Finance

Managing Your Own Money

Do your homework before making financial decisions

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Before I managed other people’s money, I managed my own. It was challenging but not overly complex. Built into my investing schedule was time to make changes before markets might abruptly swallow my gains or soar off without me. Lots of people managed their own money – either alone or through investment clubs and hardcopy research. Managing money was, well, manageable.

More recently, information about investing has proliferated and many people have retreated to the sidelines, fearful of putting money into a market ruled by computerized trading, high costs and wild swings. I believe that investing remains an important part of planning for one’s financial future and that for most people, money markets alone cannot ensure that future. Investing can still be done by individuals who apply the necessary energy and diligence to stay on top of their portfolios.

Why manage your own money? Two key reasons are costs and control. Professional financial advisors can sometimes be very expensive. Commission-based advisors charge about 4-5% per purchase or use mutual funds that can cost 1.5-2.5% or more a year in annual expenses, depending on the type of commission. Wrap accounts average between 1-3% in expenses. Many advisors charge an assets under management (AUM) fee which typically ranges from 0.75-1.5%. Some people prefer the fees flow directly to their bottom line, not the advisors.

Others prefer to be responsible for their own returns. If their portfolios underperform expectations, they can make changes without relying on an advisor. And if they have an investing idea, they don’t have to run it through someone else. In the end, while the economy, markets and opportunities have changed, investing is still all about managing risk and finding good valuations. If you enjoy the challenge, negotiating the new markets can be fulfilling. If you decide to go it on your own, what are some of the key factors you
should be aware of?

Before you do anything, define your goals and ask how much risk you are willing to take. If your goals require you to earn a high rate of return on your portfolio each year, then you must be willing to accept the risk associated with this rate of return. Risk is the chance that your portfolio will perform other than expected – both on the upside and the downside. Most people do not understand the potential percentage gains and losses that are associated with different rates of return. This misunderstanding can lead to expensive over trading. Keeping longer-term objectives in mind can help you develop a more proactive and less reactive stance in your investing.

Select an investment strategy that fits the times. You aren’t managing your money if you just buy Apple Inc. and park it in your portfolio. You should own a variety of holdings and have a strategy for both selling and buying, setting limits for how high or low you’ll let a stock or mutual fund go before selling it. Keep your strategy active and monitor your portfolio frequently, making changes as economic and market conditions indicate. Diversification is no longer about how many different holdings you own, but how each holding addresses the risks your portfolio might face.

Investing should be an emotion-free activity. People sometimes hold a stock or fund for sentimental reasons – they inherited it, they bought it through work or it has risen dramatically in the past and they are reluctant to let go. Hanging onto an investment for emotional reasons may increase risk in your portfolio and often reduces diversification. Your goal should not be supporting a company or a legacy, but rather supporting yourself.

Do your research. Almost anyone can publish an opinion about where the economy is headed and what to invest in. It is becoming increasingly difficult to identify what sources you can trust.

The tendency for investors is often to follow only those sources who agree with their investing thesis. Resist. Tracking only one risk story can cause you to miss out on upside opportunities or to suffer losses when your economic thesis proves faulty.

Find investing sources that are independent (do not have an agenda to sell) and accountable (will suffer when their opinions are not reliable). And don’t depend on just one media source. Television and radio should be observed with healthy skepticism. Like written media, live shows can provide information that can be helpful and informative but can also be geared towards ratings.

Investing your own money can still be rewarding if you have confidence in your abilities and the time, energy and resources it takes, in spite of the increased complexity and uncertainty facing investors today.

Betsey Purinton, CFP® is Managing Director and Chief Investment Officer at StrategicPoint Investment Advisors in Providence and East Greenwich. You can e-mail her at bpurinton@strategicpoint.com.