The financial press has picked up on the idea of managed IRA accounts, and with good reason: Retirement savers have paid far too much for too long and often buy the wrong advice.
Convinced that they need to beat the market, investors pay oodles of money for active managers through mutual fund fees. What they miss out on is having a solid investment policy and a thoughtful asset allocation plan, which studies have shown gets you most of your return over time.
In fact, paying for stock selection and active trading provided only a slight advantage and did so while adding risk. As a portfolio becomes more volatile, inexperienced investors can fall victim to emotional trading traps — they are more likely to chase perceived winners and bail out of possible losers, greatly diminishing their overall performance.
What most retirement savers really need from a managed IRA is exactly the opposite of what they are likely to be sold. Rather than a collection of money managers who promise to wallop their benchmarks for a fee, they need passive investments that simply keep up at the lowest possible cost.
The second half of the equation, and no less vital, is a strong hand at the portfolio level, guiding them toward the right level of risk through investment types rather than picking individual investments.
Yet even that advice need not be expensive. Some critics of the managed IRA account movement are quick to complain that such managers aren’t doing anything out of ordinary and shouldn’t be hired at all.
Perhaps so, if you are the kind of person who can build a disciplined approach and sustain it for decades. Are you? Here are three key questions to ask about owning a managed IRA:
1. Do you like to trade?
This is fundamental, and easily misunderstood. The question is not do you like investing. Some people love to read financial news and play their hunches. But a disciplined investor following a serious investment policy doesn’t do that at all. In fact, the trades are quite boring.
But do you even care to do it? Some people dislike dealing with the minutiae of their finances. They have medical practices or business to run, career paths to pursue or retirements to enjoy. It’s okay not to like investing. It’s not okay to remain ignorant, but that doesn’t mean you have to do the work yourself.
2. Are you confident in your financial planning?
Where people often stumble is in developing a sound investment strategy, one that is appropriate for their age, savings level and time horizon, that is, the number of years until they will need the money they have set aside.
Once they get to that age, the problems change. Creating income is a challenge in any environment and especially now. There might be windfalls (or obstacles) on the way toward your goal. Timely professional advice using a managed IRA can be useful, as can regular, periodic help with decision-making. A managed account can offer this level of service.
3. Can you overcome your human emotions?
The single biggest danger, as we mention earlier, is dealing yourself out of the deck at a market bottom. Another risk is chasing a single company’s stock into the stratosphere and then riding back down to the gutter. It happens all the time.
Emotional risk is huge, and it can ruin a perfectly good retirement plan. A decently run managed account will protect you from these kinds of outcomes by “taking the gun out of your hand” at those crucial moments.
Managed accounts are not free, but they do offer a skill set that many retirement investors sorely lack — stable, high-quality guidance now and along the way, as markets churn and buck. It doesn’t need to be expensive, but discounting professional advice from the start can be the most expensive mistake of all.