Being a good financial advisor is a tough gig. Not only do you have to convince wary investors they should invest with you, but you also have to distinguish yourself from all the quacks and snake oil salesmen out there. At least when you go see a doctor, you know they've had a certain amount of schooling, and if board certified, a certain amount of supervised training and have passed some relatively difficult tests. This is not the case with someone who markets themselves as a financial advisor, as a recent New York Times article points out. Many of us, having been burned a couple of times, have resorted to doing it ourselves. That's definitely a reasonable alternative to trying to find a competent advisor, but it's probably not for everyone.
In fact, William Bernstein, MD, has argued that not only is it not for everyone, it isn't for very many at all. In his timeless The Probability of Success penned (typed?) nearly a decade ago, he argues that the probability of being a successful do-it-yourself investor is quite low.
His argument goes like this:
He suggests an investor must have four qualities to be successful on his own:
- An interest in investing
- The horsepower to do the math
- The knowledge base
- The emotional discipline to execute faithfully
He then estimates that no more than 10% of the population passes muster on any one of the above given points. So multiplying 1/10 x 1/10 x 1/10 x 1/10, we see that only 1 in 10,000 in our population can actually do this himself. That's a powerful argument for using an advisor to assist you. He does admit he's a bit of a pessimist on this count, but I think even his optimistic estimate of 1% is far too low for readers of this blog. Let me explain why by taking his points one by one.
1) An interest in investing.
Yes, this is requisite. If this stuff is the most boring stuff you've ever studied then you might just have to hire someone else to do it. But readers of this blog have studied boring stuff before (remember physics and O-chem?), simply because they had to know it to get what they wanted out of life. So rather than his 10% estimate, I'm going to go with 50% of physicians, and of those docs who have arrived here, 95%.
2) The horsepower to do the math
Sorry, but the math required to be a successful investor pales in comparison to the statistics required to properly read a medical study. Again, 95% of doctors can do the math required to be a great investor. This might be a huge hurdle for our innumerate society, but not for those who read this blog. They might not yet know how to do the handful of math issues they need to learn, but they certainly can learn them.
3) The knowledge base
Yes, there is a certain knowledge base you need to be familiar with to be a successful investor. You need to know both financial theory as well as financial history. But we're talking about reading two or three 300 page books. This is hardly an insurmountable hurdle. Among those physicians who have an interest in investing and are reading this blog, almost all of them can rapidly acquire the knowledge base required to be a successful investor. Let's use 95% again.
4) The emotional discipline to execute faithfully
This is hard. Many professionals cannot do this, and realize it too late. Although I think once you're interested, can do the math, and have acquired the knowledge (especially history of past market down turns), this is not as big a leap as it is among doctors and lawyers in general. I suspect only 50% of physicians in general can do this but once they've acquired the above 3 steps, I think 75% probably have the emotional discipline.
Doing the math now arrives at a very different conclusion than 1 out of 10,000. 0.95*0.95*0.95*0.75=64%. That seems about right to me. If you're one of those 36% of this blog's readers who probably shouldn't be doing this one their own, that's okay, as long as you recognize it. It'll cost you a little bit along the way, but you'll be better off in the end than if you didn't hire someone. But the other 2/3rds of my readers ought to be reassured that embarking on your investing journey without a guide at your side isn't as foolish as Bernstein makes it sound.