The industry categorizes its participants in different ways – value investor, growth investor, GARP investor, etc. Little attention however is paid to this rare and overlooked breed – the Do Not Disturb investor.
If you’re new to this term, here are the characteristics of a Do Not Disturb (DND) and why being a DND investor is riskier than you think!
Here are the typical characteristics of a DND:
- Wants good financial results but doesn’t want to invest in risky assets
- Doesn’t care about investing or doesn’t have the time for it
- Doesn’t bother looking at their investment daily/weekly/monthly performance
- Pays no attention to tax implications other than to pay taxes when dues
Consequently, DND investors will typically believe that there is no value in actively managing their own money and this attitude can lead to opinions such as:
- I would rather stay in cash because it feels safe.
- I would rather buy a target date or asset allocation fund because it takes care of all the work for me.
- I would rather just put my money into my company 401(k) plan and trust the funds that their consultant has selected for the platform will luckily do the job for me
Most DND investors believe that nobody else can invest their money the right way. This is usually due to facing disappointment in the past or in some cases having been taken advantage by an unscrupulous broker or a financial advisor. This is true to life; misalignment of interests between brokers, financial advisors and their clients has unfortunately, many times in the past, led to outcomes that have not always been favorable for investors.
The Pitfalls of Being a DND
Most of the time, being a DND is great. You don’t have to suffer from the mental gymnastics that come with the usual market flip flops, don’t need to worry about expensive trading fees structure, and don’t have to put up with some investment brokers who’s trying to push the latest financial hot product on you.
But here’s where it gets dangerous. The results of not paying adequate attention to your money in a portfolio can potentially bring the following disasters:
- Poor performance
- Portfolio not aligned with your long term goals – risk mismatch
- Higher cost of living and retirement because you will need to compensate previous losses and poor performance with additional savings
- Possibly Higher Taxes
Let’s look at how the DND’s beliefs stack up with the risks they create.
Staying in cash
While you won’t explicitly lose money by staying in cash, it’s not all it’s cracked up to be. There is an opportunity cost that you suffer by missing the chance to profit from a bull market. If managed wisely, market movements can be embraced to result in long term value that is accretive to the portfolio.
Also factor in inflation. The long term average rate of inflation is about 3%. Over time the effect can be significant erosion of value.
Buying a target date or asset allocation fund
These funds make assumptions about your long term goals based upon your age. In reality, age is only one factor. Risk tolerance, special circumstances, and income needs should also be taken into account. This could lead to big negative surprises when you need to cash in with those funds.
Investing in a 401(k)
Keep in mind that the 401(k) plan sponsor is not your investment advisor. Plan sponsors have a fiduciary liability to present participants with an adequate number of investment choices, to monitor them routinely, etc., but they are not required to render advice that is specific to your situation.
The funds on a 401(k) platform are not necessarily the best ones available. Often these funds are selected by a consultant who may have his or her own agenda – such as staying employed by the fund sponsor.
Given all that comes with being a DND, it’s clear that there’s a great deal you are missing out on.
What Investing the Right Way Means for a DND
DND investors should take heart in understanding that working with an outside money manager doesn’t have to be an all or nothing solution.
We studied this on our own and found that it would take an estimated 40 to 60 hours per month for the average person to manage their own portfolio the right way, depending upon the frequency of their trading. It’s unlikely that most DNDs have the time or interest to do this, considering that if they were it would consume an amount of time equivalent to one full week of work.
So how can a DND invest the right way and still remain unbothered by the act of doing so? First let’s contemplate what it means to “invest the right way.”
- Fees are kept to low or reasonable levels relative to the value of the service provided
- Decisions are made with the goal of leading to the best long term performance for the portfolio regardless of how the person making the recommendation is compensated
- Decisions are made based upon knowledge, logic, and fact rather than emotion
- Opportunities are brought to light that aren’t just the most convenient but rather that provide the best return for the risk taken
Roboplatforms are opportune for DND investors because they can take care of the less glorious aspects of the process such as tax loss harvesting, portfolio trade analysis, and rebalancing. The investor is still at the helm, actively designing the portfolio by rendering the inputs used to create the asset allocation. In short, what the roboplatform does for the DND is create the potential to invest the right way without forcing the DND to become overly burdened by doing so.
Automated solutions such as roboadvisors are able to take care of all the things that need to be done in order to manage money “the right way” for a cost that is reasonable and without the necessity to work with and share your personal information with a human financial advisor.