Thanks in large part to the internet, managing your own investment portfolio has become more accessible over the past decade.
In this article, I’ll explain the factors to consider when deciding if it’s a good idea to invest on your own or if you would be better off with some degree of help, whether with a robot advisor or a full-service advisor.
What does managing your own investments mean?
Managing your own investments can be akin to individual stock picking and day-to-day market surveillance.
In reality, there is a wide spectrum of what self-directed investing can mean, from day trading (the most active) to investing every dollar invested in a single target date fund (the most passive).
For most people, the passive end of the spectrum is the right choice. The more active you are, the more risk you take and the more variation you can expect in your results. Even a small step towards a more active style of investing, like buying non-index mutual funds, can cost you more in fees.
Reliable sources, from financial expert Clark Howard to famous investor Warren Buffett, recommend sticking with a simple, low-cost, and proven long-term investment strategy.
Should you manage your own investments?
I have heard and read many dismissive statements from financial professionals and members of the media about the ability of retail investors to manage their own investments.
The truth is, especially in the first decades of your career, if you’re already managing your finances well on a daily basis, you probably don’t need help managing your investments.
If you’re in your 20s to 30s and ready to invest, financial expert Clark Howard says you should put your money in a target date fund or a combination of index funds (a total equity fund, a total fund international and a bond fund).
“Either of these options will give you complete diversification, and you didn’t need anyone to tell you how to do it or what to do,” says Clark. “You just need to put the money to work and do it on autopilot every pay period or every month. I mean, it’s just about investing the money. You don’t need a paid professional or service. You just need to do it.
This simple plan requires spending less money than you earn and being disciplined over time. It doesn’t require choosing stocks or being an investment genius. However, if you want to take some risk with a small portion of your investments, there are more online educational resources and commission-free brokerage firms than ever before. The gap between Wall Street and Main Street has closed.
Many smart and financial savvy people use robo-advisers or full-service financial advisers. But if you’re willing to take the time to educate yourself, you can be emotionally disciplined and create a solid plan, you can manage your own investments. You can even have fun, give feedback and get satisfaction.
Do it yourself? Clark’s advice still applies
If you are thinking of managing your own investments, Clark has some great advice for you.
- Build an emergency fund before investing. Clark says you should have some money set aside in a savings account for those unavoidable unforeseen expenses before you put your money into less liquid investments.
- Invest most or all of your money in a target date fund. Choose the year closest to when you plan to retire and invest as much of your investment capital as possible in this fund.
- Low-cost index funds are also good choices. If you really want to grow beyond the target date fund, Clark also likes low cost ETFs and mutual funds that track broad indexes. He recommends a mix of stock, international and bond indices.
- Make regular and automated investment contributions. The investment is not a one-off and immediate action. Get into the habit of automatically investing part of your salary, either every paycheck or every month.
- Increase the amount you contribute over time. Whether you start by setting aside five or ten cents per dollar of income, try increasing that amount by one cent every six months.
- Do not make major moves due to large market fluctuations. It’s so hard to predict when a stock market crash will end. There is a term for that: “trying to catch a falling knife”. It can be just as difficult to predict when a market will stop growing, as a stock’s price often exceeds a company’s underlying fundamentals. Focus on paying your planned amount at regular intervals. As long as you have invested well, there is no reason to sell or buy in volume during market fluctuations.
Benefits of managing your own investments
Here are some of the main benefits of managing your own investments:
- You will pay the least cost. It is the cheapest way to invest. If you choose a good broker, the only fees you will pay are the expense ratios.
- It’s easier than you might think. Managing your own investments isn’t the same as hitting an “easy” button on your desktop. But it can (and for most people, probably should) be simple. It is not as intimidating or silly to consider overseeing your own investment portfolio as some professionals, companies and members of the media claim.
- It can be rewarding if you are successful. The hiking community (those who take the Appalachian Trail, for example) has an interesting way of categorizing fun. There is type A, which is instant gratification and usually involves the senses. Consider eating your favorite ice cream or soaking in a perfectly heated hot tub. Then there is type B, which is deferred gratification. It usually involves hard work, but when you’re done, you’re proud of what you’ve accomplished. Managing your own investments should fall into type B with things like running a marathon and fixing your own car.
- You will be able to choose individual actions. It doesn’t have to be the big mistake that some would have you believe. Fractions of stocks and brokerage houses with a zero account minimum allow you to control the amount of money you invest in a specific asset. If you devote an appropriate percentage of your portfolio to one or more individual stocks, you don’t have to feel guilty.
Disadvantages of managing your own investments
Here are some of the challenges of the do-it-yourself investing approach:
- You will run more risks. You almost always take more risk by managing your own investments rather than paying a robo-advisor or financial advisor to manage them.
- It’s potentially a lot more work. Even if you take a simple approach to managing your portfolio, it will take time, education, vigilance, and discipline. Giving these tasks to someone else can be a great way to avoid stress.
- Emotional discipline is a requirement. Not everyone has the courage to invest for the long term. When you watch your wallet bleed money, whether it’s every minute, every day, or every month, can you sit back, watch and do nothing? Or will you be tempted to sell, which can cause you to miss out on huge market bounces?
- It’s easy to be overconfident. People tend to overestimate their abilities. I did it. You did it. In many cases, it’s not that we can’t do the task, but rather that we haven’t invested the time and effort to unlock our capacity. Chances are, you have the tools you need to manage your own investments. But be sure to educate yourself before you jump into deep investing.
Alternatives to self-directed investing
There are two dangers to the idea of investing on your own. You might let it overwhelm you in inaction, get caught up in a circular pattern of Google searching, reading books and articles and deciding you’re not ready. Or you could take action unprepared, making mistakes that cost you real money.
If you decide not to manage your own investments, you can invest through a robo-advisor or hire a financial advisor.
What is a robot advisor?
A robo-advisor is an automated investment platform that places your money in one of a number of predefined portfolios based on your age, timing, and risk tolerance. Portfolios typically rely on low-cost ETFs and mutual funds in addition to bonds and other means of diversification.
Good robotics advisors charge an annual fee of around 0.25% plus the expense ratios of the underlying funds, which tend to be less than 0.2%. Robo-advisers aren’t designed to beat the market for the long haul, but they do a good job of mitigating risk and aiming for stable returns over time.
What is a financial advisor?
A financial advisor is a paid professional who gives you advice on financial planning and helps you manage your money. He or she can serve as a coach, advisor and even a janitor at various times.
Great financial advisors assess your debts, assets, and goals, then work with you to create a comprehensive financial plan. In addition to managing your investments, they can work on your tax strategy, retirement plan, and more.
There is an unofficial 1% benchmark cost for financial advisors in 2021. In reality, the price varies widely. But the all-inclusive costs are often just over 1%.
There are financial advisers with many different titles, qualifications, and compensation structures, so it’s important to understand how to choose a financial advisor.
It’s important to avoid exorbitant fees, whether you’re managing your own investments or outsourcing them. Take care to find an option at a reasonable price. Clark’s two recommendations, a target date fund or a mix of low-cost index funds, achieve this goal if you do it yourself.
Moreover, if you choose to outsource your portfolio, it does not relieve you of your responsibility. You should always avoid making big investment decisions out of emotion. You should also contribute new money regularly and make healthy choices with your general finances so that you can put enough money aside for retirement.