A question that often comes up is why I do my own investments. Initially I wanted to justify it but then I thought about life in general. There are may major decisions and responsibilities in life that we undertake ourselves. Major decisions that can make or break our lives. Deciding on a career path, choosing a life partner, deciding where to live and raising kids. So why not manage your own money and investments?
An overarching rationale for me is that I started from scratch. If you don’t have any investments or any significant capital then you are perfect for DIY investing. The reason is that you are just starting out and you have nothing to lose by trying and teaching yourself. In fact, it’s the perfect opportunity because you have time to learn. By the time you have created wealth, you will have a very good understanding and ability to manage your own money and investments.
If however you suddenly come into millions and millions and you have no experience then you probably need some advice. Nothing stops you from trying yourself but the risk of loss is significant. You can’t get away with absolving all responsibility either, that is also too risky.
A common trait in those pursuing financial independence is a strong sense of responsibility and DIY investing. It is easy to find at least six reasons to do your own investments by looking at FIRE folks. Most of them are completely comfortable and successful being their own advisors and taking charge of their money. You are more empowered now than ever before to manage your own money.
So lets get into my six reasons why I manage my own money and investments and why you can too.
1. I want to understand all of it
Doing your own investments does not mean that you take more risks or are careless with your money. Completely the opposite actually. You should not invest in anything that you don’t understand. When you do your own investments it forces you to understand what you are investing in and how you will get the returns. This you should be doing anyway even if you are using an advisor. If you don’t understand it how will you know if the investment advice is good or not.
For most of us the reason that you work is to make a living and to provide for the future. Earning and creating income is only one part of the process. Saving and investing is the other part. Your investments are what you have worked for all your life. It is my responsibility to understand exactly how to manage this money and to make it grow. I have seen and heard of too many stories of family and friends who have lost life savings due to a lack of understanding.
The consequences of not understanding are too grave. At best you will have average investments and not be able to live the life you dream of. At worst you will fail to accumulate enough or lose what you have accumulated and be dependent on others.
I believe that regardless of your line of work if you earn money you must learn how to look after it. Anything less is irresponsible. A good place to start is by improving your financial literacy.
2. I trust myself to manage my own money and investments
Putting your life’s earnings in the hands of someone else takes a lot of trust. It also requires that person to really know you and understand your needs. They also have to have your best interests at heart. I think I am the best person for that job.
So then why do I trust doctors and not professional financial advisors? Firstly I don’t implicitly trust doctors. However studying medicine for 7 years, internship and several years of experience puts you way ahead of anything I can do better.
Unfortunately the money and finance world is filled with people and companies who need your money to make their own money. Yes there are professional financial advisors and some of them will have solid track records of proven wealth creation. The majority however are just doing a job earning a salary. Your average advisor has a one or two year qualification and is legally registered.
If you spend your life learning about investing you can and will know more than your average advisor. For this reason I would trust myself more knowing that I have my best interests at heart and that I have learned and understood what I need to.
3. Lower cost investing
Have you ever wondered why banks and financial services companies do so well? They have these massive buildings and executives that earn fortunes. Its not like you spend a lot with them? A hundred rand here or there, 1% or 2% here or there?
Financial returns overtime are typically measured in single digits or low double digits. Tripple digits are virtually unheard of. Average SA stock market returns over the last 30 years have been around 12%. Interest rates are around 7% in SA and almost 0% in developed markets. Inflation is around 5% at the moment in SA. That means that real returns (difference between investment return and inflation) are anything from 2-7% on average.
You can imagine that a couple of percentage points will make a significant difference on large sums of money or investments over a 20 year period.
If you invested R1M over 20 years, at 12% return the value would be R10.9M. If you paid 3.5% fees every year the value of your investment would only be R5.5M. That is a difference of R5.4M. Of that difference the total cost of the fees makes up R3M. The other R2.5M lost would have accumulated due to compounding but the fees have robbed you of that too.
For a R1M investment at 1% fee it will cost you R2M over the 20 year period.
Now imagine you have bought an investment product from a provider or via and advisor and their management fee is 2% or 3% ? If your real returns are going to be 2-7% then you will be paying all or at least half of your investment returns on fees?
These fees are not for some fancy investment products that require special access or secret knowledge. These are fees that are put on top of investments that you and I can make. It’s the cost of advice and or admin done on your behalf. These fees won’t guarantee you any better returns.
What makes it worse is that the larger your investment is the more you pay. To understand the effect of fees in more detail check this Stealthy Wealth cost of fees article.
So my choice is to rather take that guaranteed 1% or 2% for myself because the impact of fees is significant on my over all returns. My aim is to spend no more than 0.5% in total on all fees. This is possible if I manage my own money and investments.
4. Free information and knowledge
There is enough information available for me to learn and make the right decisions. Investment books have always been around and still are. That is a good place to get some background and real learning. The internet is a huge resource to learn from too.
Learning about financial literacy and investing is one part. The other is access to company and market information required to make your investment decisions. All of this information is available online. There are several online resources that provide some basic as well as some analysed information. Just googling the info you are looking for will bring up tons of options to manage your own money and investments.
The best part of the internet is learning from other people on the same journey. Reading finance blogs and following people on twitter is a great way to learn from people who are doing the same. Interact with these individuals to pick up tips and understand the nuances of how to do it yourself.
There are also many useful webinaars and regular podcasts on financial education as well as market insight and analysis. Once to start looking for this information you will actually be overwhelmed. You can pick and chose to find the most valuable and relevant for your purposes.
5. Easier Access to markets
Easier access to trading and markets is a major reason why I do my own investments. The availability of low cost trading platforms and exchange traded funds have made investing more accessible. It used to be quite complicated and you had to rely on a broker to do your stock buys. If you didn’t go that route the only other option was expensive investment products. Investing off shore was also very complicated and reserved for an elite few.
Online trading has revolutionised the stock exchanges with almost all of them now operating digitally. This together with the internet allowed the man in the street to start trading on his PC at home.
Initially the trading platforms provided by online banking allowed you to invest directly without using a broker. This already reduced the cost for smaller DIY investors and meant that you could do this yourself online. More recently companies like Easy Equities have reduced this cost even further and made the process simpler. With an interface akin to online shopping and the ability to buy fractions of shares you can buy shares with just a few rands.
Index products like ETFs have also made investing easier. These products are packages of shares based on market indices. This allows you to buy a basket of shares thereby eliminating the complexity and risk of choosing individual shares. ETFs have become hugely popular and a recognised way to benefit from most of the growth in share markets with lower exposure to risk. An often quoted fact is that many of these general ETFs out perform the actively managed porfolios of some of the biggest fund managers.
By using these low cost trading platforms and buying ETFs I like many others I am able to manage my own portfolio with minimal cost and complexity. I am also able to invest in offshore shares and ETF using these platforms or directly using international online brokers. Here is a good article on how to invest offshore that helped me get started.
6. Nobody can predict the future
The last reason why I do my own is investments is because nobody can predict the future. Even the best of the best advisors, stock traders and investors, none of them can predict what the market or stocks will do. Sure they can do analysis and have insights but that does not guarantee anything. There are so many variables in portfolio design, stock pics, market dynamics that will affect me whether I have advice or not.
If you are into short term investing then you better understand trading and market volatility yourself. You definitely cannot rely on someone else to tell you what to do. Trading is a profession all to itself.
For long term investors like me success is not about short term, its long term. Short term predictions and volatility is not relevant and has virtually no impact. The most important factor for investment success is to be in the market and stay in the market.
The long term growth of the stock market is virtually guaranteed. The longer the invested period the lower the risk and the greater the guarantees of returns. The continual progress by businesses, growth of economies together with compounding mean that company values increase over time. The more value they add the more their value increases.
How I got started with my own investments
As I mentioned earlier I started from scratch. First I opened a trading account with my bank. I used some of my money that I saved every month to buy some shares and an ETF Satrix 40. I bought some investment books and started reading and learning about the market. Those initial stocks that I bought eventually added up to a fair amount. I used that to help me settle my debt and become debt free.
Then I started to get more organised. I decided to stick to simpler lower risk investments like exchange trade funds. The broad index based ETFs are very well diversified, low cost and easy to access through all online brokers. With a very diversified ETF most of the risk is in the overall market volatility rather than picking the right share.
Take a look at my mostly passive investment portfolio and how I am putting that together and growing it.
Don’t be scared to start, just get on with it. As long as you use reputable online brokers and buy reputable ETFs or funds you will be fine.
Normally I would tell you not to take any of this as advice and consult a professional financial advisor for that. But this time I will say, go out and do it yourself. Manage your own money and investments, it has worked for many many others and is working for me.
Share your experience below in the comments.