Twofish's Blog

October 10, 2006

Personal finance is hard….

Filed under: finance, personal, personal finance, tcfa2006 — twofish @ 4:11 am

I’ve got pages and pages of notes from TCFA ‘2006, and I’m going to be posting them on my blog over the next few weeks. It will be stream of consciousness, and it won’t be in chronological order. Just whatever I’m interested in.

One of the interesting talks was by Professor Robert Ibbotson, who made a very interesting point in that he pointed out that it is tougher to manage personal finances than it is to manage a huge billion dollar portfolio for an institution. Invididuals have to worry about a very, very complex tax code whereas institutions don’t have to worry the tax consequences of their investments. Individuals have to have most of their investments in liquid investments, whereas institutions don’t have to do this. Individuals take whatever products are available whereas institutions can have financial products custom built for them. Individuals pay a huge amount in transaction fees, whereas transaction fees are a minor part of an institutional investment. Individuals don’t have the ability to get much advice and a lot of the advice has conflict of interest issues whereas institutions can hire specialists to manage their investments.

The net result is that the average person has a much harder problem managing their finances than a institutional fund manager has in managing theirs. (And institutions do more or less what individuals do, which is to to look up and invest in what are basically mutual funds.)

The other interest point is that for an individuals, *returns don’t matter*. The difference between returns is insignificant compared to transaction fees and taxes, and those need to be the main concerns for an individual.

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