manage money wisely if you don’t know how you are doing,” Mr. MacKenzie said in an interview. Do-it-yourself investors should measure their performance against a benchmark of exchange-traded funds, he says. They may find that they would be better off with a couch-potato portfolio – a handful of ETFs that offer diversification geographically as well as among asset classes.

Alternatively, investors can turn to a handful of low-fee mutual funds such as those offered by Steadyhand Investment Funds Inc. of Vancouver and Mawer Investment Management Ltd. of Calgary, among others, that achieve the same diversification and in many cases beat the market.

If you like the idea of managing your own money, do it with a portion of your portfolio rather than going “whole hog,” Tom Bradley, president and co-founder of Steadyhand, said in an interview. “People can learn a lot from doing it themselves.”

One of the main things they stand to learn is how difficult it is to beat the pros, Mr. MacKenzie said.

Even the do-it-yourselfer should get a second opinion every now and then for a fee, Mr. Bradley said. “Investing isn’t an easy thing to do. Every once in awhile, check in with somebody and ask, how does this look?”

Do-it-yourself investing tends to be cyclical, rising with the market and inevitably falling with it as well, Mr. Bradley said. “Bad markets tend to shake some investors out.”

Investors are prone to glory in their winners and “shuffle away the losers,” Mr. Bradley said. “We ask people how they are doing – what their returns are – and quite often they don’t know.” He recommends do-it-yourselfers go a full market cycle to see whether they can handle the extremes or whether they are tempted to panic and sell.

One area where professionals excel compared to individuals is valuation, Mr. Bradley said. Investors may love a company’s story but they have a hard time assessing value. Professional analysts have a better grasp of what a stock is worth.

Mr. MacKenzie suggests investors draw up an investment policy statement that will help them stick to a disciplined investment process and avoid emotional responses. As well, he recommends a “goals based” approach in which asset mix is designed to achieve a specific rate of return.

First, though, investors should sit down with a qualified professional and draw up a financial plan to determine what rate of return they need to achieve their spending and estate planning goals, he says. “Without a financial plan that shows the required rate of return, you don’t know the asset mix that would be most appropriate for you.”

Even people who have investment advisers of one sort or another often don’t realize the fees they are paying, industry watchers say. Investors need full disclosure of all the embedded fees and costs – regardless of what they are called – associated with their portfolios.

It is also important that your investments be tax-efficient, Mr. MacKenzie says. “Income tax may be your biggest expense,” so a portfolio that is designed properly can increase your after-tax returns.

Who’s really to blame?

Before you blame your investment adviser, consider your own role in your portfolio’s performance.

Many investors have handed over control and decision making to their adviser or portfolio manager, Mr. Bradley said. “They’re going along for the ride as a passive, only slightly interested passenger, and are quick to blame someone else when their returns are sub-optimal,” he writes.

They would do well to examine their own role: “Who hired the adviser? Who invested without an overall plan? Who didn’t ask what they were paying? Who approved, or even encouraged, the move to get out of the market, go all precious metals or never own anything in the U.S.?”

Mr. Bradley recommends investors act like CEOs of their investment portfolios. “When it comes to your retirement portfolio, you are the boss, whether you like it or not,” he writes. He offers the following pointers:

• Spend time upfront to determine what your long-term asset mix is going to be.

• Do a thorough review of your entire portfolio once a year.

• At least one other time, go through your account statements thoroughly and read your adviser’s quarterly report.

• Meet your adviser or portfolio manager once a year or attend a group presentation.

• Most important, ask lots of questions.

More advice

Mr. MacKenzie offers a wealth of ways to improve your performance. He has drawn up seven full pages of them – single spaced. Here are his top suggestions:

• Know the differences among the types of advisers and sales people in the financial services industry. They are not equally qualified.

• Don’t be over-confident. You are competing against professionals and big traders who have much more information, smarts and discipline than you.

• Understand what it means to follow a disciplined investment process and remember to rebalance your holdings regularly.

• Don’t take any more risk than necessary to achieve your financial goals.

• Focus on the big picture and take time to clarify your goals.

• Don’t let your emotions get in the way of sound decisions.

• Focus less on fees and more on what you get for them.

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