One million dollars work or trade

I have a friend who says he has the following dilemma. He has one million in cash, owns the house some old cars etc.

Now he says to me, if the average fund manager can't beat a random portfolio. He may as well pay himself a salary instead of asset management fees. and trade the money himself.

All I could say well, alternatively you could buy an ETF and just carry on working?

It just got me thinking, basically what he seems to be saying is if these guys can't beat a few random choices in portfolio selection. He may as well do it himself!

 

What's your friend's expected rate of return? If I was going to invest with myself or someone else, I'd like to see at least a 5 year track record with a minimum return of 15% per year. Who cares what the fees are. All I care about in the end is to get the highest net return with a minimum of risk.

In Canada, we have a company at www.asldirect.com where you can get a lot of your fund fees rebated. I have most investments set up through them which adds about one percent a year. Is there an American equivalent to that company?

 

what makes him think he can beat a random portfolio?

 

he is better to keep his job and buy some ETF.

 

A mutual fund's manager charges a fee of 0.5% to 1.5% per year. On a million $Can that's 5K to 15K $Can per year. Not much of a salary.

A private money manager such as the ones Charles Schwab refers million dollar clients to, charges a fee of 1.5% to 4% per year. On a million $Can that's 15K to 40K $Can per year. You could live on it but not richly.

A hedge fund manager charges a management fee of 2% per year, PLUS an incentive fee equal to 20% of profits. Let's make-believe this hedge fund manager is able to produce 25% returns before fees, each and every year. Thanks to incentive fees, the manager keeps 20% of those returns (5%) and gives the other 80% of the returns to the client. The client therefore makes 18% per year. (20% returns minus 2% management fee). Which is an awfully nice return, net of all fees. The manager made (2% of 1M) plus (20% of 25% of 1M) = 7% of 1M. That's 70K $Can per year. You could live on it but not add to your collection of vintage automobiles.