One of the first questions when starting investing is to figure out whether you should manage your own portfolio or let a professional do it.
There are pros and cons to both approaches.
Of course, there are endless opportunities and ways to construct a portfolio. For the sake of simplicity, this article focuses on individual stocks and funds.
Key Takeaways
- Learning to invest takes time, interest, and effort. If you have none of those, it’s best to let someone else help you.
- When you do things yourself, you pay fewer fees.
- By learning to invest, you learn a great deal about the markets, economy, and yourself.
- The do-it-yourself approach takes time and comes with a risk of making bad decisions.
When Should You Manage Your Own Portfolio?
As with everything worthwhile in life, portfolio management will also take time and require a certain amount of effort.
If you decide to do it yourself, you need to be sure you have the time and the willingness to do your homework.
In general, most of us invest in stocks by owning individual companies or buying funds. As the approaches are somewhat different, it’s best to address them separately.
Individual stocks
When investing in individual stocks and building an investment portfolio, you have to be interested in the markets and in analyzing different companies.
If you’d like to get wealthy by owning great companies but don’t want to do the work, you’re probably header for a financial fall.
You also need time to follow the companies you own. Now, I’m not saying you need to get your hands on every ripple of information out there, but you should have time to read quarterly and annual reports.
It’s worth remembering that individual stocks are riskier than funds, so you also need to have a higher risk tolerance.
Although there are no simple rules to investing, there are some things that every stock investor should know.
If you don’t have the time or the inclination to analyze and follow different companies, you can always invest in index funds or mutual funds.
Funds
When you invest in individual companies you mostly deal with firm-specific factors. In fund investing, you don’t need to worry about singular companies.
What you do need to do is to internalize the concepts of compound interest and consistent, long-term investing.
There’s usually not much sense in chasing short-term returns and jumping in and out of different funds. The best results are achieved with regular and long-term investing.
Before investing in funds, you should have a general knowledge of how different funds work. Whatever you invest in, it’s important to know what you’re putting your money into.
You also need to figure out what types of funds suit you best. There’s a myriad of different types of funds, and it may be a daunting task for a beginner investor to decide which ones to invest in.
The rule of thumb is that index funds are usually low cost and mutual funds a little bit more expensive because they have a chance of beating the index.
Although investing in funds is generally less risky than investing in individual stocks, there are some common mistakes in regular fund investing to avoid.
Pros of Managing Your Own Portfolio
So, if you feel like you want to do things yourself, there are quite a few benefits to doing it.
You’re in Control
First and foremost, you have complete control over your investments. No one is forcing you to buy or sell anything, which gives you quite an advantage over professional fund managers.
Another thing is that you can define your risk level in any way you want to. If have a higher risk tolerance and want to have a more focused portfolio, nothing is stopping you.
You can decide your own investment strategy, asset allocation and the exact amount of money you want to invest.
In essence, you can do whatever you wish in the stock market, which can be quite exhilarating.
Fewer Fees
Usually, when you’re in charge of your portfolio management, you pay less. This is also true in investing. When you make your own trades, you generally only pay transaction fees.
There’s no need to pay operating fees since you’re the one doing the work.
Now, you may think that one or two percent is not that much, but when you invest for a lifetime, the expenses really start to add up.
Live and Learn
Also, one major aspect of investing is often overlooked, and that is learning.
When you study the stock market and different companies, you gain knowledge and learn new skills. The more you know, the more independent you are.
If you know how to accumulate wealth, you have one of the most useful skills a person can have.
Usually, you don’t learn much when you let someone else take control of your finances, which makes you quite dependent on others.
What really gives you freedom is knowledge, and you learn by doing.
Cons of Managing Your Own Portfolio
The Risk of Making a Mess
The biggest downside of the do-it-yourself approach is the risk of botching it up.
Investing is not the most difficult thing in the world, but it certainly isn’t the easiest either. There are some basic skills that every investor should have.
Acquiring a skill requires time and effort. In the end, investing is a skill like any other. If you don’t put in the work, you most likely won’t achieve the results you’re after.
Of course, no matter how skilled you are, you can still make foolish decisions. The point is that the more you know, the less likely you will make a really bad decision.
Take(s) Your Time
Learning financial skills and managing your investments also takes a bit of time.
Sometimes we just don’t have the time or the energy to study new things. It’s also safe to say that most people aren’t interested enough to spend their time studying investing and economics. That’s okay too, it’s the reason why we have professionals that can do it for you.
The important thing is to consider whether you have the time to learn the necessary skills or not.
The most convenient approach might be to pick a low cost, broadly diversified index fund and just invest regularly. Of course, this too requires some amount of time and knowledge, so nothing is completely free.
If you feel like you have enough on your plate and the whole idea of building an investment portfolio stresses you out, it’s better to let someone else do it.
With Great Power Comes Great Responsibility
This one can be a good and a bad thing. When you do something yourself, you’re the one responsible which, as mentioned before, gives you complete control.
The downside is that when you’re not using professional services, you’re on your own. There’s no professional to support you or give you advice.
Sometimes it’s useful to have a second opinion. For example, no real financial advisor would recommend putting all your assets in cryptocurrencies or whatever is being hyped at that moment.
A part of being a financial advisor is to prevent a client from making a serious mistake. When you manage your portfolio on your own, there’s no one telling you what you should or shouldn’t do.
Summary
So, if you are interested in the markets and have the time to develop your skills, you should definitely do it yourself.
By managing your own portfolio, you have complete control over your investments, learn a lot of new skills, and avoid paying expensive fees.
If you let a professional handle it, you pay for the convenience. You don’t learn anything new but have the freedom to spend your time doing something you actually like doing.
It’s important to realize that you can let someone else manage a part of your portfolio and manage a part of it yourself. The two aren’t mutually exclusive.
If you’re doing things yourself and feel like you’re not achieving your financial goals, you can always outsource your portfolio management to a professional and vice versa.
