Let’s cut right to the chase. Do you need a professional financial advisor? The alternative is to do it yourself. After all, the internet is full of stories of how plain folks started with nothing and became millionaires after a short time using day-trading or some other scheme to beat the stock market. If they can do it, why can’t you? The short answer is: you can’t because the short run is not a good measure of how skillful anyone is in making money on the stock market. Many can demonstrate a period of time when everything went right, and the sky was blue. Not everyone can sustain profitability for ten, twenty, or thirty years. In the long run, the stock market has tended up, but in the short run, it has gone up and down. A clever man was once asked for a simple truth about the stock market, and he replied, “It’s gonna fluctuate.”
If you want to make a killing in the stock market, remember who your competition is. There are many professionals who work at it 40 or more hours per week. They find out about what is moving the market long before you will. Do you think you can compete with them? Your broker calls you with a hot tip. Do you think you are the first one he called? Don’t bet on it! Other brokers may have gotten the tip long before your broker did. There’s a saying that the stock market is a way of funneling money from the poor to the rich. You don’t stand much of a chance trying to do it on your own.
So what should you do? Answer (1): Look for a professional money manager/advisor, but..humans have their ups and downs, and eventually, they die. If you choose a human being ask if they have an organization. Is there a plan for succession? Do they have a team? Do they use computer analysis or seat-of-pants analysis? How do they choose stocks for your portfolio? Ask for a performance summary for at least the last twenty years. How did they do when the market tanked? The object is to sell just before the high and buy just before the low. Were they close to doing that?
Answer (2): Investing in mutual funds is a good option. The reasons are:
· You can choose to have dividends and interest reinvested for you automatically. If you don’t see the dividend and interest checks, you can’t spend the money.
· A huge advantage is instant diversification. Mutual funds typically have portfolios with about 100 stocks, so if one turns out to be a stinker, you won’t lose all your money. Once you buy a mutual fund, you avoid picking individual stocks, which is extremely time-consuming. You don’t have to do any research or decision-making after you pick a fund (or funds). With your purchase, you avoid the multiple commissions you would pay if you bought the stocks individually on your own.
· You have professional, full-time market analysts working for you usually, with the aid of sophisticated computer programs, so there’s no risk of a single person leaving or dying and the service collapsing.
· Mutual funds are also fairly priced according to the value of their portfolio so there’s no fooling around with bid and asked prices and no brokers’ commissions to be paid.
· You also have the option to invest money monthly without worrying about how many shares to buy. It’s good to invest the same amount every month (dollar-cost-averaging) so that you even out your purchase price. You won’t have to determine if the market is at a high point or a low point. You buy into the fund at an average price over time.
· If you ever need money in a hurry, the liquidity is at your fingertips, and you don’t have to worry about selling the stock that’s doing well or selling one that’s under-performing.
Remember that mutual funds have their good years and bad years, so you want to pay attention to their long-term record. Right now, in August 2020, with the virus raging, Health Stock Funds are performing extremely well, far above their long-term results. This leads to another decision you have to make: it’s probably not a good idea to invest in only one mutual fund since many of them are specialized. Large-cap, small-cap, retail industry, basic resources, are just a few of the myriad categories of mutual funds. So you would be wise to invest in more than one fund.
When choosing an investment management strategy, it may help to use the internet. It’s full of information, and some of it is even correct and useful. For example, if you decide to go with a financial newsletter, there are websites that rank them according to their performance. Google, for example, The Hulbert Financial Digest. You will find a list of about 50 financial newsletters. Some of them recommend mutual funds, some individual stocks. Hulbert shows performance from twelve months to thirty years. They also display an honor roll of seven newsletters, which gives grades for the overall performance since April 2000. Obviously, this would include up and down markets.
Others who rank newsletters are the Wall Street Survivor, MarketWatch, Stock Gunshoe, and many more.
If you choose to use a newsletter, be sure to check the cost. Some of them are very expensive. It’s a good idea to contact them, and ask for two or three (free) back issues, so you get a feel for how they operate. See if you are comfortable with their format and the way they come to their recommendations.
I have only scratched the surface of the money management question. I’ve raised some issues and offered some suggestions for you to look into. In the end the money management decision is yours to make.