Over the years we’ve worked with a lot of clients who retained us for “planning only” advice. Some of them were working with a broker or advisor already, but one who didn’t offer robust planning advice. Just as often, though, they were managing their own portfolios as “self-directed” investors.

We build many of these stand-alone financial plans every year. These clients often tell us that they learned a lot, derived great value, and gained peace of mind and confidence from the planning process. However, after our engagement has ended and we’ve delivered a plan summary, we’re often left wondering how successful these clients will be as self-directed investors.

Successful investing is challenging. It requires smarts. It takes time, patience and discipline. It takes diligence. If you’re thinking about managing your own investments, or if you’re already a self-directed investor, we’d strongly encourage you to consider these four questions.

Do I have the aptitude to manage my own investments?

Managing investments is a craft that requires knowledge and skills. People who manage investments professionally are naturally good with math. They have a grasp of economics, and they see how public policy affects investing. They understand concepts of risk and return.

To be a successful investor, you need to have an aptitude for it. It should come to you naturally. You shouldn’t struggle with it. We all have things for which we have an aptitude. The question to ask yourself is, do I have an aptitude for investing? If you don’t, you shouldn’t manage your own investments.

Do I have the time to manage my own investments?

Successfully managing a portfolio of investments takes time. It’s not something you do once, set aside and move on to other things in life. Successful investors are engaged. The world of investing is dynamic and the only way to be in tune with it is to stay close to it.

Investing is also more than a hobby. Some people think that they can approach investing as they would other interests they have, such as reading, watching movies, listening to music, and gardening. While these pursuits can be very enjoyable, they’re not nearly as demanding as investing.

If you’re working, do you have the time to invest? If you’re caring for others – like kids or parents – do you have the time to invest? If you’re retired, but busier now than you were when you working, do you have the time to invest? If you don’t have time to focus on investing, you shouldn’t manage your own investments.

Will I enjoy managing my own investments?

Have you noticed that you tend to avoid the things in life that you don’t enjoy? If you don’t enjoy yardwork, you probably avoid it. If you don’t like maintaining your car, you probably don’t do it. If you don’t like preparing your tax return, you probably don’t do it.

If you don’t enjoy doing something that’s important, you have a few choices. You can buckle down and just do it anyway. Alternatively, you can hire someone to do it for you. It goes without saying that hiring someone is almost always the better choice. Yes, it will cost something – professionals don’t work for free. But it will save you from doing something you don’t enjoy and, invariably, the results will be better, because you hired an expert.

Investing isn’t for everyone. Professional investors enjoy it, even though most people don’t. Do you know enough about investing to know whether you’ll enjoy it? If you’re not sure you’ll enjoy it, you shouldn’t manage your own investments.

Can you manage your emotions when the stock market crashes?

How do you react when the stock market pulls back (a 5% decline), corrects (a 10% decline) or, worse, enters a bear market (a 20% or more decline)? Do you remember how you felt, and what you did, during the Great Recession (2007-09) when US stocks declined by over 50%? How did you react in the spring of 2020, when the COVID-19 pandemic hit and the stock market suffered its steepest and fastest drop (34% in less than one month) in history?

Successful investors manage their emotions. They’re not swayed by events and circumstances that may cause others to feel greedy, anxious or fearful. They remain level-headed, and recognize that investing is a marathon and not a sprint. Market storms invariably pass, and successful long-term investors ride them out.

How well do you manage your emotions? How about when it comes to your own investments? If you find yourself compelled to “do something” when the stock market is unsettled, you shouldn’t manage your own investments.

Should I manage my own investments?

Now, if you answered “yes” to all of these questions, you might consider managing your own portfolio. But, if you answered “no” to any of these questions, you shouldn’t. Instead, you should hire a professional. Your investment advisor will have aptitude for investing, will have the time to focus on your investments, will enjoy serving you and will remain calm and even-keeled at times of market uncertainty. This will allow you to spend more time doing things you enjoy and are good at.

Costs, Performance and Net Returns

If you’re concerned that hiring a professional investment advisor will cost too much, please think about this. DALBAR, a leading market research firm, has studied investor behavior for decades. Their studies consistently show that the average investor under-performs the market (as measured by the S&P 500 index). For example, during the 20 years ending December 31, 2019, the average stock mutual fund investor earned an annualized market return of 4.25%, while the S&P 500 Index averaged 6.06% a year – an under-performance gap of 1.81%. More recently, in the first half of 2021, the average stock mutual fund investor earned 13.14%, while the S&P 500 index earned 15.25% – an under-performance gap of 2.11%.

Investors typically pay about 1% per year to an investment advisor for portfolio management. So, if the advisor can generate a return that’s approximately equal to the market, the average investor will be better off, even after accounting for the advisor’s fee.

In addition, a professional advisor should be able to improve your portfolio’s performance through proper asset allocation, strategic asset location, cost control and tax management.

Final Thought

In the movie, Magnum Force, “Dirty” Harry Callahan, played by Clint Eastwood, says, “A man’s got to know his limitations.” Well, we all know need to know our limitations. If you know yours, and know you shouldn’t be managing your investments, hire a qualified investment professional.

Hiring an Investment Adviser

If you need to hire an investment advisor, consider working with a Certified Financial Planner™ (CFP®) or a Chartered Financial Analyst (CFA). Advisors who hold these designations had to meet rigorous educational, experience and ethics requirements.

If you’re looking for help with investment management, contact us today to see how our team at Springwater Wealth can help you.