Having worked as a financial advisor, I have encountered people who just don’t understand basic money management. So paying for financial advice makes a lot of sense. However, there are more tools available for the do-it-yourself investor than ever before. All of the online trading firms offer an array of charts, quotes, research and educational materials.
So, is there anything wrong with do-it-yourself investing? No, of course there isn’t. I don’t knock anyone who invests without the guidance and expertise of an experienced professional. Here are just a few of the reasons why:
- There are more “age-based” portfolio products also known as target-date mutual funds and index funds. These funds of funds can plot out an investment course over a lifetime which is close to having your portfolio on autopilot.
- We also have the rise of the robo-advisors. These highly advanced computer programs armed with algorithms, data, and speedy processing power can offer you advice on investments and planning. Major financial services firms that have built reputations to help do-it-yourself investors have invested great sums of money into these.
- The majority of financial advisors are commissioned based. It is difficult to find good advisers willing to look after small investment accounts. Plus investment products that they sell you can have hidden fees that you make or may not be aware of.
Now, before you quit your day job, do you have what it takes to be a DIY investor? Here are some of the factors you may want to consider when deciding whether or not to employ the help of a financial services professional or go it alone. This is by no means an exhaustive list, but I’ve identified 7 factors I think should rise to the top before making the decision.
1. Investing takes time
- Will you make time to reassess your personal financial situation , after your honeymoon, after the birth of a child, upon your retirement, upon a divorce or even after the death of a loved one?
- Will you make time to take steps to start adjusting your investment portfolio ahead of major life changing events the way you’re supposed to?
- Will you make time to follow-up on each individual investment in your portfolio? To check recent news? To rebalance your account?
- Do you have the discipline to do the research to pick and choose, buy and sell and follow?
- Were you one of the ones who didn’t open your brokerage or 401(k) statement in 2001 or in 2008?
- Did you bail out of every investment and convert to cash at the market bottom in 2009?
- Did you forget how to be a long-term investor?
- Do you tend to overreact to stressful situations?
- Did you buy that stock when it came down in price, just like you said you would the last time you checked out the quote?
- Are you afraid of making a mistake and unwilling to take a lost?
4. Risk management
- Do you have a strategy, or do you kind of go with whatever is working or being touted on TV or in a newsletter?
- Mistakes happen. Every investor, including Warren Buffett, makes investment mistakes along the way. But how you handle them and what you learn from them are much more important. Mistakes are unavoidable when it comes to investing.
- Have you taken proper steps like diversification to help mitigate costly mistakes, which is what risk management is all about?
- We all start out as novices so are you willing to learn by taking courses, reading investment books, financial newspapers ….?
- Do you have any peers or a mentor that will share investment mistakes with you.?
- Have you worked with people who have lived through various markets and economic downturns? Can you learn which strategies they used to get them through the tough times?
6. Staying current
- Are you a news junkie?
- Do you follow economic stats?
- Are you up to date on Federal Reserve policy?
- Do you follow politics?
- Do you keep up with foreign events?
7. Sweating the details or thriving on them
- Has your portfolio grown in value? Would a mistake be more costly as a result?
- Are you aware of holding periods regarding capital gains treatment?
- Are you taking undue risk in trying to juice your passive income in this low-interest-rate environment?
- Do you know which assets are best in a retirement account and which are best in a regular taxable account?
After you think deeply about the seven factors above, you may conclude you are strictly a do-it-yourself investor or find you need the help of a professional or decide that you are somewhere in between. That’s okay, we are in an era of choices and that’s the way it should be.
Here’s the key. Investing is not an easy thing to do successfully. Bear markets make all of us look like unsuccessful investors while they last. This is often when investors walk away from the market. Make sure you have a strategy that includes the possibility of losing money, the certainty of corrections and bear markets.