Ed Mamula.com

J.S. Kim at The Zen of Investing has written a terrific article about the role of self-reliance in investment returns.  The following quote is particularly compelling :

 ”If we consider the fact that a the hours of a 16 week college class that met four days a week for 1.5 hours a class, or 96 hours of learning, is probably sufficient to set one on the path to significantly greater financial returns, it’s just plain silly that the overwhelming number of people make excuses that they just don’t have this kind of time.”

The entire retail investing industry is set up in such a way to convince the investor that investing is complicated and should be left to the professionals.  The truth is, it takes relatively little time to learn the ropes, and cut through the salesmanship and BS to create a winning, self-directed investment strategy.

The key is not only self-reliance, but personal responsibility.  If an investor is not willing to “own their results” then they can hand their money over to a professional, and in that case, if there are losses, at least there is a scapegoat.  If there are losses in a self-directed account, the only person to blame is the man in the mirror.   Own your strategy, and own your results, because in the end, no one cares more about your money than you do.

Getting To Enough asks, How Did You Really Do Last Year?

The article wisely reminds investors to compare their returns to their relevant benchmarks instead of focusing on an arbitrary benchmark like 10%.  The only point not covered by the article is how much volatility (Beta) did you endure in order to get to the absolute rate of return.  Many people claim that all they care about is the bottom line rate of return, but they cannot stomach the volatility that occurs in the interim, and they change investment strategies too often, chasing the hot performing sector, reducing their overall rate of return, and becoming frustrated in the process.  An investor can improve his results by mentally rehearsing for “normal” losses, staying the course when appropriate, and searching for investment strategies with the best risk adjusted rate of return for any given volatility level.

In modern portfolio theory, the number that describes risk-adjusted return is called alpha.

Alpha - A coefficient which measures risk-adjusted performance, factoring in the risk due to the specific security, rather than the overall market. A high value for alpha implies that the stock or mutual fund has performed better than would have been expected given its beta (volatility).

 Simply put, investors need to do some self-exploration in order to determine their personal risk tolerance (Beta tolerance), and then search out investment strategies with the least negative volatility that will carry them to their expected rate of return.  All else equal, fewer big swings in the account mean fewer sleepless nights.