Every month, Stoic partner Freddy Forger writes a short column in FiscAlert, the magazine with the smartest tips for managing money — essential reading for financial advisers and tax professionals. If you don’t have a subscription, you can read the column here. This month, Freddy Forger talks about the major disadvantage of investing independently.
Kapé Breukelaar regularly publishes the results of his passive DIY portfolio here in FiscAlert. Passive investing is so simple, after all, anyone can easily do it themselves.
There's just one problem: who's going to make sure you, as a DIYer, don't make any mistakes? For that reason, the ‘four-eyes principle’ is applied in the financial world, as well as in places like pharmacies: at critical moments, a colleague always double-checks.
But as a DIY investor, no one is looking over your shoulder. This can have more than just unpleasant consequences. Imagine you have €1,000,000 passively diversified in a global index. Your assets are steadily growing along with the global economy, until the stock market is suddenly hit by a crash. The value of your portfolio plummets to €700,000 in no time. Ouch. The next day, there's only €650,000 left. Numerous studies have shown that the vast majority of people in such a situation, completely overcome with emotion, choose to play it safe. They convert the remaining amount into cash as quickly as possible.
You can probably see where this is going: that’s exactly what you shouldn't do. This action means taking a huge loss, while history shows that a crash or recession almost always recovers within ten years. So you simply have to be patient. But that's not easy when you see your money disappear.
In short: an extra pair of eyes protects you from your own emotions. This is, in fact, the most important role of an asset manager in passive investing.
