Farming out services

[obiwan]

ok, this is going to sound heretical, but is trading your own account necessary at all ? Why do people insist on trading or stock investing when it is so difficult and time consuming and when there are perfectly good firms that you can farm this out to.

Stock selection : can be farmed out to funds (hedge, mutual, sector specific, strategic (eg small cap, bear)) funds. I believe I (and most individuals) have no selective advantage in stock selection over these entities.

Trading : can be farmed out also. I believe I have no selective advantage over proprietary trading firms. Why would I want to do this, it is like going to medical school so I can deliver my wifes baby. There are obstetricians who can do this so why not use them !

This leaves only two arenas in which the firms have no advantage and that is in market timing and asset allocation. Most funds have to deploy their assets, they cannot risk underperforming year on year. Their variation in cash is pretty miniscule (0-10%). So if I feel bearish then I can have more in cash. They also have portfolio allocations that are generally restricted in it's parameters (they cannot for instance go from being diversified to 100% property or shares). I see it as rational to employ their services to construct my own portfolio based on my risk preferences and investing experience. This makes the process of stock selection and trading redundant.

performance someone once told me is 90% portfolio asset allocation

 

[stefan]

Well, first of all if you are INTERESTED in delivering babies then you probably WOULD go to medical school. Most traders here are very much interested in what they do and so they are learning everything about it to finally become experts in their field.

Secondly you have a valid point in that big firms and funds have some advantages compared to the small guy. Now if you don't know anything about trading and don't show any interest in learning the trade then by all means invest your money into a fund or whatever investment is offered to you.

Sure, there is always the question as to what fund or investment to choose as there are hundreds out there. Again, it comes down to what you're trying to achieve and what your interests are.

It is very interesting but it is not easy at all to become a successful trader. Especially if you want to beat the pros constantly and not just on one or two trades. Is it worth the time and effort? Every trader has to find the answer to that. You're right. If it's not paying the money then you're better off going to the beach and let the pros do the work.

Whether or not you do it yourself or not comes down to your personal interest in investing. If you're a passive investor then let them do the job for you. If the financial markets are catching your interest and you are keen to learn, then you'll do it yourself anyway.

You sure have to be good at it to make it worthwhile. But you'll only get good at it by doing it yourself. Depends on what you want out of it. Skills or just money. I have some money invested in a fund but I just love trading so I ENJOY doing it myself as long as I can see a point in it. It doesn't always have to be money. After all if you learn, you'll make mistakes and therefore lose money. But the same thing can and does happen with funds.

Happy trading

Stefan

 

[tech/a]

Answered under both your Mutual Thread and The "What" thread.

 

[obiwan]

Stefan,

I know enough about trading and I have an interest in learning to trade but I choose not to trade. My aim is to make money efficiently, which I think is the aim of any business. My portfolio is like a business, it is not there to gain pleasure or to learn or keep me interested.

Is it worth the time and effort even when it is profitable if you could make this profit more efficiently by other means ? I have confidence that my levered portfolio will do better than the majority of trading accounts with less risk over the next 5 years.

'I have some money invested in a fund but I just love trading so I ENJOY doing it myself ' - When does something become an obsession or an addiction ?

 

[stockGURU]

'I have some money invested in a fund but I just love trading so I ENJOY doing it myself ' - When does something become an obsession or an addiction ?

Isn't life about doing things you enjoy?

It's like the difference between doing handyman jobs around the house yourself or choosing to hire a professional tradesman to do them. Sure, you can pay to have things done by a professional but sometimes it's more fun to learn how to do them yourself.

Life's not all about money.

 

[markrmau]

Just a question: If I have a stock for more than 12months, then capital gains are taxed at 50% the rate of the actual captital gain. Is the same true for a managed fund portfolio? (Of course, I would see accountant if I needed to know for tax purposes).

 

[crashy]

yes

.

 

[stefan]

'I have some money invested in a fund but I just love trading so I ENJOY doing it myself ' - When does something become an obsession or an addiction ?

You're certainly painting a black and white picture here. Just because I like what I'm doing doesn't mean I'm obsessed or addicted to it. As most here, I have a life beside trading and even if I did not, then trading obviously would be my main stream of income and as such I would VERY MUCH doubt your idea that a fund will give you the better returns over the same period of time.

My portfolio is like a business, it is not there to gain pleasure or to learn or keep me interested.

You are a passive investor who likes investing but can't be bothered with doing it himself. Fair enough. I'm an active investor who's enjoying the work that's involved in research and fundamental analysis. The two can live side by side happily ever after. You claim you will do better. I don't claim the same. I just doubt that you will be right.

I have confidence that my levered portfolio will do better than the majority of trading accounts with less risk over the next 5 years.

Where do you take this confidence from? You have no idea what the market is going to do and neither do the fund managers or the individual investor who's trading on his own. Your funds will return a negative figure in a bear market and if you only have a horizon of 5 years I would say you'd have to be extremly skilled in how to spread your investment to pick the right funds. Shifting in between funds is expensive and within 5 years you don't have much time to do so. You can only spread your investment based on what you THINK will happen and as such you will be forced to reduce your risk by selecting different type of funds. Funds as such are slow and can't react to certain market shifts due to guidelines and limits which fund managers have to follow. Sure, that also means that they will not be as volatile as another portfolio. It sure depends on what sort of market conditions we will experience over the next 5 years but for now I can't see where you take your confidence from. Funds are what I consider a thing of 8-10 years and then it may indeed become hard for an individual to beat the overall performance as it takes a great deal of discipline to keep going for 10 years without major glitches.

Isn't life about doing things you enjoy?

I would have thought so.

Happy trading

Stefan

 

[Tric]

totally agree with what stefan has said,

It's all about how much your profit is and if you enjoy it.
It's the old COST + EFFORT = REWARDS ratio. ie if the reward's not worth it or the cost is too great, why do it?

I am prob on a different wave length to alot here as I trade full time and view it as a job. I gave up work last year when I could see that my part time effort in the market was giving me good rewards for minimal effort and cost and I could see the potential (in my circumstances) for doing it full time. I often avoid getting into some discussions here because I know how much my strategies have changed now that I do it for an income but I think the same answer applies for all of us: you do it while it works.

And yes, as stefan says, the bull market sure helps.

 

[TjamesX]

Stock selection : can be farmed out to funds (hedge, mutual, sector specific, strategic (eg small cap, bear)) funds. I believe I (and most individuals) have no selective advantage in stock selection over these entities.

Trading : can be farmed out also. I believe I have no selective advantage over proprietary trading firms. Why would I want to do this, it is like going to medical school so I can deliver my wifes baby. There are obstetricians who can do this so why not use them !

This leaves only two arenas in which the firms have no advantage and that is in market timing and asset allocation. Most funds have to deploy their assets, they cannot risk underperforming year on year. Their variation in cash is pretty miniscule (0-10%). So if I feel bearish then I can have more in cash. They also have portfolio allocations that are generally restricted in it's parameters (they cannot for instance go from being diversified to 100% property or shares). I see it as rational to employ their services to construct my own portfolio based on my risk preferences and investing experience. This makes the process of stock selection and trading redundant.

If funds were totally aligned with maximising the value of MY units over the long term and minimising the cost of managing those units then this may true.

But I don't believe they are, they make money by attracting more people to their funds - and then charging them money for management expertise. Since they make money from management fees straight away they do not have an incentive to minimise the cost to ME of managing my funds.

Further their priority is to attract more people to their funds. So this can influence their judgement to make short term decisions in the interest of the fund so that they can advertise short term gains to the market. And eventhough they have fine print saying past performance is no indication of future performance - they know that people only invest their money on past performance because what else do you have to go on.

They can also make money from charging people money to switch out of their fund when they don't want them to.

Farming out does have an associated cost