You might’ve heard the term self-directed investing before, especially if you’re deciding how (and where) to invest your money. Many wealth firms refer to the term differently—self-directed, direct investing, self-managed and do-it-yourself (DIY) investing. And they all mean the same thing…you manage your own portfolio.
But is self-directed right for you? It’s probably not. And here’s why.
What is self-directed investing?
Traditionally, anyone looking to invest their money would seek out hiring an agent to manage their portfolio on their behalf. Like the various terms imply, self-directed or “do-it-yourself” investing refer to the investment approach where the investor creates and manages his or her own investments.
This is common across investors who’d like to take matters into their own hands, who choose not to lose part of their profits to agency fees, or have a general distrust when it comes to someone else managing their money. But why isn’t it for every investor?
Why is self-directed investing not for everyone?
The key question you want to ask yourself before jumping into the world of self-directed investing is not only how hands-on would you like to be, but how hands-on can you be. The reality is, self-directed investing requires you (and only you) to manage whatever securities you’ve invested in. Here are the 3 main reasons why self-directed investing isn’t right for everyone:
You will need a lot of resources
Being left to your own devices when it comes to your investing needs can be daunting. The biggest and most obvious reason for that is because managing your own investments will require a lot of time, skills and effort. From creating your own portfolio mix, right down to managing the portfolio to maximize your wealth. It’s a lot to take on.
Having the patience and dedication are good traits for DIY investors but not everyone has the time it takes to capture good openings and other opportunities in the market. That’s why investors pay management fees to financial professionals.
It will be a “lonely pursuit”
Without having investment advice from a financial professional on your side, you’re lacking more than just re-assurance in your investment decision.
Gail Hebee at The Globe and Mail cautions investors that “direct investors research and make investment decisions on their own. It can be a lonely pursuit. There is no financial adviser to provide a second opinion or caution against selling at the wrong time. You may miss opportunities that professional advisers know about, or that are available only through an adviser.”
Without having the expert on your side, you may question your decisions and consequently, your portfolio potential.
Odds are you’ll lose money
Spending time tracking your investments on your own is likely to cost you, too. That’s because stock market and bonds returns are rarely linear. One US report shows that across various investing categories, only 1% to 14% of actively managed stock funds outpaced their benchmark over the past 15 years. The underperformance of professional active stock pickers proves that if professionals find it difficult to create returns, it’s hard to imagine DIY investors would have better luck.
With market volatility, self-directed investors could find themselves making rash decisions out of uneasiness, like pulling your investments out prematurely. That’s why other wealth solutions like robo-advisors are so much more popular and attractive to the everyday investor.
Did you know? Although robo-advisors might feel like Do-It-Yourself investing, they’re not. While using a digital wealth manager like Nest Wealth, you are actually receiving real wealth advice from a dedicated portfolio manager.
Whether you’re working with a Nest Wealth Plus advisor or invested with us directly, at Nest Wealth, each portfolio is managed by a portfolio manager. We take the time to get to know the investor’s investment needs, their risk tolerance and investment timeline so we can build a personalized low-cost ETF portfolio made to support each individual goal.
If you’re questioning if now is the time to make the change to digital wealth management and digital advice, you might also want to check out this checklist we put together that guides you through how to tell when you’re ready to switch to a robo-advisor.