I’m often asked if you should be a do-it-yourself investor or hire someone to give guidance. My answer is always the same: it depends.
If you’re a DIY investor, how much time and effort are you willing to put into managing your money?
There’s a cost to managing your money no matter how you do it. Even for a DYI investor, the time you invest into managing your money is a cost. You can pay that cost with your time, you can hire someone to do it for you and pay them or you can do a combination of both.
It’s your money and no one should care more about how it’s managed than you do. But your time is valuable, and many people don’t have the willingness or knowledge to tackle the task on their own.
If you decide not to go it alone, shop around for an investment adviser or – better yet – a Certified Financial Planner (CFP) who you’re comfortable dealing with.
Many DIY investors don’t put in enough effort to manage their own money properly and would be much better off paying someone to manage it for them.
Many DIY Investors make short-term mistakes, like selling out at or near the bottom of the market, or buying in at or near the top. As well, they often buy an investment based on recent performance and don’t fully consider the future potential.
If you’re going the DIY route, you should put in effort consistent with the amount of money you’re dealing with and how it should be managed.
Say you have an investment portfolio of $100,000, and you expect that portfolio to make you five percent a year or $5,000. You should be willing to put in at least the equivalent of 20 percent of that in your time ($1,000 in working hours), if not more, to make sure your money is invested properly and working as hard for you as you did for it. If you paid yourself $25 an hour, that means you should put in at least 40 hours a year towards looking after that investment portfolio. As your portfolio grows, you need to invest more time into managing it.
If you’re willing to spend the necessary time each month, then the DIY approach can serve you well – if you put in the time to learn and manage your money to a professional standard.
If you want to have very little to do with your investments, then you need to find a manager, investment adviser or CFP to look after it for you.
Many DIY investors fall for a hot new stock tip or get caught up in the “But it’s different this time” approach. Avoiding this and investing a well-diversified portfolio will help it out-preform an index over time.
I’m not a fan of hot tips or gambling with my hard-earned money, and speculative investing is gambling. In a speculative venture, put in whatever amount you’re willing to lose. If it grows above the amount you’re willing to lose, take out the profits and place that amount in something safer. This can cause regret if the investment keeps rising, but it forces discipline and keeps your long-term capital safe.
For example, if you invest $500 and it turns into $5,000, pull out $2,500 to $4,000 and leave the balance invested. Should the remaining balance grow 10-fold again, don’t regret protecting the first part of your profit, just as you shouldn’t regret if the investment went to $0 after your sale. Be disciplined enough to take some profits off the table and protect them.
Being thorough and prudent is the only sure way to make DIY investing pay over the long haul.
Bill Green is an hourly financial and estate planner, public speaker and author of The Success Tax Shuffle.