Would You Rather Manage Your Portfolio, Or Have Someone Else Do It?
Investing is sometimes complicated and can be fraught with risk, especially if you've never invested. Generally, you have two options. The first is a self-directed portfolio, wherein you control all purchases made and what stocks, bonds, or index funds you purchase. On the other hand, you could choose a managed portfolio, where a human being or a robot driven by algorithms and artificial intelligence makes purchases for you. Which is best? Let's explore.
What Is Self-Directed Investing?
Self-directed investing does exactly what it says on the tin. You are in charge of your portfolio and manage which stocks, bonds, index funds, or other purchases you make through an investment account. There are multiple types of investment accounts that you can utilize to invest, from tax-sheltered, like the Roth IRA, to tax-deferred, and finally, taxable accounts.
Advantages Of Self-Directed Investing
Self-directed investing has many advantages over paying someone to manage your investments. Let's examine some of these advantages to help you decide if self-directed investments might be your best option.
You Save Money—Possibly A Lot Of Money
Managed investment portfolios come at a cost. This cost is known as a management expense ratio, or MER. These MERs are often charged as a percentage of each dollar you invest in a specific product. Self-directed investing has no fees associated with it. In the long run, even a low-percentage MER could mean tens of thousands of dollars lost over decades of investing.
You Learn About Investing
By going the self-directed route, you'll learn more about investments than you otherwise would. Although educating yourself on your options for investing and your possible returns can be time-consuming, you'll learn a lot about finances that will set you up for financial success down the road.
You Have More Options
As a self-directed investor, you'll have access to the full range of investment products, from bonds and stocks to ETFs. Depending on whether you're investing through a brick-and-mortar (traditional) bank or an online bank like Wealthsimple, you may have access to different types of investment vehicles. Still, you'll have access to a wider range of investment products.
Access To Educational Resources
We talked about learning earlier; many self-directed investment platforms have educational resources that allow you to decide what type of investor you are and what your risk tolerance level is. They also show you growth calculators so you can see what your investments would look like in 30 or 40 years.
Disadvantages Of Self-Directed Investing
Of course, not everything about self-directed investing is sunshine and rainbows. Here are some disadvantages to going it alone in the investment world.
It's A Time Suck
With self-directed investing, you may find yourself going down an investment rabbit hole online because you have to learn it all on your own. Whether that's YouTube videos, blogs, or whatever your medium, you'll likely spend hours learning all you can. This is fine, as you're just starting, but don't waste too much time learning—you're costing yourself valuable compound interest time!
There's A Steep Learning Curve
Diving headlong into investing can seem like a great idea, but it can be a steep learning curve with expensive consequences if you take too much risk too soon. Even for a younger investor with time to wait for the markets to rebound, losing hundreds or thousands (or more) dollars on a bad investment strategy or choice can be devastating.
Less Insight Into The Markets
You can only learn so much on your own, and your insights into the market might not be as informed or accurate as those of a financial advisor with an education and different connections to remain on top of things, market-wise. This could mean you miss a key market trend, which could have provided you with an opportunity to make money.
Is Self-Directed Investing Right For You?
If you value the autonomy that comes with self-directed investing, have the time and energy to educate yourself on what to invest in, and have a clear financial goal in mind, then a self-directed portfolio might be your best option.
What Are Managed Investment Portfolios?
While similar to self-directed portfolios, managed investment portfolios are investment portfolios that are managed for you by a fund manager. These are wealth professionals with years of experience in managing funds of various types for clients.
Advantages Of Managed Investment Portfolios
Although you don't get the autonomy of a self-directed investment portfolio, managed funds come with their own advantages. Let's go through some of them.
A Hands-Off Approach
If you're the type of person who doesn't have the time or the energy to engage with your own investments and just want to throw your money into the stock market, then take your hands off the wheel, managed investment portfolios are for you.
Managed By Professionals
Managed investment portfolios aren't handled by amateurs. These are generally professionals with years of experience and education in the financial sector. They know what they're doing and have built a reputation for themselves by making clients more money than they otherwise would have on their own.
Access To Alternative Investments
Many financial advisors and investment managers have access to a broader variety of investments than you, as a self-directed investor, would have. For example, hedge funds—these can be even more lucrative than self-directed investment funds.
Employing Risk Management Strategies
Unlike you, an investment fund manager knows how to employ risk-management strategies to reduce the overall risk of losing all your money. These strategies can be tailored to your overall financial goals and risk tolerances. They're designed to protect your portfolio during market downturns.
Diversification Is Almost Automatic
There are many financial experts who'll say that diversity is key when it comes to investing. There seems to be an equal number who'll say that you don't need to diversify, just buy long-term index funds and you'll be set. With a managed portfolio, diversification is almost a guarantee, as any decent advisor will seek to spread your wealth through different asset classes. This saves you time in diversifying your own portfolio.
Disadvantages Of Managed Investment Portfolios
Of course, there are trade-offs to using an investment fund manager. Let's explore some key disadvantages that are worth considering, if you're still on the fence about opening up a managed portfolio.
Management Expense Ratios Can Become Expensive
Those expense ratios we talked about earlier? They're called Management Expense Ratios (MERs) and are charged by financial advisors on a percentage basis of the daily average value of the asset. MERs are the combined costs of managing a fund for you, including operating expenses and taxes. The more money you're investing, the more expensive an MER could become in the long run.
You Don't Have Control Over How Your Money Is Spent
If you go with a robo-advisor, you have even less control, as they use algorithms and artificial intelligence to determine how best to spend your money. But, even with a human management specialist, they have the ultimate control over how your money is spent. This lack of control is part of the trade-off with managed investments.
Minimum Investments Are Usually Required
Because investment advisors need to get paid too, there is typically a minimum investment amount that you're required to have to open a managed investment account. This can be anywhere from $500 to $10,000, depending on the bank or financial institution. If you're just getting started, this may be cost-prohibitive for a young investor.
Photo By: Kaboompics.com, Pexels
Is Having A Managed Investment Portfolio Right For You?
Using a managed investment portfolio may be right for you if you don't have the time, energy, or inclination to learn about investing and the stock market. It may also be a good fit if you're happy to take a hands-off approach to investing and trust the education and experience of others. Lastly, if you have complex financial goals or a complex financial picture (or are of high net worth), then a managed investor may be your best option.
A Word About Robo-Advisors
Finally, a word about robo-advisors. These are robotic, AI-driven investment options that use algorithms and artificial intelligence to choose investments for you. You're asked questions about your financial situation and goals through an online survey, and the advisor will then use those answers to offer advice and automatically choose investments for you. They're great if you want to take a fully hands-off approach with no intervention, but terrible if you want to have any sort of control over your investments.
Would You Rather Self-Invest Or Use A Manager?
Let us know in the comments below whether you'd rather take the self-directed investment route or use an investment fund manager. Or are you okay with a robo-advisor? What has been your experience with each option? Discuss in the comments below.
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