Investor biases and human nature work against successful self-directed investing. Turnkey asset management establishes the procedures and performs the quantitative research necessary to overcome emotional roadblocks to profits.

DIY investing has surged during the pandemic.

A survey of online brokerage operations showed new account openings up 50%–300% in the first quarter of 2020. According to CNBC, Robinhood, the darling of the younger generation, added 10 million accounts in 2021. (However, it appears they will have a very tough time matching 2021’s record user growth in 2022—despite some enhancements such as longer trading hours and their own “Cash Card.”) 

Most new DIY investors would be wise to remember that there are costs to trying to do it yourself.

Since 1984, analysts at independent investment research firm DALBAR Inc. have been publishing their annual “Quantitative Analysis of Investor Behavior” report (QAIB). Since that time, the report has shown that investors managing their own accounts consistently underperform the mutual funds in which they invest.

While our firm was one of the first to create a turnkey asset management platform that allows the advisor to be the portfolio manager (“DIY investing” for the financial advisor), we’ve also learned that there are some common pitfalls for retail investors attempting to do it themselves:

1. Insufficient knowledge of what they are investing in. Whether they are investing in assets or strategies, they have to spend the time to learn about the investment. This sounds pretty basic, but losses of inexperienced investors in options, bitcoins, volatility vehicles, and leveraged and inverse funds are testimony to the fact that many do not research before they invest.

Hopefully, these investors have learned how important this knowledge is to be able to correctly use the investment. But it is also important because the more you know the characteristics of an asset class or strategy, the more you are able to trust it to do what it is intended to do within an investment portfolio. This trust is essential to allow investors to stick with their plans and invest for the long run.

2. No time or opportunity. Most investors cannot devote all of their time to their investments, yet the 24-hour investment and news cycle demands such attention. And, of course, the demands of everyday life further dilute the necessary time investment. They can’t do everything all of the time.

See Related Article: 10 destructive behaviors of ‘emotional investors’

3. Emotion gets in the way. Frustration and anxiety are the most likely result of the chaos so many investors believe is endemic in the financial markets.

Fintech entrepreneur George Mitra makes the following point in his insightful article “DIY Investing May Lead to an Unhealthy Portfolio During the Current Pandemic”:

The interplay of these and other investment biases has spawned a whole new field of study: behavioral finance. We now know that the internal mechanisms of the human brain work against successful investing. Successful professional investors establish procedures and do the quantitative research necessary to overcome these emotional roadblocks to profits.

4. Lack of discipline. This can undermine the best-laid plans and overcome years of research. When I was doing weekly seminars for investors, I used to tell my attendees that I had researched thousands of investment systems. Many of these systems have long-term records of success. Based on my experience with investors, I know that I can explain a profitable system’s rules and history, but I know that, in most cases, investors will not go home and follow it.

It’s like when investors subscribe to an investment newsletter. The writer tells them when to buy and sell. Here’s what investors typically do with that information: (1) They wait to see if a recommended trade is successful in real time. (2) When they see enough successful trades, they finally start investing. (3) Once they have a losing trade or two, they stop following the signals and let the newsletter subscription expire. DIY investors tend to be easily discouraged.

Of course, investors eventually learn that, unfortunately, the best buy and sell signals seem to occur when it is hardest to pull the trigger. You probably know how the story goes: The market falls and falls, and then you get the buy signal. At this point, you may have been losing money for weeks, losses have mounted from 20% to 30% to 40%, and now you are being told to invest. It’s very hard to do. Similarly, if you get a sell signal when gains are multiplying and it seems like the best of times, will you sell?

If not DIY investing, then what?

As a TAMP (a turnkey asset management program), the answer for our firm is easy: turnkey investment management. With turnkey separate accounts, we pick the investments, allocate and reallocate them for our advisors and their investor clients, and provide the dynamic risk management that we are known for.

Since I founded the firm in 1981, we have always provided turnkey separately managed accounts and nothing else. In the past, these have mostly consisted of a single strategy, often involving a single asset class.

As we developed and made available hundreds of these strategies over the years, advisors and investors asked us if, instead of just picking when to invest in an asset class, we could also pick the strategies and when to invest in them. The results were our turnkey multi-strategy offerings: QFC Multi-Strategy Core, QFC Multi-Strategy Explore, and QFC Fusion 2.0.

Because these are turnkey strategies, there are none of the roadblocks that foil DIY investors:

1. Choosing investments is less complicated. Investors don’t have to learn the ins and outs of 100-plus strategies to make an informed judgment of what is right for them in the current environment—nor do they have to stay up late reviewing all of the stats on every one of them so as to have enough confidence to stay with the strategy for the long run.

This is also an incredible advantage for financial advisors. It means that they have a limited number of strategies to become familiar with, and a single, unchanging concept on which to educate clients—the advantages of multi-strategy investing.

No longer do investors have to decide which strategies to buy and when to do it. And they won’t have to agonize over how much to invest in each strategy that is chosen.

No more strategy changes when market conditions change. No learning new strategies. No monitoring individual strategy performance. No having to learn how to tell whether a strategy has just stalled or suddenly stopped working. No dropping old strategies when they become ineffective. We do all of that for our turnkey investors and their advisors.

2. Time constraints are no more. Our firm has more than 70 financial service personnel to watch over accounts when advisors (or their clients) have pressing personal or business concerns—whether for a day or for several weeks. 

3. Investor emotion is not a problem. Our quantitative strategies are all drawn from years of research, backtesting, and experience. The rules for buying, holding, and selling are all laid out in technical precision and constantly monitored for improvement. They are detailed in advance, so there is no question about what to do when the time for action presents itself.

4. Trading discipline is not a problem. Our quantitative systems leave no room for indecision. The signals are generated by our computers and go to a trading staff that is not connected with the strategy development. There are no egos involved with the people charged with executing the signals. They are only concerned with getting the trading done accurately and as soon as the computers generate a signal to buy or sell. The trading staff is judged not by the profitability of the trade but by precision and timing in each trade’s execution.

DIY investing remains susceptible to all of these pitfalls. Turnkey multi-strategy investing avoids them all.

***

Fintech entrepreneur George Mitra concluded in the article quoted previously,

Robert R. Johnson, president and CEO of the American College of Financial Services, in Bryn Mawr, Pennsylvania, sums it up like this: 

Generally, people can’t. And today, people don’t have to. 

Turnkey multi-strategy investing means no investor (or their financial advisor) has to do it all themselves.

The opinions expressed in this article are those of the author and do not necessarily represent the views of Proactive Advisor Magazine. These opinions are presented for educational purposes only.