Should I Use a Financial Advisor or Do it Myself?
Whether you’re freshly 18 or headed into your 50s, it’s important to invest at any age. Parents should even invest on behalf of their children through custodial accounts, to help them get started on wealth accumulation as early as possible in life. Yet, not everyone understands exactly how investing works. It can be daunting or scary to put money into the stock market where it’ll fluctuate every day.
Many people start their investing journey with a simple question: should I use a financial advisor or do it myself? The answer depends on many factors, including your willingness to learn and your confidence in your own decision-making ability. That said, some people much prefer to hand off portfolio management to someone they trust as an expert. The decision depends on the person.
The most important thing to remember is that anyone can learn to invest. You don’t need to be an investment expert to build a strong portfolio. You just need to ask the right questions.
What Industries Do You Know and Understand?
If you’re going to build a stock portfolio of individual companies, start with what you know. For example, if you work in software development, invest in companies specific to this field. The same goes for energy, engineering, real estate or any other sector. The reason? Your fundamental understanding of the industry or product will help you better-understand how that company is positioned to succeed. You’ll feel more confident as a new investor when your money is in stocks that you can really and truly understand.
If you don’t have any expertise that applies or you’re not confident in applying it, indexing is a good way to get invested generally. As an added bonus, you’ll also diversify your holdings.
Can You Read and Interpret a Balance Sheet?
Investors picking individual stocks need to get comfortable with the practice of fundamental evaluation. This means looking at the company’s balance sheet and financial metrics to determine its position. At a surface level, it means understanding the company’s revenue and profit metrics, its debts, its assets and how these factors come together in a picture of financial health.
To become more skilled and confident as an investor, expand your understanding of company financials to include valuation metrics like P/E, PEG, P/B and others, as well as risk metrics like a company’s beta. Sites like Finviz or Yahoo! Finance offer visualizations and breakdowns for almost any financial metric you can think of. They’re great resources for financial evaluation.
What Advantages Does the Company Have?
When choosing companies to invest in, one of the simplest ways to become a confident investor is to investigate the company’s operations. What do they do? How do they do it differently than competitors? How do they stay current in their market? Asking these questions will shed light on competitive advantages, as well as how the company profits. These are details a financial advisor takes into account.
Seek out companies that have “moats:” practices or products that other companies can’t easily duplicate. For example, consider Equifax Inc. (NYSE: EFX), one of the three big credit reporting agencies in the United States. The company has few competitors, offers essential services and is large enough to overwhelm new entrants into the industry. Look for companies that have similar moats in their specific industries.
What is Your Personal Risk-Reward Tolerance?
It’s up to every investor to determine their tolerance for risk before they begin investing. And, it’s important to understand that reward represents the other side of the scale. The more risk you take on, the higher the potential reward. The lower the risk, the lower the potential reward. New investors should look at what they’re willing to lose as they establish realistic expectations for what they could gain.
Calculate risk-reward and hold firm to your standards. If you’re willing to lose 20% of your portfolio value, don’t sell at 15% losses or you risk selling yourself short of a potential rebound. Likewise, don’t get greedy. If you’re aiming for 20% profits and a stock hits 20%, exit your position instead of pushing your luck for 25%. Discipline is one of the most important traits of a successful investor and it starts by maintaining risk-reward tolerance.
Should I Use a Financial Advisor or Do It Myself?
No matter your skill as an investor, you need access to information that helps you make good decisions. Thankfully, there’s no shortage of investing information out there. The path to prosperity depends on your ability to cultivate resources relevant to your investing strategies and concerns.
Find investing websites that discuss stock activity from a timely standpoint. Subscribe to an investment newsletter that delivers information directly to you. Use stock ticker software that lets you monitor your positions passively. And, most importantly, watch videos and listen to podcasts that help you further your investment knowledge. The more information you consume, the more knowledgeable you’ll become.
Remember, Investing is a Journey
Should I use a financial advisor or do it myself? This is a question worth asking if you’re new to the concept of investing. But perhaps a better question is, “do I want to learn how to become a smart investor?”
If the answer is yes, there’s no time to waste. Start small and take your time, and don’t worry if your first few stocks don’t pan out the way you want them to. Over a long enough time horizon, it’s likely you’ll recover your losses. In the meantime, you’ll gain valuable insights that help you invest with confidence now and for the future. You’ll be in control of your investing future, and there’s no better peace of mind.