Is DIY investing the right thing for your investment journey? Last week we wrote about what to consider when deciding whether you can do investing without using a professional.
With the increased amount of content online and inexpensive brokerage firms, it’s not hard to see why one would choose DIY investing. So, if this is the route you are choosing, do you know how to go about it?
DIY Investing: How To Go About It
1. Learning About Investing
- asset allocation
- portfolio diversification
- issues that affect your investment’s return, and
- the management of your portfolio
With DIY investing, you will be relying heavily on brokerage firms, Robo advisors, and other online investment tools. Therefore, it’s important that you know what to look for to ensure that you settle for the best firms to work with and avoid being scammed.
Interesting read: Stop Falling For Investment Scams: Scam Types & Telltales
2. What’s Your Current Financial Situation
You also need to think about your present financial situation. For instance, how much income do you have at your disposal after paying for your expenses? Do you have an emergency fund? What’s your debt status? So, do a Financial Checkup: Take Stock of Your Financial Health
For starters, how much money you have after expenses will determine what portion goes into savings, debt management, and investing. Second, you can’t put all your money in investment accounts if you don’t have an emergency fund.
What happens when you have an unexpected expense? Will you start selling your assets? Also, you can’t ignore your debts and put all your money into investing. Your loans will start accumulating interests, penalties and fines, putting your financial status in a worse situation.
Related post: What to Consider Before Making Investment Decisions
3. Setting Your Investment Objectives
Now that you understand what investing is, the next step is to develop your objectives. Why are you investing? To answer this question, you need to list down the below:
- Expected return
- Your willingness to take risk
- Risk tolerance levels
- Financial needs
- Investment horizon – how many months or years can you last without the need to liquidate the asset?
- Financial goals – have a list of your short, mid, and long-term goals
By answering the above, you will have an easier time choosing the best investment assets and strategies.
4. Developing Your Investment Plan
The third step is to develop an investment plan that acts as your guide. Whenever you are veering off course, you can always refer to it for guidance. Your investment plan needs to include:
- The type of asset/s you are investing in
- Asset allocation – how much of each asset to have in your portfolio in percentage
- How much you will invest every month
- Your investment strategy. Should you invest passively or actively? Are you a growth or value investor?
- When to change your portfolio
- An exit plan – when to sell your assets (helps in preventing the use of emotions)
5. Implementing and Monitoring
Once you have everything set, you can now start investing. Use your plan to implement your investing journey. But, this is not something that you do and forget about it. You have to monitor your portfolio and make the necessary changes when needed.
The Pros and Cons of DIY Investing
DIY investing will save you some coins from management fees and other professional charges a wealth advisor would charge. In return, this will affect your net return.
Keep in mind that when using an investment firm, the management charges affect the return of your investment. So, the higher the fees, the lower your return. With DIY investing, you do not have to pay these management fees because you are getting rid of the middlemen.
That said, if you go about trading your assets now and then, you’ll be increasing your transaction costs. These, of course, will lower your net return.
2. Avoid Professional Biases
Unfortunately, professionals can be biased and tend to push for some investment products. For example, some will want you to invest in risker assets because of the higher returns that might earn them more commission.
Others might use a one-size-suits-all strategy or use popular investment products rather than customizing your investment strategy and plan to suit your specific needs. With DIY investing, you can avoid biases and filter what you receive to what you need and want.
3. You Are in Control
If you like to control every aspect of your financial life, you don’t have to stop at DIY financial planning. DIY investing will also put you in control of your investing journey. You get to choose what assets to invest in, when to sell or buy and make changes as you wish without consulting anyone.
The Cons of DIY Investing
Just because you can invest on your own doesn’t mean the process doesn’t have its drawback.
1. Complicated and Demanding Process
For starters, the whole process of investing and investment management is complicated and pretty demanding. That’s why professionals have to meet several qualifications for the job.
Unless you have the educational background and professional experience in finance and investments, the whole process will be overwhelming for you. First, you need a lot of time on your hands to do the necessary research regarding investment assets, strategies, and the companies you are investing in.
Second, you need to know and understand how to manage your portfolio. You will also require time to ensure that you do not mess this up. Third, you must keep up with the happenings of the market.
Let’s say you learn about investing, can pick your assets, and keep up with the trends and news. What about mismanagement? Will you let your emotions get in the way of your investment plan? Will you remember to factor risks in your investment plan? Are you ready to always stick to your investment plan? Sadly, most DIY investors fail at this. The cost is higher than one would have to endure if they paid a professional to manage their investments.
3. Lack of Professional Advice and Skill
There’s a reason why even the most sophisticated millionaire investors have a team of professional advisors on their side. It’s for the same reason a doctor doesn’t treat themself.
Working with wealth advisors means you benefit from their years of training and experience. They can advise you better on the best assets, investment strategies and ensure your emotions don’t get in the way. Most importantly, they will implement tax strategies that save you on taxes legally.
If you are doing DIY investing, it helps to have a concrete plan instead of going at it blindly. Think of it as your roadmap to investing, just like you have a roadmap for your financial success. Be as detailed as possible in your investment plan. I’d also recommend that you still talk to a financial advisor or wealth manager. They might not be in charge of your investing, but they can provide you with valuable pointers. Most importantly, be disciplined and keep your emotions in check. All the best!