Becoming a DIY investor might help you become a better investor. It should certainly help you understand if financial advice is really worth paying for. Here I’ll discuss what it takes to be a DIY investor and why you should consider this path.
You save money
Perhaps the most important reason to be a DIY investor is to save money. Financial advice is expensive. It is foolish to mow your own lawn, clean your own house, and work on your own car to save money and then turn around and pay thousands of dollars per year to have your money managed by someone who is mostly doing things you can do yourself with minimal effort and time.
How much can advice cost you? If you save $80,000 per year for retirement for 30 years and pay 1% of your assets to advisors each year, by the time you retire, your portfolio will be $1.5 million smaller ($7.5 million vs $9 million) than if you had managed it yourself. What did your advisor really do for $1.5 million dollars? Not a lot I’ll wager. Worse, most of the performance of your portfolio will be driven by the stock market, and you can invest across the whole stock market and capture those returns for essentially $0 if you buy total market funds at of the large brokers such as Vanguard, Fidelity or Schwab.
If you can learn to be your own investment manager, you can make up to $1.5 million worth of mistakes and still come out ahead! If you want to see how the effects of advistor fees compound over time, I wrote a nifty interactive calculator to show you.
It’s an enjoyable hobby
I think DIY investing is fun. If you want to make a success of it, it’s something you’ll need to enjoy as well, since this is a long game played over many decades. If you detest it, you may want to rethink doing this on your own because you are unlikely to learn as much as you need to learn and unlikely to pay as much attention to it as you should.
You have more control
No advisor cares about your money as much as you do. Doing it yourself eliminates the risk of some advisor ripping you off. Remember, their interests are often only casually aligned with yours; they want to profit from you first, and perhaps help you second.
Start slowly
Managing your own money is easiest if you start doing it at the very beginning when your financial life tends to be pretty simple. Your taxes are easy and your portfolio might only be in the low four or five figures. Mistakes made on a portfolio that small are relatively inexpensive.
You don’t have to fire your advisor the day you decide to be a DIY investor. You can manage a portion of your money on your own, perhaps just your Roth IRA or 401(k), and see how much you like it. You should find it to be easy so then you can quickly move onto doing everything yourself. Just don’t be tempted to rashly invest in crypto or some other fad investment of the moment until you are really sure you know what you are doing.
Choose a simple asset allocation
Once you’ve decided to become a DIY investor, you need to put your money into some investments. Your goal should be to beat inflation by a few percentage points, so you will need to invest somewhat aggressively. That means most of your money should be invested in risky assets like stocks or real estate. The exact percentages don’t matter all that much, but the higher you feel comfortable with, generally the better long term. You want something low-cost, diversified, and with an appropriate level of risk—high enough that it will reach your goals and low enough that you can tolerate the volatility. There are hundreds of reasonable asset allocations. Pick one you like, write it down, and stick with it.
Don’t know how to pick an asset allocation? Some people follow the rule of thumb of investing (120 - age)% in stocks, e.g. if you are 30, your portfolio should be 90% stocks. If you want some suggestions of portfolios you might use, I have a page for that very purpose.
Just keep swimming
Some people don’t like the idea of risky assets such as stocks, but for most of us you have no choice and you MUST invest in assets with some risk. Risk free assets simply don’t pay enough to reach any kind of reasonable financial goal. If you stick with bonds and CDs you might need to save 50% or more of your gross income every year for retirement. That’s just not an option for a lot of people. You need to take investment risk.
I love it when a plan comes together
Once you have a target asset allocation, it becomes relatively easy to implement and maintain the plan. Pick a low cost brokerage such as Vanguard, Fidelity, or Schwab, and open an account and start buying low cost mutual funds or ETFs. You should take advantage of any tax-advantaged accounts available to you. If you put $20,500 into a 401(k) each year, and $6,000 for you and $6,000 for your spouse into Roth IRAs, that’s a total of $32,500 in tax advantaged space for a start.
- Stay the course.
- Maintain the plan and make the required contributions each year, rebalancing the account as periodically as necessary, usually with new purchases.
- Stick with the plan through thick and thin over decades regardless of market conditions.
Are you a DIY investor? How did you come up with your investing plan?