Do You Need Professional Help?
This article, the first of a three part series, focuses on whether or not you should consider handling your investments yourself, as opposed to relying on a stockbroker or a money manager. The second article will explore "How to Do it Yourself" and the third will address "Choosing Professional Help." If you are fortunate enough, through either fortune or hard work, to have money available for investment purposes, then you should at least consider that you may not need anyone managing your money or making investment decisions for you. Rather than seek professional advice, or if you are dissatisfied with your current financial advisor, consider doing it yourself.
If you dont currently have a stockbroker or money manager, a prerequisite to this analysis is that you first have stashed away 6 months or more in cash-type reserves for emergency purposes. Investment advisors agree that regardless of where you are on the income and net worth scale, you should have enough investments in CDs, checking accounts, or money market accounts to cover your average expenses for 6 months. If you are not able to save above that level, then your focus should be either on reducing your expenditures or increasing your income - not investing.
Reasons to Do it Yourself
- Cost Savings - For many, this is the number one reason to tackle managing your own investments. Many financial planners and stockbrokers will charge you full fees and commissions for the advice and products they provide you. With the proliferation of deep discount firms and computer trading programs, you can save significant sums by purchasing investments yourself.
- Elimination of Brokerage Firm Byproducts - At all brokerage firms, a large percentage of the financial planners and advisors are paid when you buy and when you sell and regardless of whether you make or lose money. Almost everyone knows somebody who has been ripped off by a financial services person. In most cases, this inherent conflict of interest played a part in the wrongdoing. These conflicts can be subtle, such as where your "full service" brokerage firm provides such encouragement and incentives to sell "in-house" products, that there might as well be a restriction. Generally, other people are not as conscientious with your money as you might be. Also, be aware that for brokers, the necessary qualifications and the criteria for hiring them are minimal. You could call Merrill Lynch, one of the biggest brokerage firms in the country, and be assigned a stockbroker who was selling used cars the week before. Lastly, turnover is relatively high in the brokerage industry. Just when you think things are going smoothly with your broker, you get a phone call telling you that your broker has left the firm. The next phone call is from your new broker who recommends you sell everything you have in order to implement his new and improved investment ideas.
- Its Easier Now Than Ever - Even if you dont know beans about investments, with an interest in the subject matter and some time, you can be on your way. The publics accessibility to financial and investment related information is at its highest. Between books, newsletters, library material, magazines, seminars, television shows, and the Internet, your resources are endless. Many discount brokerage firms offer software that is relatively easy to use, with which you can enter your own trades. However, if you are going to do it yourself, it is highly recommended that you incorporate your spouse into the project. Too many times, one person in the family manages all the money. When there is a death or divorce, the other person is thrown into the position of managing money with no experience whatsoever. Such people are sometimes bait for wolves. Take the opportunity now to involve your spouse in your investment decisions.
- Its Not All or Nothing - If going it alone intimidates you, consider crafting a hybrid relationship with your current stockbroker or money manager. For example, you could take over decisions regarding all municipal bonds in your portfolio, leaving the rest of the portfolio decisions to your broker or money manager. This way, you obtain some of the cost savings, you get to pick and choose types of investments that interest you most, and you become more knowledgeable regarding your account.
Reasons Not to Do it Yourself
Remember the transition between the time when you did your own taxes and when you hired an accountant to do them for you? When you were making less money and you had few deductions, doing your own tax returns was a breeze. But as your income increased and your deductions became more complex, you considered help not only an option, but a necessity. An analogy can be drawn to tackling the management of your own investments.
- Time - One of the major disadvantages of managing your own investments is the time commitment required. The amount of time required is dependent upon a number of factors, including the amount of money you are dealing with, your access to relevant data, the extent that you research investment products, and your ability to absorb the subject matter. You simply may not have the time to manage your own investments, or you may reason that your time is better spent in other ways. Only you can make that call.
- Lack of Interest or Inclination - Does your lack of interest in the subject matter outweigh any of the benefits mentioned above? Does the thought of reading a prospectus make your skin crawl? If so, then you probably ought not embark on managing your own investments. For many, it is very easy to rationalize that the management of your money is better off in the hands of one whose daily activity revolves around the investment world, than in your hands. That may very well be the case.
- The Benefits of a Brokerage Firm - Brokerage firms provide an array of benefits appealing to investors. If the firm is truly "full service," then you should be able to review every investment product available worldwide and not be limited whatsoever. All of your investments are consolidated at a brokerage firm, which saves you from having to go to multiple firms or resources for your own investment decisions. Ideally, there is a hierarchy of supervision within the firm, in place to prevent abuses and violations regarding your account. And perhaps most importantly, a brokerage firm offers you at least the potential for a long term, profitable relationship with someone you can trust - and someone who has your best interests at heart.