Thanks largely to the internet, managing your own investment portfolio has become more accessible in the last decade.
In this article, I’ll explain the factors to consider when deciding whether it’s a good idea to invest on your own or whether you’d be better off with some degree of help, either with a robo-advisor or full-service advisor.
Managing your own investments may conjure thoughts of picking individual stocks and monitoring the market on a daily basis.
In reality, there’s a huge spectrum of what self-directed investing can mean, from day trading (most active) to putting every investment dollar into a single target date fund (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 with your results. Even a small move toward a more active investing style, such as buying non-index mutual funds, can cost you more money in fees.
Trusted sources, from money expert Clark Howard to famed investor Warren Buffett, recommend sticking to a tried-and-true simple, low-cost, long-term investment strategy.
Here are some reasons why you may consider managing your own investment portfolio.
I’ve heard and read a lot of dismissive statements from financial professionals and media members about the ability of retail investors to handle their own investments.
The truth is that, especially in the first few decades of your career, if you’re already doing a good job managing your day-to-day finances, you probably don’t need help to manage your investments.
If you’re in your 20s or 30s and you’re ready to invest, money expert Clark Howard says you should put your money in a target date fund or in a mix of index funds (a total stock market fund, an international fund and a bond fund).
“Either of those options will give you complete diversification, and you didn’t need anybody to tell you how to do it or what to do,” Clark says. “You just need to put the money to work and do it on automatic pilot every pay period or every month. I mean, it’s all about just putting the money in. You don’t need a paid professional or a service. You just need to do it.”
That simple plan requires spending less money than you make and being disciplined over time. It doesn’t require picking stocks or being an investing genius. However, if you want to take a few chances with a small portion of your investments, there are more online educational resources and commission-free brokerage companies available than ever. The gap between Wall Street and Main Street has closed.
Lots of smart, financially savvy people use robo-advisors or full-service financial advisors. But if you’re willing to make time to educate yourself, you can be emotionally disciplined and you create a sound plan, you can manage your own investments. You may even have fun, make a good return and get satisfaction out of doing it.
If you plan to manage your own investments, Clark has some good advice for you.
Here are some of the biggest benefits to handling your own investments:
Here are some of the challenges of the do-it-yourself approach to investing:
There are two dangers to the idea of investing on your own. You could let it overwhelm you into inaction, getting caught in a circular pattern of searching on Google, reading books and articles and deciding you’re not ready. Or you could jolt into action unprepared, making mistakes that cost you real money.
If you decide against managing your own investments, you can invest through a robo-advisor or hire a financial advisor.
A robo-advisor is an automated investment platform that puts your money into one of several pre-built portfolios based on your age, timeline and risk tolerance. The portfolios typically rely on low-cost ETFs and mutual funds in addition to bonds and other means of diversification.
Good robo-advisors charge an annual fee in the neighborhood of 0.25% plus the expense ratios of the underlying funds, which tend to be less than 0.2%. Robo-advisors aren’t designed to beat the market long term, but they do a nice job of alleviating risk and aiming for steady returns over time.
A financial advisor is a paid professional who gives you financial planning advice and helps manage your money. He or she can serve as a coach, counselor and even concierge at various times.
Good 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’s an unofficial benchmark cost of 1% for financial advisors in 2021. In reality, the price varies widely. But the all-in costs are often slightly more than 1%.
There are financial advisors with several different titles, qualifications and compensation structures, so it’s important to understand how to choose a financial advisor.
Avoiding exorbitant fees is important whether you handle your own investing or you outsource it. Take care to find a reasonably-priced option. Clark’s two recommendations, a target date fund or a blend of low-cost index funds, accomplishes this goal if you’re doing it yourself.
Also, if you do choose to outsource your portfolio, it doesn’t absolve you of responsibility. You still need to avoid making big investment decisions out of emotion. You also need to contribute new money regularly and make healthy choices with your overall finances so that you’re putting enough money aside to retire.
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