The pros and cons of managing your own portfolio

Summary

In this video, Eric from VipinInvesting.com discusses the pros and cons of managing your own investment portfolio. He explains the responsibilities involved, such as selecting companies, deciding when to buy or sell, and allocating funds. Eric contrasts managing your portfolio with investing in index or mutual funds, highlighting how managing your own portfolio can sometimes result in returns that aren't worth the effort. He advocates for aiming higher returns, similar to private equity strategies, using focus investing and leverage. Ultimately, he suggests that if the returns don't justify the time spent, outsourcing to a mutual fund might be a better choice.

Takeaways

• 😀 Managing your own portfolio means picking companies, deciding when to enter, allocating funds, and determining when to exit.
• 😀 Whether you should manage your own portfolio depends on the return you're aiming for and how much effort you're willing to put in.
• 😀 Investing in ETFs or mutual funds typically yields around 7% return on average over the long term, but fees reduce this return.
• 😀 If you're only aiming for a return of 8-9%, the time spent managing your portfolio might not justify the effort compared to hiring a professional.
• 😀 For managing your own portfolio, aiming for a return of 30% is more in line with private equity investing strategies.
• 😀 Private equity funds aim for returns between 20%-50% annually, which significantly outpaces the S&P 500's historical returns.
• 😀 Compound interest shows that with an average 5% return in 10 years, an investment grows from $10,000 to $16,000, while a 30% return grows the same amount to $107,000.
• 😀 The disparity in returns between average investors and private equity investors highlights the wealth gap, as private equity has a higher return due to different investing strategies.
• 😀 Focus investing, where private equity funds concentrate on buying a few high-quality companies, is a key strategy compared to diversification.
• 😀 Leverage, or borrowing money to make investments, is commonly used in private equity to amplify returns, unlike index funds or mutual funds.
• 😀 If you're managing your own portfolio and spending significant time researching stocks but earning modest returns, consider outsourcing the management to a fund manager and redirect your time to other pursuits.

Q & A

What does it mean to manage your own portfolio?

Managing your own portfolio involves making decisions such as selecting companies to invest in, choosing the right time to enter the market, determining portfolio allocation, and deciding when to exit investments. Essentially, you are acting as your own fund manager.

Why should you consider managing your own portfolio?

You may want to manage your own portfolio if you're willing to put in the work of researching companies, timing your entry and exit, and trying to achieve a higher return than what is typically offered by index funds and mutual funds. This allows you to be more hands-on and potentially gain higher returns, especially if you use strategies like focus investing and leverage.

What are the typical returns of mutual funds and ETF funds?

The typical returns from mutual funds and ETF funds are around 7% annually over the long term, with management fees ranging from 1% to 2%. These returns might be lower if you're investing in mixed funds, like those with a 50% bond allocation, where returns can range from 3% to 6%.

Why might managing your own portfolio not be worth the effort?

Managing your own portfolio might not be worth it if the returns you're getting (such as 8-9% per year) are not significantly higher than what you could expect from index or mutual funds. The time and effort involved in researching stocks, monitoring the market, and making decisions may not justify the incremental return.

What return should you aim for if managing your own portfolio?

If you're managing your own portfolio, aiming for a return around 30% annually could be a good target. This is in line with the return that private equity funds aim for, which is significantly higher than the S&P 500's historical average of 7%.

Why do private equity funds tend to have higher returns than the S&P 500?

Private equity funds typically aim for higher returns (between 20% and 50%) because they use different investing strategies, have longer time horizons, and focus on more specialized opportunities. They often focus on fewer investments, using leverage to amplify returns.

How does compound interest impact the difference between index funds and private equity investments?

The difference is significant over time. For example, with a 5% annual return from an index fund, $10,000 grows to $16,000 in 10 years. However, with a 30% return from private equity, the same $10,000 grows to $107,000 in 10 years, illustrating the power of compound interest and higher returns.

What is the concept of focus investing in private equity?

Focus investing involves concentrating on a few high-quality investments rather than diversifying across many smaller ones. Private equity funds typically purchase a full stake in a select group of high-growth companies, unlike typical index funds that spread investments across a wide range of companies.

How does leverage work in private equity investments?

Leverage in private equity refers to borrowing money to make investments. This allows funds to use less of their own capital, amplifying potential returns. However, it also increases risk because if the investment doesn’t perform well, the borrowed funds must still be repaid.

When should you consider managing your own portfolio rather than using a mutual fund?

You should consider managing your own portfolio if you're aiming for higher returns and are willing to invest time and effort into learning and executing strategies like focus investing and leverage. If your goal is just average returns (5-7%), it may be more time-efficient to invest in mutual funds and focus your energy elsewhere.