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  • Robert Stammers

Will Self-directed Investing Simplify Your Life?

It is becoming increasingly easy to manage one’s money. For almost any level of wealth, there are low-cost services or products that can maximize your diversification and minimize the amount of work you have to do. But making the decision to become a self-directed investor really comes down to one thing: Will managing your own wealth make your life better and help you achieve your financial goals?

Of course, the answer to this question may have many facets. Will managing your own money ultimately increase your wealth? If you feel you have the required knowledge and experience to make complex financial decisions and plans for your wealth after you pass, then you may be well-placed to take the reins of your financial future. However, financial astuteness is only one part of the puzzle. You also need to have the time to take on what may be a full-time role – being your own investing guru.

Striking Out On Your Own

Before striking out on your own, you should consider each of the points carefully to see if self-directed investing will work for you:

  • Does simplicity excite or frighten you? Often, the products most suited for self-directed investors are quite simple. The most straightforward example is index mutual funds. Many investors feel it’s important to enact complicated strategies to build wealth in the market, but the truth is that for many self-directed investors keeping it simple is almost certainly best. Although you may feel underwhelmed by the notion of a portfolio that may be simpler than your friends and neighbours, remember this is not about appearing smart, it’s about managing risk. Maintaining discipline, staying the course, and aligning your decisions with your long-term financial goals become very difficult when we cease to be an objective investor and, instead, dive in with ‘whiz-bang’ decisions. The decisions you make should be unique to your financial goals and shouldn’t be influenced by the actions of those around you.

  • Are you prepared to resist a sexy sales pitch? You know the drill and you probably receive frequent solicitations by investment professionals eager to tout their services. These may range from the sedate traditional fee-based products to the sensational – investments that promise fantastic returns with little risk. Do you think it’s likely you’ll be able to turn that down and are you sure you know how to evaluate the risks and potential rewards of an investment opportunity?

  • Do you understand your risk tolerance? As Warren Buffet explains, risk comes from not knowing what you’re doing. This is especially true for self-directed investors and is best measured by one’s ability to handle investment loss. Unfortunately, risk is a fundamental part of investment management. As a self-directed investor, you need to understand the level of risk (potential loss) you are willing to take in the hope of longer term gains.

  • What do you want your money to do? Investors sometimes invest to meet their goals and they sometimes invest to exceed normal market performance. As you accumulate more and more money, it becomes increasingly tempting to try and outperform the market – something that has proven quite difficult to accomplish in recent years. If this is your goal, it’s important to make sure you’re not at an analytical disadvantage. Investment houses, hedge funds, and brokerage firms all around the world employ countless professionals whose job it is to study very specific areas of the market. If you are trying to compete with them for outperformance, you will need to consider getting some outside help. Investors seeking to manage strategies targeting outperformance need the benefit of experience and a specialist set of skills ranging from accounting and corporate finance knowledge to plain old wisdom.

  • Do you know how to ask for help? The number of services available to investors is vast and highly varied. Some, like advanced advice on choosing between complex investment service providers, are highly optional and focused on increasing your upside. Others – like tax, trusts, and estate planning – can help avoid very costly mistakes and are neglected at your peril. It’s essential that self-directed investors consider all aspects of their finances and not just the exciting world of investment markets. If tax or succession design is not your thing, then bring in an expert.

  • Do you know how to measure success? Many investors don’t have the skills or understanding to do this. Make sure you are capable of monitoring your progress towards your goals so you can stay on track with your overall financial plan. This may be more difficult for self-directed investors and is one of the core services that financial advisers provide.

  • What’s truly important when you have more money than you could ever possibly spend? If after reading all these points, if you are still up for the challenge of managing your own wealth, you should consider how your money will continue to work for you, build your legacy, and help and support others after you’re gone.

Wealth management has historically been oriented toward one goal: making money. However, if you have already accumulated significant wealth, thoughtful and strategic wealth management becomes more about funding the life you want to lead and leave for others. As much of our financial goals exist to develop and build our personal goals and legacy, maximizing your investment return can take on a very limited role when goals are more than financial.

Other Considerations

Good financial management is not just about making money, it may also involve other considerations, such as:

  • Philanthropy – Inspired by the Gates Foundation and the giving pledge, it is becoming increasingly important to have well-considered philanthropic endeavors that reflect your values and goals. What sorts of philanthropic efforts would you like to support and what will your approach to supporting them be?

  • Are your children good stewards of wealth? – One of the key roles that financial advisers sometimes play is to transmit objective truths about ‘the right way’ to manage money. Coming from mom or dad, advice may be ignored, but coming from a senior and trusted investment professional it can carry more weight.

  • Will your money transfer to its beneficiaries efficiently? – Tax provision, estate planning, and trust structure are often overlooked. Such forward planning can deliver substantial cash savings to your loved ones.

The critical thing to remember is that good financial advice is not just about which stocks to buy and companies to invest in. It is a constellation of services that exists to help you reach your overall financial goals and will likely include tax and estate planning, as well as, perhaps, philanthropy.

It’s easy to be a jack-of-all-trades and a master of none! For those with significant wealth to manage and the complexities that go hand-in-hand with such wealth, professional advice is often a necessity in some facet of their activities, even for the most ardent do-it-yourself investors.

Robert Stammers (CFA) is director of investor education for the CFA Institute.


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