Be Your Own Boss: Manage Your Investments Independently

Being your own investment manager can be a great way to take control of your finances and save money. While it may sound intimidating, building a reliable investment portfolio is simpler than you think.

The first step is to learn some basic investment principles and understand your financial goals and risk tolerance. Next, you'll need to open a brokerage account and purchase index funds or stocks that align with your investment strategy. It's important to diversify your investments across different sectors and asset classes to minimise risk. Monitor your portfolio regularly and rebalance it at least once a year to ensure it remains aligned with your financial goals.

By taking the time to educate yourself and staying disciplined in your investment approach, you can become your own successful investment manager.

Learn simple investing principles

Investing is about putting your money into something today with the hope of getting more money back in the future. This is usually done by investing in productive assets, which are assets that generate money from some kind of activity. For example, if you buy an apartment building, you will not only have the building, which may increase in value over time, but you will also earn rental income from it.

There are three common types of productive assets: stocks, bonds, and real estate.

• Stocks: When people talk about investing in stocks, they often mean common stocks of publicly traded companies, but they could also be buying partial ownership of a private company. Investing in publicly traded businesses is done by buying stocks on an exchange, while investing in private businesses is riskier but can lead to larger gains. The types of stocks you buy depend on your risk tolerance: blue-chip stocks are stable and good for risk-averse investors, growth stocks are more volatile and suited for those seeking greater rewards, and value stocks are for those who seek bargains.
• Bonds: When you buy a bond, you are lending money to the bond issuer and receiving interest income in return. U.S. Treasury bonds are considered safe, while corporate bonds are riskier and depend on the creditworthiness of the company.
• Real Estate: Investing in real estate can be done by purchasing properties and renting them out or selling them for a higher price. Another way is through real estate investment trusts (REITs), which are companies that own real estate and provide tax benefits to investors.

When investing, it is important to diversify your portfolio, which means spreading your investments across different assets to minimise risk. This can be done by investing in multiple companies across various sectors or by investing in mutual funds, which are managed investments that pool money from many investors to buy a diverse portfolio of stocks, bonds, or other securities.

It is also crucial to monitor your investments regularly and rebalance your portfolio if certain assets deviate from your target percentages. This can be done by purchasing new shares of underperforming funds or selling shares of overperforming funds to maintain your desired allocation.

Additionally, consider the fees associated with your investments. Financial advisors and fund managers can charge significant fees that may eat into your returns. It may be more cost-effective to invest independently through online platforms or brokers, especially if you are investing small amounts.

Finally, remember that investing can be intimidating, but it doesn't have to be complicated. Educate yourself, seek advice when needed, and make decisions that align with your financial goals and risk tolerance.

Understand different types of stocks

When it comes to understanding the different types of stocks, there are two primary categories: common stock and preferred stock. Common stock is the most prevalent and widely recognised form of stock. It represents partial ownership of a company, along with a claim on its profits, typically distributed as dividends. Each share of common stock also comes with voting rights, allowing investors to elect the board members who oversee major decisions. While common stock offers higher returns over time through capital growth, it also carries the most risk. In the event of bankruptcy or liquidation, common shareholders are last in line to receive payments, following creditors, bondholders, and preferred shareholders.

Preferred stock, on the other hand, represents a degree of ownership without the same voting rights as common stock. Preferred shareholders receive regular dividend payments before common shareholders and are prioritised for repayment in the event of liquidation. Preferred stock is often compared to bonds due to its fixed dividend payments. Additionally, preferred stock prices are less volatile than common stock, resulting in shares that are less prone to significant value gains or losses.

Beyond these two main types, stocks can be further categorised based on various factors:

• Company Size: Stocks can be classified as large-cap, mid-cap, or small-cap based on the market capitalisation of the company. Large-cap companies have a market value of $10 billion or more, mid-cap companies range from $2 billion to $10 billion, and small-cap companies fall between $300 million and $2 billion.
• Sector: Stocks can be grouped based on the sector or industry in which the company operates. The Global Industry Classification Standard (GICS) divides the market into 11 sectors, including consumer discretionary, information technology, and energy.
• Geographic Location: Stocks can be categorised as domestic or international, depending on the geographic location of the company's operations.
• Growth vs. Value: Growth stocks are shares of companies expected to grow faster than the broader market, often outperforming during economic expansions and low-interest rate periods. Value stocks, on the other hand, are considered undervalued by the market and tend to have more attractive valuations.
• Income Stocks: These stocks provide regular income by distributing higher-than-average dividends. They are typically associated with lower volatility and are suitable for risk-averse investors seeking consistent returns.
• Blue-Chip Stocks: These are shares of well-established companies with a large market capitalisation, a successful track record, and a leading position in their industry or sector. Examples include Microsoft, McDonald's, and Exxon Mobil.
• Cyclical and Non-Cyclical Stocks: Cyclical stocks are influenced by the performance of the economy, exhibiting higher volatility and stronger performance during economic strength. In contrast, non-cyclical stocks operate in industries that are relatively unaffected by economic fluctuations.
• Defensive Stocks: These stocks provide consistent returns across various economic conditions and market environments. Defensive stocks often sell essential products and services, such as consumer staples, healthcare, and utilities.
• ESG Stocks: Environmental, Social, and Governance (ESG) stocks emphasise environmental protection, social justice, and ethical management practices. They have gained popularity among socially conscious investors.

Understanding the different types of stocks is crucial for investors to make informed decisions, reduce portfolio risk, and achieve their financial goals.

Know the risks of investing in multiple funds

While investing in multiple mutual funds can be a smart move for investors who want to diversify their portfolios and benefit from professional asset management, it is important to be aware of the possible drawbacks, such as the potential for over-diversification and higher transaction costs. Here are some key points to consider:

Over-diversification

Despite the benefits of diversification, there is a risk of over-diversification when investing in multiple funds. When investments are spread too thinly, each individual investment may not generate sufficient returns to offset the costs of the fund, leading to underperformance. Adding too many funds can also create an expensive index fund, as the impact of any single fund on performance is negated, while the expense ratios of multiple funds can add up and impact returns.

Complexity and Tracking

Investing in multiple funds can add complexity to your portfolio. With multiple funds, you need to keep track of different investments and the performance of each fund. This can be time-consuming and difficult to manage, especially with a large number of funds. Coordinating different investments and knowing when to rebalance your portfolio can be challenging.

Higher Transaction Costs

Investing in multiple funds incurs higher transaction costs, including trading fees, annual maintenance fees, and redemption fees. Over time, these costs can accumulate and eat into your investment returns.

Impact on Performance

The addition of too many funds can dilute the impact of any single fund on overall portfolio performance. This can result in mediocre returns, as the expense ratios of multiple funds add up while the potential for significant gains is reduced.

Redundant Holdings

Investing in multiple funds may lead to an overlap of assets, which can be counterproductive. For example, if you invest in a target-date fund that already holds a diverse mix of stocks, bonds, and other securities, adding another fund with similar holdings will increase your risk and reduce diversification.

Interference with Target-Date Funds

Target-date funds automatically rebalance their holdings over time to match your likely needs as you approach retirement age. Adding multiple funds with different investment strategies and holdings can interfere with the changing composition of target-date funds, requiring you to actively manage and rebalance your portfolio more frequently.

In conclusion, while investing in multiple funds offers the advantage of diversification, it is important to carefully consider the potential drawbacks. Over-diversification, higher costs, reduced performance, and complex management are risks that should be evaluated before deciding to invest in multiple mutual funds.

Be aware of the fees charged by financial advisors

When becoming your own investment manager, it is important to be aware of the fees charged by financial advisors. Financial advisors will have different fee structures depending on the services they offer. It is important to ask your advisor about the total cost of any given plan and their approach to charging for their services.

Firstly, many financial advisors charge a flat fee based on "assets under management", which refers to the amount of money they are looking after for you. The most common percentage for in-person financial advisors is 1-2%. For robo-advisors or online advisors, the fee is generally under 1%. While 1-2% may not sound like a lot, it can add up over time. For example, one financial advisor demonstrated how a 1-2% fee could decrease investment gains by half over a 25-year investment.

Secondly, some financial advisors will charge a flat fee, which they will inform you of upfront. This fee could be anything from $1,000 to $3,000. Others might charge an hourly rate of $200-$400 per hour. The more of their services you require, the more time they will spend and the more you will pay.

Thirdly, some advisors charge a commission on the products they invest in on your behalf, such as mutual funds or exchange-traded funds (ETFs). They direct you to certain investment products and receive a commission on the purchase of those products.

Finally, another approach is a combination of a percentage charge based on total assets under management, plus a flat fee for additional services. This means that when you require insurance or estate planning, you pay extra on top of the percentage charged on your assets.

It is worth noting that financial advisors are useful for those with a high net worth, a complicated estate or tax situation, or those going through a major life event, like retirement. If you do not fall into these categories, you may want to consider an online robo-advisor, which is an automated investing service. Robo-advisors will typically ask you a few questions to determine your risk tolerance and then use an algorithm to create a highly personalized investment portfolio. While they may not offer a full financial plan, they are a cheaper alternative to human financial advisors.

Learn how to manage your own portfolio

Portfolio management is the process of creating and managing your investment account. It involves selecting and managing a set of investments that align with your financial goals. The goal is to maximise expected returns while minimising risk by holding a diverse range of assets.

• Evaluate your current situation: Before investing, it's important to establish your financial goals and risk tolerance. Understand your financial life, including any debt and savings, to set reasonable expectations.
• Determine your investment objectives: Decide on your investing goals to help you make a plan, solidify your strategy, and choose your investments.
• Figure out your asset allocation: Build your portfolio with an asset allocation that's right for you based on the level of risk you're comfortable with. Diversifying your portfolio across different asset classes, industries, and regions can help reduce risk and balance returns.
• Choose investment options: Select investments that align with your asset allocation. You can invest in stocks, bonds, mutual funds, exchange-traded funds (ETFs), and more.
• Monitor and rebalance your portfolio: Regularly check your investments to ensure they remain in line with your chosen asset allocation and financial goals. If they've drifted, you can rebalance by adjusting your stake in each category to restore your original weightings.

Remember, successful portfolio management requires ongoing learning and adaptation. Stay informed about the financial markets, monitor your investments, and make adjustments as needed to maintain alignment with your goals and risk tolerance.

Frequently asked questions