Many folks I meet feel intimidated about trying to invest their own money. These are bright people who, for the most part, have done an excellent job at their business or profession. Yet financial markets seem so erratic and unpredictable. How can even the most careful person avoid making huge mistakes?
You can take charge of your investments, and do it successfully — without spending 60 hours a week on the task. You don’t need a degree in finance. What you do need is an unshakeable determination to quarterback your own game, together with a willingness to call in other players for appropriate support.
If you start with an honest understanding of your abilities and limitations, the rest will follow.
Is It Your Cup of Twinings?
Frankly, this isn’t a path for everyone. Some people shouldn’t manage their own investments. Hollywood stars and professional athletes are notorious for messing up their financial dealings. In general, if you earn more than $1 million a year from your business or profession, your time might be too valuable to spend on managing investments. (Unless, of course, you’re a professional investment manager!) You’re probably wise to consider hiring out the work.
Health issues, too, can provide a compelling argument for turning over your investment management to someone else. I’ve had many subscribers tell me, as they advanced in years, that they no longer had the stamina to run a complex portfolio.
Finally — and here’s where the “honest with yourself” factor comes to the fore — you might want to use a personal money manager because you just don’t trust yourself to do a good job of it. Maybe you’re really too busy, regardless of your income level. Or perhaps you’ve made a number of investment blunders and you feel you need a spotter to keep you from falling again.
Most people, however, are well suited to take at least some role in shepherding their investments. As we’ll see, it isn’t necessary to do everything yourself. To draw an analogy from the construction industry, you can cast yourself as the general contractor. But I encourage you to do as much as you can on your own. Nobody cares as much about your money as you do.
Here’s how to test your abilities and find out how much you can do yourself.
Find a Discount Broker
Start by opening an account with a discount broker — preferably one of the big firms with a broad suite of investment products and ample research tools. (All discounters share the attribute of low commissions.)
TD Ameritrade (AMTD) is my all-around favorite broker, although Fidelity and Schwab (SCWH) are strong contenders, too. What sets TD Ameritrade apart from the other two is that it alone features complimentary stock research from a reputable Wall Street investment bank, Credit Suisse (CS).
Bank of America (BAC) also offers excellent research facilities through its Merrill Edge discount-brokerage unit, but the website is clunky in places — dividends aren’t credited to your account until a day or more after the pay date, for example. Despite these inconveniences, I have a Merrill Edge account myself. I recommend the firm particularly to BofA customers, who can qualify for free commissions by maintaining a $25,000 balance at the bank.
All four of the brokerages I’ve just named reserve their lowest commissions for Internet-based trades. (Merrill Edge is the lowest for stock transactions at $6.95, regardless of how many shares you trade.) For an account application, visit the firms’ websites, www.tdameritrade.com, www.fidelity.com, www.schwab.com or www.merrilledge.com.
Funds Keep You in the Driver’s Seat
Once you’ve set up a brokerage account, you can try your hand at managing your own money. If you’re a genuine novice, I recommend launching your investment program exclusively with no-load mutual funds or exchange-traded funds.
With mutual funds or exchange-traded funds, you delegate to the fund the task of selecting individual securities (stocks or bonds). Thus, you’re hiring professional management, while retaining the right to supervise what the managers do with your money. If you conclude it’s time for a change, all you have to do is sell one fund and buy another. You’re much more in control than if you were to hire a financial adviser to select funds or individual securities for you.
However, should you want to enlist the help of a personal financial adviser or a newsletter like my own, I don’t recommend following advice blindly. Everyone has different needs and a unique risk tolerance. I’m not aiming to muster an army of robots here. I want you to think long and hard about your own situation.
When I suggest a 50-50 split between stocks and fixed income, as in our model portfolios, I’ve got in mind a person in the later stages of his or her working career, perhaps four to seven years from retirement.
If you’re already retired, you might decide you need a higher weighting in fixed income (for peace of mind, or to boost your immediate cash yield). On the stock side of the ledger, you might also prefer a heftier weighting in equity-income funds, which emphasize companies that pay generous dividends. Conceivably, if you’re a retired person who finds price fluctuations to be quite unnerving, you might wish to pare down exposure to foreign markets (emerging markets in particular).
But if you’re young and your career is taking off, you might feel comfortable bumping up your total equities exposure well above our 50% benchmark.
ETFs and Individual Securities
It’s OK to mix and match between traditional mutual funds and exchange-traded funds. Bear in mind, though, that with an ETF, you generally have to pay a brokerage commission to buy or sell. Don’t get carried away with frequent trading of your ETFs, especially if you’re managing a smallish portfolio (under $25,000).
On the other hand, some brokerage firms, in an effort to attract more customers to exchange-traded funds, are now offering commission-free trades on selected ETFs. For instance, TD Ameritrade allows commission-free trading in more than 100 ETFs, including some names on our current buy list: iShares Barclays 1-3 Year Credit Bond Fund (CSJ), iShares Barclays Intermediate Credit Bond Fund (CIU), iShares Russell 1000 Growth Index (IWF) and SPDR S&P Emerging Europe (GUR). TD Ameritrade does require you to hold any commission-free ETF for at least 30 days. Otherwise, you’ll incur a short-term-trading fee.
ETFs give you a gentle introduction to buying and selling securities in real time, with the hour-to-hour and indeed minute-by-minute fluctuations. That experience, in turn, can help you decide whether you wish to go on to trading individual stocks and bonds.
If you’ve never dealt in individual stocks before, I advise you to begin cautiously, with no more than half your equity position. (The rest should be in funds.) I urge you never to allow a single stock to make up more than 5% of your total portfolio.
Stock picking is a challenging discipline that requires not only patience and perseverance, but also a plan. Too many investors randomly accumulate stocks on tips and touts. Know what industries you plan to invest in, and why. If you’re going to overweight or underweight an industry in your portfolio (versus the weight that industry carries in a market index like the S&P 500), understand the reasons for your choice. Don’t stumble into it.
Sounds a little too difficult? It might not be for you, or you might need the help of an adviser. Whatever you decide, chances are you’re fully equipped to be your own money manager, and you can look forward to saving thousands of dollars in fees over an investing lifetime.
Richard Band’s Profitable Investing advisory service helps retirement savers outperform the market without losing a minute of sleep along the way. His straightforward style and low-risk value approach has won seven Best Financial Advisory awards from the Newsletter and Electronic Publishers Foundation.
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