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.
Posts Tagged ‘funds’
INVESTMENT MANAGEMENT
Friday, November 27th, 2009ASSET ALLOCATION
Monday, November 16th, 2009Another fundamental decision that must be made concerns the distribution of your investment across different types of assets. Different asset types—small stocks, large stocks, bonds—have very different risk and return characteristics. In formulating your investment strategy, you must decide what percentage of your money will be placed in each of these broad categories. This decision is called asset allocation.An important asset allocation decision for many investors is how much to invest in common stocks and how much to invest in bonds. There are some basic rules of thumb for this decision, one of the simplest being to split the portfolio into 60 percent stocks and 40 percent bonds. This popular 60-40 mix is generally a reasonable allocation strategy, but you should read the article in the nearby Investment Updates box before you finally decide.
Political decision making
Saturday, October 31st, 2009Public choice analysis is a branch of economics to the operation of the political process. Public-choice analysis links the theory of individual behavior to political action, analyzes the implications of the theory, and tests them against events in the real world. Over the past fifty years, research in this area has greatly enhanced our understanding of political decision-making.’ Just as economists have used the idea of self-interest to analyze markets, public-choice economists use it to analyze political choices and the operation of government. After all, the same people make decisions in both sectors. If self-interest and the structure of incentives influence market choices, there is good reason to expect that they will also influence choices in a political setting.
The collective decision-making process can be thought of as a complex interaction among voters, legislators, and bureaucrats. Voters elect a legislature, which levies taxes and allocates budgets to various government agencies and bureaus. The bureaucrats in charge of these agencies utilize the funds to supply government services and income transfers. In a representative democracy, voter support determines who is elected to the legislature. A majority vote of the legislature is generally required for the passage of taxes, budget allocations, and regulatory activities. Let’s take a closer look at the incentive structure confronting the three primary political players- voters,legislators, and bureaucrats- and consider how they affect the operation of the political process.