Savvy DIY investors are proving they no longer need money managers

The recent bear market was the first opportunity since the financial crisis to gauge how investors would hold up during a market plunge

Economic and financial impact during the Covid-19 health crisis deepens. Businesswoman with protective face mask checking financial trading data on smartphone by the stock exchange market display screen board in downtown financial district showing stock market crash sell-off in red colour. Getty Images
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Now that the bear market is officially over, with the US stock market having reclaimed its pre-coronavirus peak in August, it’s a good time to ask how well investors navigated the market’s breakneck plunge and recovery, the fastest round-trip on record. The answer may inform another question that is increasingly on the minds of individual investors: whether to hand their savings to a money manager or invest it themselves.

Investors have never had more places to put their savings. Money management was once reserved for the well-heeled, but now everyone from Wall Street banks to discount brokers, fund companies and independent robo-advisers will happily look after anyone’s money, no matter how modest the sum. Alternatively, do-it-yourself-minded investors can purchase low-cost exchange-traded funds that track broad stock and bond markets on Robinhood and other free trading apps, which is cheaper than paying a money manager.

Or is it? Money managers like to say that investors are better off hiring a professional, even after accounting for fees, because the manager will stop them from making costly mistakes. Chief among them is investors’ reputation for ill-timed investment moves, loading up on stocks during booms and dumping them during busts.

But recent data suggest investors no longer deserve that reputation, at least when it comes to investing in US stocks. Morningstar’s annual “Mind the Gap” report estimates the impact of investors’ behaviour on their investments in US mutual funds and ETFs.

Specifically, it attempts to measure the so-called behaviour gap, or the difference between the performance reported by funds and the returns investors in those funds manage to capture. According to the latest report, the gap for US stock funds was a positive 0.29 per cent a year during the 10-year period from 2010 to 2019, meaning that on average, investors captured every bit of their funds’ return and then some.

It wasn’t always so. During the 10-year period ending in 2015, the first 10-year period in Morningstar’s report, the gap was a negative 0.36 per cent. The next two 10-year periods ending in 2016 and 2017 were even more negative. But the gap turned positive during the 10-year period ending in 2018. One reason for the improvement is that 2008 dropped out, a year in which investors dumped US stocks in huge numbers as the market collapsed in response to the financial crisis.

Investors appear to have learned from that experience, as the positive behaviour gap during the past 10 years suggests. But the past decade was also notable for an unusually long and uninterrupted bull market, and investing is obviously a lot easier when stocks are surging. The recent bear market was the first opportunity since the financial crisis to gauge how investors would hold up during a market plunge.

In any event, there's never been a better time to be a DIY investor, and there are many indications that investors are getting savvier

So how did they do? Shockingly well. Early indications suggest that most of them didn’t budge. Monthly net flows as a percentage of total assets in US stock mutual funds and ETFs have been consistently minuscule this year, averaging 0.26 per cent per month through to August with little variation, according to numbers compiled by Morningstar. In other words, faced with one of the wildest market gyrations on record, most investors just shrugged their shoulders.

If anything, those who moved money around this year more likely bought low and sold high rather than the other way around. US stock funds took in a net $10 billion during the market’s swoon in March. Since then, as the market has recovered, investors have pulled on average a net $31 billion a month from those funds.

That squares with Dalbar’s widely followed “Quantitative Analysis of Investor Behavior”, which attempts to track investors’ moves into and out of mutual funds. The latest report finds that “the average investor’s appetite for equities has remained unchanged throughout the Covid crisis”.

None of this is to say there aren’t good reasons to hire a money manager. Perhaps you have no interest in managing your own money. Perhaps you need someone to talk you out of selling when markets wobble. Maybe you want personalised advice about how much of your salary to save or how much to spend in retirement. Or maybe you just like a manager’s investment style.

In any event, there’s never been a better time to be a DIY investor, and there are many indications that investors are getting savvier. So give it a shot. But for the love of investing, whatever you do, don’t sell when markets are down.