Many people wonder whether or not hiring a financial advisor to manage their investments is right for them. The truth is that many people handle their investment management on their own for the length of their lives. However, taking the DIY route can have some negative implications on your financial life in the long term.
If you want to know whether you’re ready to manage your own investments, you can start by asking yourself three questions.
Do You Have The Expertise?
A successful investment portfolio needs to be low-cost, globally diversified, and occasionally rebalanced to ensure the appropriate asset allocation based on your goals. With enough research, you may be able to determine what investments you can use to build a portfolio that checks these three boxes. However, a financial advisor or investment manager has years of experience backing up their investment decisions.
As with most things, the DIY route serves you - for a time. But managing your own investments can result in mistakes that simply would not have happened had you consulted a financial planner with more expertise. It’s not to say that you aren’t capable, or that you haven’t done your research - it’s just a matter of a professional having a broader range of experience and education to make more informed decisions.
Do You Have the Discipline?
Everyone thinks they have the discipline to be their own investment manager when things are good. It’s fun to check your portfolio and track your progress when your investments are performing well. It becomes significantly more difficult to stick with your investments during temporary declines, or longer periods of little to no return.
A recent Dalbar study shows that DIY investors consistently have underperforming investments. The study shows that the three primary reasons for performance lag are:
- Capital not available to invest (25% of investors).
- Capital needed for other purposes (25% of investors).
- Psychological factors (50% of investors).
One common psychological mistake we see DIY investors making is attributing an investment’s performance to their personal expertise and intelligence. When the investment is performing well, the investor will say, “I’m smart, I knocked this decision out of the park.”
When an investment is performing poorly, an investor says, “I’m unintelligent. How could I have made this mistake?” It’s this kind of thinking that’s detrimental to long-term success as a DIY investor. Investors are tempted to change their strategy to feel like they’re successful, when oftentimes riding it out is in their best interest for long-term wealth growth.
If you’re a lifetime investor, you have to focus on lifelong goals, but that becomes difficult amid short-term market turmoil. Financial advisors are usually market-hardened professional investors. Temporary dips in the market, though intimidating to the DIY investor, don’t usually phase us. We are significantly less likely to make drastic changes to a client’s portfolio because we have the long game in mind.
Do You Have the Time?
Expertise and emotional impact aside, time is one of the biggest things that stands in a DIY investor’s way. Successful investment management requires time during every part of the investment cycle. On the front end, researching how to manage your portfolio requires a significant amount of time. On an ongoing basis, the actual management of your plan takes time, as well.
As you age, the time commitment required to successfully manage your investments grows. Between adjusting your investments to meet your ever-evolving retirement, to staying on top of your required minimum distributions, you’ll practically be working a full-time job just managing your wealth!
A financial advisor does all of the tedious financial planning for you. From implementation to management, your portfolio is their full-time job. Letting them manage your investments frees you up to spend your life the way you’d like, instead of perpetually worrying about your finances.
Maybe you’ve run through these three questions and still feel that you can handle managing your investments without the help of an advisor. That’s fair! Many people manage their own portfolio with respectable results when they first begin investing. However, over time, their ability to continue successfully managing their portfolio slowly declines.
People’s financial lives often get more complicated as they age. As you age and your wealth grows, investing decisions become much less cut and dry. An advisor can be your guide as investing becomes more complex, and as you run out of time to do the research yourself.
You also need to consider whether you’ll be mentally sharp enough to handle your investments later in life. It’s not fun to think about, but everyone slows down as they age. Nobody is immune to this phenomenon, and there’s no reason to be embarrassed about accepting the inevitable. The Ruedi Wealth team has seen some worst-case-scenarios where aging adults forgot about their investment accounts altogether and owed significant tax penalties because they didn’t take their required minimum distributions.
Read more: Preparing for the Later Years of Retirement
An investment manager helps you to ensure that your portfolio will always have a full-time advocate. Their job is to make sure nothing slips through the cracks, and that you’re always kept informed about all of the options available to you at any given time in your life. Ultimately, the Ruedi Wealth team (including myself) believe that you deserve to give yourself the best shot at growing your wealth and living the life you want to live. Working with a financial advisor can help put you on the path to achieving your goals in a way that going the DIY route often can’t compete with.
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