Time Management: Can You Handle Your Investments Personally?

Managing your own investments can be a daunting task. It requires time, education, vigilance, and discipline. The internet has made it easier than ever to access the necessary tools and knowledge, but it's still a complex and risky endeavour. Emotional discipline is a key factor, as it can be challenging to separate your feelings from your financial decisions. Seeking the help of a financial advisor or robo-advisor can be a good alternative if you don't have the time or inclination to manage your investments yourself. These professionals can provide valuable insights, help you avoid common pitfalls, and free up your time to focus on other priorities. However, it's important to remember that even with professional help, you should stay informed and make educated decisions about your finances.

Understanding Modern Portfolio Theory

Modern Portfolio Theory (MPT) is a practical method for selecting investments to maximise their overall returns within an acceptable level of risk. It is a mathematical framework used to build a portfolio of investments that maximises the amount of expected return for the collective given level of risk.

MPT is based on the idea that an asset's risk and return should not be assessed in isolation but by how it contributes to a portfolio's overall risk and return. This is a formalisation and extension of diversification in investing, which is the idea that owning different kinds of financial assets is less risky than owning only one type.

MPT assumes that investors are risk-averse, meaning that given two portfolios that offer the same expected return, investors will prefer the less risky one. Therefore, an investor will only take on increased risk if compensated by higher expected returns.

MPT is useful for investors trying to build efficient and diversified portfolios using ETFs. It can also be used to reduce the volatility of a portfolio by choosing assets that have a negative correlation, such as US treasuries and small-cap stocks.

MPT has been criticised for evaluating portfolios based on variance rather than downside risk. For example, two portfolios with the same level of variance and returns are considered equally desirable under MPT, but one may have that variance because of frequent small losses, while the other may have experienced rare but significant declines. Most investors would prefer the former.

Evaluating your risk tolerance

Age and Time Horizon

It is commonly believed that younger investors have a longer time horizon and can afford to take on more risk. Conversely, older individuals, especially those in retirement, are often thought to have a shorter investment horizon and lower risk tolerance. However, this may not always be the case, as life expectancies increase and individuals remain active later in life. It is important to consider your age and the time frame within which you are planning to achieve your financial goals when assessing your risk tolerance.

Financial Goals

Your financial goals play a significant role in determining your risk tolerance. For example, if you are saving for retirement or a child's college education, you may want to be more cautious with your investments. On the other hand, if you are investing with disposable income or risk capital, you may be willing to take on more risk in pursuit of higher returns. Understanding your financial objectives will help you balance risk and potential rewards.

Net Worth and Risk Capital

Your net worth, calculated as your assets minus liabilities, and the amount of risk capital you have available can influence your risk tolerance. Individuals with a higher net worth and more liquid capital can often afford to take on more risk, as they have more financial resources to draw from. Conversely, those with limited financial resources may need to be more conservative in their investment approach.

Investment Experience

Your level of investment experience is another factor to consider when evaluating your risk tolerance. If you are new to investing or exploring a new area, such as options trading, it is generally advisable to proceed with caution. Gaining experience and knowledge can help you make more informed decisions about the level of risk you are comfortable with.

Emotional Discipline

Emotional discipline is a critical aspect of risk tolerance. Investing can be an emotional journey, and it is important to assess your ability to remain disciplined during market fluctuations. Can you resist the urge to sell when the market declines, or will you be tempted to make impulsive decisions? Emotional discipline is a key differentiator between successful investors and those who struggle to manage their risk effectively.

Risk Assessment Tools

There are various risk assessment tools and questionnaires available online that can help you evaluate your risk tolerance. These tools often consider factors such as age, income, financial goals, and anxiety about market fluctuations. While they can provide valuable insights, remember that the results may be biased towards the financial products or services offered by the sponsoring organisations.

In conclusion, evaluating your risk tolerance involves considering multiple factors, including your age, financial goals, net worth, investment experience, and emotional discipline. By carefully assessing your risk tolerance, you can make more informed investment decisions that align with your financial objectives and comfort level.

Picking the right investments

Understand Your Risk Tolerance:

Before investing, it is essential to assess your comfort level with taking risks. All investments carry some degree of risk, and it's important to recognise that you could lose some or all of your money. Evaluate your financial goals, time horizon, and personal risk tolerance to determine how much risk you are willing and able to take.

Diversify Your Portfolio:

Diversification is a key strategy to manage risk and improve long-term returns. By investing in a variety of asset classes, such as stocks, bonds, and cash, you can reduce the impact of market volatility on your portfolio. Diversification ensures that not all your investments are affected by the same market conditions, smoothing out returns and protecting against significant losses.

Asset Allocation:

The allocation of your investments across different asset classes is critical. A well-diversified portfolio typically includes a mix of stocks, bonds, and cash or cash equivalents. The specific allocation will depend on your financial goals, risk tolerance, and time horizon. For example, if you are saving for retirement, most financial experts recommend including stocks or stock mutual funds in your portfolio for potential long-term growth.

Regular Rebalancing:

Over time, the performance of different investments in your portfolio may cause your original asset allocation to shift. Rebalancing involves adjusting your portfolio back to your desired allocation. This can be done based on a set calendar interval or when the weight of an asset class deviates from your desired allocation by a certain percentage. Regular rebalancing ensures your portfolio remains aligned with your risk tolerance and financial goals.

Consider Professional Advice:

While managing your investments yourself can be rewarding and cost-effective, it also carries greater risk and requires significant time and discipline. Consider seeking advice from financial professionals, such as fee-only financial planners or robo-advisors, who can provide valuable insights and help you navigate the complexities of investing.

Avoid Emotional Decisions:

Investing often involves emotional discipline. It can be challenging to separate your emotions from your investment decisions, especially when the market is volatile. Try to avoid making impulsive decisions based on short-term market fluctuations. Instead, focus on contributing regularly and sticking to your long-term investment strategy.

Stay Informed:

Investing requires a strong understanding of financial concepts and market trends. Stay informed by seeking out educational resources, newsletters, and expert advice. Consider using financial management programs or online dashboards to help track your investments and make more informed decisions.

Remember, investing carries inherent risks, and there is no guarantee of profits. Always do your research, understand the risks involved, and ensure any investment decisions you make align with your financial goals and risk tolerance.

Time and emotional discipline

Managing your own investments takes time, education, vigilance, and discipline. It is important to understand the basics of investing and the market before committing your money. Watching the market and learning how it reacts to daily events can help you gain experience and knowledge.

The time you spend on managing your investments should be consistent and regular. Investing is not a one-time action, and it requires discipline to invest a portion of your pay automatically, either every paycheck or every month. Over time, you should increase the amount you contribute.

Emotional discipline is also a key factor in managing your own investments. Can you remain calm and do nothing when your portfolio is losing money, or will you be tempted to sell, potentially missing out on market rebounds? It can be challenging to make rational decisions when your own money is at stake.

The time and emotional discipline required to manage your investments successfully may be better handled by a financial advisor, who can provide expertise and objectivity. A financial advisor can free up your time, allowing you to focus on other areas of your life, while also alleviating the stress that comes with managing your financial matters.

Robo-advisors are another option for those who want a lower-cost, digital alternative to a human financial advisor. These automated platforms create investment portfolios based on your goals, timeline, and risk tolerance, and typically charge lower fees than human advisors.

Whether you choose to manage your investments yourself or seek professional help, it is important to consider the time and emotional commitment required and decide what will best align with your goals and risk tolerance.

Seeking professional help

Expertise and Experience:

Professional financial advisors bring a wealth of knowledge and experience to the table. They understand the complexities of investing and can provide valuable insights that you may not have considered. This includes helping you navigate the vast information available online, which can often be overwhelming for inexperienced investors.

Time Commitment:

Managing investments is a time-intensive task that requires vigilance and discipline. By hiring a professional, you can free up your time to focus on other priorities, such as your career, family, or hobbies. This is especially beneficial if you don't have the time or inclination to monitor the market regularly and make timely investment decisions.

Risk Mitigation:

Financial advisors can help you better understand and manage risk. They can assess your risk tolerance and create a portfolio aligned with your comfort level. Additionally, they can provide emotional discipline, preventing you from making impulsive decisions during market fluctuations.

Comprehensive Financial Planning:

Good financial advisors offer more than just investment advice. They can assist with tax strategies, retirement planning, estate planning, insurance analysis, and more. This comprehensive approach ensures that your entire financial house is in order, helping you achieve your short-term and long-term financial goals.

Behavior and Emotional Support:

Investing can be an emotional rollercoaster, and it's easy to make behavioral mistakes that impact your financial success. Financial advisors can provide valuable support and guidance, helping you make rational decisions based on facts rather than emotions.

Access to Tools and Resources:

Financial advisors have access to sophisticated tools, software, and research that may not be available to individual investors. These resources enable them to make more informed decisions and provide comprehensive reports on your portfolio's performance.

Monitoring and Rebalancing:

Investing is not a "set it and forget it" endeavor. Regular monitoring and rebalancing of your portfolio are crucial to staying on track. Financial advisors can handle these tasks for you, ensuring your investments align with your financial goals and risk tolerance over time.

Cost-Effectiveness:

While hiring a financial advisor incurs additional costs, it can also save you money in the long run. Advisors can help you avoid costly mistakes and may have access to investment opportunities with lower fees. Additionally, they can provide "free money" advice, such as taking advantage of employer-matched retirement plans.

Peace of Mind:

Hiring a financial advisor gives you peace of mind, knowing that your finances are in capable hands. This can reduce stress and allow you to focus on the things that matter most in your life.

Remember, when seeking professional help, it is essential to do your research, understand the fees involved, and ensure your advisor is a fiduciary, always acting in your best interest.

Frequently asked questions