CHAPTER 15

Understand When It Makes Sense to Pick Individual Stocks and Managers

Despite the advantages of indexed investments, many investors like to play a more active role on their own or with the assistance of a financial adviser. This chapter covers three active investment management scenarios: (1) investment selections by the Family CFO, (2) actively managed broker accounts, and (3) actively managed mutual fund accounts. With minor exceptions, the general recommendation for all these scenarios is the same: Don’t do it!

Active Management by the Family CFO

As a professional investor, I usually reserve 5 to 10 percent of my portfolio for my own investment ideas. These investments are often simply an extension of my observations from work, where I have significant time, resources, and a network of professionals to assist in evaluating these opportunities. For most Family CFOs, I do not recommend such an approach, for several reasons:

  • Unique investment ideas are opportunistic by nature and are usually difficult to manage in the context of a disciplined asset-allocation strategy.
  • As Table 15.1 shows, the investor community as a whole is pathetically poor at predicting stock market performance. There’s a strong inverse correlation between investor optimism, or pessimism, and how stocks later move. Essentially, the market as a whole has a predisposition to buy high and sell ...

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