How much stock do you put into the expression “if you want something done right, do it yourself?” And how much stock do you put into that expression when it comes to investing?
Becoming a do-it-yourself (DIY) investor can be either exciting or frightening, depending on how much you love riding roller coasters without seatbelts.
Blame the world wide web. All this information available at our fingertips has made it easier than ever to do due diligence and make educated decisions—as long as the information you’re getting is actually factual and and applicable.
Pros of DIY Investing
At first glance, DIY investing can seem rather attractive and doable. Here are some of the pros:
• Lower fees. A DIY investor, over the course of years or even decades, can save thousands of dollars in fees paid to financial advisors and institutions. Fees paid to an advisor could result in less money for you and your life plan.
• Unlimited choice. These days, regular civilians can purchase many of the same financial products that used to be the exclusive territory of financial professionals: exchange traded funds (ETFs), stocks, bonds, and more. The availability of low-cost brokerage firms has removed much of the need to hire a professional to do it for you.
• Knowing your own risk limit. You know when you’ve had enough, or when you’re hankering for more. You can stop and start without having to communicate your wishes to a professional advisor. No drama, no fighting. This can also backfire, however, as you may not have a steady hand to guide you through difficult periods.
Cons of DIY Investing
However, even if you’re gonzo and fearless, going it alone without knowing all the facts can slow down the reaching of your ultimate financial goals.
The litmus test for DIY investing: risk. It will be there, no matter if you invest on your own or team up with a professional advisor. It’s important to know how much risk you can tolerate, and choose investments based on that knowledge.
Investments that carry greater risk have the potential to produce greater reward, but there’s also a much higher risk of loss.
Ask yourself: how would you truly cope with this reality? We often think we can stomach risk until the market crashes, so it’s important to be honest with yourself. Panic selling has the potential to derail long-term goals.
Another element of risk is the ability to sit on your investment for the long term without giving in to the itch to sell it or cash it in. When you let your investment alone so that it can grow (and experience any growing pains that go along with that strategy), the money compounds.
That means that even your earnings earn earnings. And the sooner you start, the more time you will have to watch the magic happen.
If you’re not as risk-happy, you can attempt to reduce your risk through diversification. That’s when you spread your money across different asset classes and types.
You’ll place your eggs in different baskets, such as stocks, bonds, mutual funds, and real estate. The hope is that if one part of your portfolio is experiencing losses, other parts might be going the other way.
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Will You Be More Successful with DIY Investing?
So when it comes to DIY investing, can you confidently say, “I got this?” Like many things in life, it’s easier said than done; try repairing your own car or diagnosing a health concern with 100% accuracy. When is the last time you repaired your own laptop with hunches?
Forbes asks you to ask yourself five questions before going it alone:
• How complicated are your finances? If you’re young and single and just starting out, you may be able to stomach more risk. Maybe perhaps not so much if you are getting married, starting a family, or about to retire.
• How much money do you have to invest? You’ve heard the expression “with great power comes great responsibility.” That can be applied here. When your portfolio starts to grow, you may need to get super-responsible and get some professional guidance if your needs become more complex than you can handle on your own.
• Do you need comprehensive financial planning? Even with all the information available to you on the Internet—especially with all that information available to you—you may need somebody to help you navigate through all the bull and “fake news” in order to work exclusively with the truth. And good, solid, practical advice may need to be presented to you; you may not always find it on your own.
• What are your expectations? You know that most people, even the most professional and seasoned investors, cannot consistently beat the market, right? Right? True investing success can only be achieved with a long-term strategy and mindset. That may involve a few losses and disappointments along the way. As long as you know that, you’re golden.
• What is your level of sophistication and interest? How ready are you to spend hours of your life researching companies, reading annual reports, video-conferencing quarterly meetings, listening to podcasts, and teaching yourself how not to second guess? How many hours can you spare at your laptop and on investment sites? How much time can you dedicate to living and breathing this?
Even the most seasoned and savvy DIY investors may be influenced by outside factors. Kiplinger lists five of them to consider before going the DIY route:
• Can you keep your emotions out of it? How good are you at avoiding panic? How unflappable are you? How good are you at not needing anyone to hash out decisions with?
• Do you have the time? How long before your brain shuts off for the day, or you start thinking about dinner or basketball? How much time will your job allow for you to dedicate to total investment focus?
• You may not be as smart as you think you are. You don’t know what you don’t know. And there is probably a lot you don’t know (yet), regarding good, solid investment strategies, smart shortcuts, tax savings, and other useful investment secrets still to be uncovered.
• Every quarterback needs a coach. Here’s another expression that applies: “it takes a village.” Often, an experienced investor can hip you to advice, tips and answers that may have never occurred to you. Attorneys, tax experts and insurance professionals are going to know more that you. They just are. And in turn, listening to them will help you know more.
• It’s only going to get more complicated. “Mo’ money, mo’ problems” (thought we were finished with the expressions?). There will come a time (in fact, many times) in your investment journey where you have to reconfigure, reconsider and realign, possibly when you don’t realize that the time has come. You may need someone to tap you on the shoulder and give you a heads up that it’s time.
The Financial Times , a source that deals in investing 24/7, is not feeling the DIY strategy. In fact, it found a quote to sum up its opinion: “A wise man once said: ‘The man who is his own lawyer has a fool for a client.’ So is it advisable, or even possible, to be your own investment manager?”
The publication points out that one of the major roadblocks to successful investing is paying someone who tells you to do nothing, even though “that is often wise council.”
Permit us to add in a few more cons that you should be aware of before taking any bold DIY investor steps: hidden fees, overlooked tax savings and deductions (as well as tax errors that can be easily made).
Before you go it alone, consider a no-obligation conversation with a SoFi financial planner. We’ll listen to you and help you map out a plan that follows your lifetime financial goals: retirement, starting a family, buying a home or a car, and even career and salary advice.
Let us emphasize that these are real-life, human advisors who can provide personalized advice based on your own financial situation.
If you choose to not go it alone, SoFi offers an automated investing approach that does the heavy lifting for you. Through this approach, you’ll be invested in a diversified portfolio, which attempts to minimize your risks and set you up for the long haul. We’ll actively manage passive investments and automatically rebalance your investments to keep you on track.
Open an account with SoFi Invest and let us help you put your money to work. You’ll pay no SoFi management fees and you’ll get unlimited access to our financial advisors at no charge.
All it takes is opening an account or making an appointment with an advisor and—boom—you are no longer all alone in this game. You’ll have a team behind you.
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