A basic decision that you and every other investor must make is whether you will manage your investments yourself or hire someone else to do it. At the one extreme, you can open an account with a broker and make all of the buy and sell decisions yourself. At the other extreme, you can invest all of your money in a managed account, such as a wrap account, and make no buy and sell decisions at all.
Often investors partially manage their investments themselves and partially use professional managers. For example, you might divide your money between, say, four different mutual funds. In this case, you have hired four different money managers. However, you decided what types of funds to buy, you chose the particular funds within each type, and you decided how to divide your money between the funds.
It might appear that managing your money by yourself is the cheapest way to go because you save on the management fees. Appearances can be deceiving, however. First of all, you should consider the value of your time. For some, researching investments and making investment decisions is something of a hobby; for many of us, however, it is too time-consuming and this is a powerful incentive to hire professional management. Also, for some strategies, the costs of doing it yourself can exceed those of hiring someone even after considering fees simply because of the higher commissions and other fees that individual investors frequently pay. For example, it might not be a bad idea for some of your investment to be in real estate, but a small investor will find it difficult to directly acquire a sound real estate investment at reasonable cost.
An interesting question regarding professional management concerns the possibility of generating superior returns. It would seem logical to argue that by hiring a professional investor to manage your money, you would earn more, at least on average. Surely the pros make better investment decisions than the amateurs! Surprisingly, this isn’t necessarily true. We will return to this subject in later chapters, but for now, we will simply note that the possibility of a superior return may not be a compelling reason to prefer professional management.