The Argument for Self-Management

Dragster in art form.

ITA Wealth Management is an educational blog designed to help investors of all levels learn how to manage their own portfolios.  Numerous models are explained and updated each month.  These models vary from the very simple to a few that are more complex.  Complex is defined as requiring more judgment and decisions vs. Buy and Hold portfolios.  The very simple portfolios to follow are the Copernicus and Schrodinger.

While do-it-yourself (DIY) requires a little more work on the investors part, there is money to be save by putting in a little effort.  I’ve written several blogs on the cost of management fees and this post is an update on those earlier writings.  In 2014 I posted this blog on the cost of management fees.  Check it out.  In January of 2022 I updated the DIY argument with this blog post.  While it includes a tad more mathematics, it is perfectly understandable.

When working out the cost of portfolio management fees, many assumptions go into the calculation so it pays to be on the conservative side when making those assumptions.

I would like to direct readers to a calculator so you can plug in your own figures.  In one example I began at age 20 and contributed $2,000 per year for 45 years or till age 65.  I entered an annual return of 6.0% as that is the annualized gain of the Schrodinger over the past five years.  The historical return for the S&P 500 is between 8.0% and 9.0% per year.  Look this up for confirmation.

The last bit of data is the expense or management fee.  This morning I spoke with someone who works for one of the largest portfolio management firms in the country and they are charging 1.25% for accounts of $1,000,000.  That is a very high load to pay for professional management.  Nevertheless, that is the percent I entered to come up the the dollar amounts used below.

Using those values in the calculator, the final return is $478,545 and if one subtracts fees, the final total is $328,014.  The fees sum to $150,532 or 31% of the nearly half million saved.  This stunning sum is why a management fee of 1.25% is close to usury.  While such high fees are not illegal, they are unnecessary and that is why I highly recommend investors manage their own portfolios and save that $150,000.  Remember, I am using a 6% return as that is what the Schrodinger returned, free of fees, over the past five years.  One could have done better by investing only in the S&P 500 (SPY).  Over the same five-year period the Schrodinger returned 6.0%, Vanguard’s Total U.S. Equity ETF, VTI, returned an annualized 11.6%.  And one could have done this without incurring any management fees.  Yes, there is an expense ratio (3 basis points) associated with VTI, but the 11.6% annualized return takes that into account.

Return to that mutual fund calculator linked above and enter your own figures.  Then take the cost of fees and divide that number by the total amount saved and earned through growth.  Let that percent soak into your brain and I don’t think you will quickly be running out to find a money manager.  Instead, you will be saying to yourself – I think I can do this myself if I take a little time to learn a bit about investing and follow some simple models such as the Copernicus and/or the Schrodinger.

Note:  If you spot any errors in calculations or assumptions, post the corrections or recommendations in the Comment section and I will revise this blog post.

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