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Once you accumulate some money to invest, a key decision you'll have to make is whether to manage your own money or have someone else do it. There's no one-size-fits-all answer to that question since each of us has different abilities and circumstances. For many people, managing their own money is the best option. Here are three advantages of managing your own money.
1. You can take a long-term view
Brian Feroldi:We at The Motley Fool are big believers that buying great companies and holding them for the ultra long term is the best way to build wealth. That's a big reason why we regularly recommend ignoring short-term price movements and instead staying focused on the long-term potential of the companies you own.
Unfortunately, one disadvantage financial advisors often face is that they can't always have a long-term outlook when they invest. Why? Well, some feel that in order to justify their fees, they need to frequently tweak portfolios. After all, if their clients saw that they kept holding onto the same companies year after year without making any changes, then the clients might start to wonder why they couldn't manage their money on their own for a fraction of the cost.
Another pitfall financial advisors face is that they don't want to be caught holding the "wrong" stocks when it comes time to send their clients a statement. After all, if a financial advisor had heavy exposure to a poorly performing sector of the market, his clients might think he was bad at their job. To compensate, some might sell their under-performers and buy into hot stocks just prior to the statements being sent out. This practice -- called "window dressing" -- can protect them from being asked tough questions by their clients.
Thankfully, when you manage your own money, you're under no such pressure to constantly have to justify your actions. That affords you the luxury of having a long-term outlook. That's apowerful advantageindividual investors shouldn't overlook.
It's not always best to hand over your money to someone else. Image source: Getty Images.
2. You have greater control
Jeremy Bowman:Employing someone else to do something for you inevitably creates friction. After all, we've all muttered, "I should've done it myself" at one time or another. Orders can be misunderstood or miscommunicated, opinions may differ, and personal incentives don't always align. The same is true with investing.
You understand your own financial needs and goals better than anyone else. If you have the time and the interest, there's no reason you shouldn't be managing your own money. A good baseline to start with is a low-fee index fund such as theVanguard S&P 500 ETF if you're just looking to park your money in the broad stock market and watch it grow. Investors with a higher risk tolerance may seek out growth stocks or a mix of investments to offer income and growth. As your needs and expectations change, you can make adjustments to your portfolio in a much more seamless way than if you were dealing an advisor. Similarly, if you get a tip or see a stock you like at a good price, you can jump on it immediately without having to go through a third party. The plunge and recovery following the Brexit vote was a perfect example of this. The broad market fell 5% in two days, with many stocks falling much more sharply. If you wanted to get in on those bargain prices, the window was short -- the market recovered in just three days.
Having control of your investments offers transparency, too, as there's no need to parse someone else's decisions.
Best of all, you'll learn as you go. Managing your money is a lifelong pursuit, and though it may seem intimidating at first, you'll learn from mistakes you make along the way and adapt as you go, feeling more comfortable all the time.
A lot of money can go down the drain in fees. Image source: Getty Images.
3. You can save a lot on fees
Selena Maranjian: A key advantage of managing your own money is that you can avoid paying a lot in fees. Of course, if you haven't taken the time to learn a lot about investing and don't have a good plan, your savings may be outweighed by your underperformance. But for those who know what they're doing, it can make a lot of sense to manage your own money.
Consider that many investment advisors or money managers will charge you a percent of your assets each year for their services. According to the folks at AdvisoryHQ, here are some averagerates:
That's serious money, charged each year, very likely costing you tens of thousands of dollars over the course of your investment period. Managed mutual funds charge fees, too. Plunk $100,000 into funds with 3% front-end loads, and you'll fork over $3,000 immediately. If they have typical expense ratios (annual fees) of 1%, you'll be paying $1,000 per year. If, like some funds, they charge closer to 2% annually, you'll be bleeding nearly $2,000 per year.
You don't have to be an investing genius to manage your own money. Since most managed mutual funds fail to outperform simple index funds, and many money managers and advisors aren't going to deliver results that beat them, either, it can make good sense to just park your hard-earned dollars in inexpensive index funds, such as the SPDR S&P 500 ETF . If you want to do your own stock-picking, favor a low-commission brokerage to save on trading fees.
Managing your own money isn't right for everyone, but it might make good sense for you.
The article 3 Advantages of Managing Your Own Money originally appeared on Fool.com.
Brian Feroldi has no position in any stocks mentioned. Jeremy Bowman has no position in any stocks mentioned. Selena Maranjian has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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