The case for self-directed investing.
In the complex and often intimidating world of personal finance, the idea of DIY investing can seem daunting, a realm reserved for seasoned experts and Wall Street wizards. But for many, especially those looking to build long-term wealth, the traditional model of a financial advisor can sometimes fall short. There are specific, and surprisingly common, scenarios where taking the reins of your own index fund investments can not only be a viable alternative but a superior path, offering greater control, lower costs, and a more direct route to your financial goals.
1. You want to avoid the high fees of financial advisors.
Many financial advisors charge a percentage of your assets under management, which can be as high as 1-2% a year. While this may not seem like much, over a 30-year investment horizon, these fees can eat up a significant portion of your returns, sometimes thousands of dollars a year. DIY investing in low-cost index funds means you keep more of your money working for you.
By choosing to invest in low-cost index funds on your own, you can drastically reduce the fees you pay, which can lead to a much larger nest egg over time. This is a simple but powerful way to supercharge your wealth-building journey.
2. You’re comfortable with a simple, long-term investment strategy.
For many people, the best investment strategy is a simple one: buy and hold a diversified portfolio of low-cost index funds. If you’re comfortable with this approach and you have a long-term time horizon, a financial advisor may be more than you need. A DIY approach allows you to implement this strategy without the added cost of a professional.
Index funds are designed to be passive, requiring very little maintenance or rebalancing. If you understand this basic principle, you are more than capable of managing this type of portfolio on your own.
3. You believe in the power of compound interest.
The magic of compound interest is a simple but powerful concept. By investing your money and letting it grow over time, you can create significant wealth. A DIY approach, with its low fees, allows more of your money to compound, making it a more effective strategy in the long run.
When you’re not paying high fees to a financial advisor, every dollar you invest has more power to grow and multiply. This is the simple math behind why a DIY approach can outperform a more expensive, professionally managed portfolio over time.
4. You don’t need hand-holding or emotional support.
A good financial advisor can provide emotional support during a volatile market, preventing you from making rash decisions. But if you’re a disciplined and patient investor who can stay the course during a downturn, you may not need that added layer of emotional hand-holding.
For many, the best defense against market volatility is a long-term perspective and a strong belief in the underlying assets. If you have this mindset, you can save a significant amount of money by managing your own investments.
5. You have a desire to learn and be in control of your finances.
DIY investing is a great way to learn about personal finance and take control of your financial future. The process of setting up your own accounts and choosing your own investments can be incredibly empowering and educational. It gives you a deeper understanding of where your money is going and why.
For those who are naturally curious and have a desire to be more engaged with their money, a DIY approach can be a more rewarding experience. It turns investing from a passive, hands-off process into an active, empowering one.
6. You want to avoid the potential for conflicts of interest.
While most financial advisors are ethical, there can be a potential for conflicts of interest, especially if they are compensated based on the products they sell. DIY investing eliminates this conflict entirely, as you are the only one making decisions for your portfolio.
This gives you a sense of security and trust in your own decisions, knowing that every choice is made with your best interest at heart. It’s a way to ensure that your financial plan is purely about what’s best for you.
7. Your investment goals are straightforward and easy to define.
If your financial goals are simple—for example, saving for retirement in a low-cost index fund—a financial advisor may be an unnecessary expense. DIY investing is perfect for a simple, straightforward investment strategy that doesn’t require a lot of complexity or nuance.
A financial advisor is most useful for complex financial situations, such as estate planning or managing a high-net-worth portfolio. For a simple, long-term plan, a DIY approach is often the most efficient and cost-effective option.
8. You want the flexibility to make changes quickly.
When you’re managing your own investments, you have the flexibility to make changes to your portfolio quickly and on your own terms. You don’t have to wait for an appointment with an advisor or go through a series of meetings to make a simple change to your asset allocation.
This can be a significant advantage in a fast-paced world, allowing you to be more responsive to your own life changes and financial needs. It’s a level of control and autonomy that you just can’t get with a traditional advisor.
9. Your investment portfolio is below a certain threshold.
For smaller portfolios, the fees of a financial advisor can be a significant percentage of your assets, making a DIY approach far more cost-effective. Many advisors require a minimum account balance, and if you’re not at that level, you may not even have access to their services.
DIY investing allows you to get started with a small amount of money and build your portfolio over time without the burden of high fees. It’s a more accessible and equitable way to begin your wealth-building journey.
10. You have access to a 401(k) or similar retirement plan.
Many people have access to a 401(k) or similar retirement plan through their employer, and these plans often offer a selection of low-cost index funds. In this scenario, managing your own investments within the plan is often the most cost-effective and efficient way to save for retirement.
You can set up your contributions, choose your funds, and rebalance your portfolio all within the plan’s interface. This DIY approach is a great way to take advantage of your employer’s retirement benefits without incurring additional fees.
11. You are disciplined enough to stay the course during a downturn.
A key part of successful investing is staying disciplined and not selling your assets during a market downturn. If you have the emotional fortitude and a long-term perspective to weather these storms, a financial advisor may be an unnecessary expense.
For those who are prone to panic selling, an advisor can be a valuable tool. But if you have the discipline to trust in your long-term plan, you can save a significant amount of money by managing your own investments.
12. You have a low-maintenance, set-it-and-forget-it personality.
A set-it-and-forget-it approach to investing is often the best strategy for building long-term wealth. If you have this personality type, a DIY approach with low-cost index funds is perfect for you. You can set up your investments and check in on them only periodically, saving you a lot of time and money.
A financial advisor might be more inclined to make changes and adjust your portfolio more frequently, which can sometimes lead to more fees and a less-optimal long-term outcome. A passive, hands-off approach is often the most effective.