diy investor

The Secret to Successful Investing Is Trusting the Process

Matt Bell — Mon, 23 Oct 2017 08:30:06 +0000

To a great degree, the biggest threat to your success as an investor is you. Making investment decisions based on fear, greed, a hot tip from your brother-in-law, the headline of the day, or any of many other flawed inputs can wreak havoc on your results. What's needed instead is a trustworthy investment process.

It should be rules-based, time-tested, easy to understand and execute, and it should be one you have enough confidence in to stick with in good markets and bad.

Here are three broad types of investment processes to consider making your own.

1. DIY

You can absolutely invest on your own. The recommended process involves following traditional rules of asset allocation, using an online calculator or questionnaire to determine your optimal stock/bond mix, choosing investments accordingly (index funds that represent each desired asset class are the easiest way to go), and rebalancing annually. Or, you could choose an appropriate target-date fund, which would simplify the asset allocation process.

DIY is the least expensive investment process, but also the one that leaves you most vulnerable to emotion-driven portfolio tinkering. After all, the process I just described, whether you choose your own index funds or use a target-date fund, is essentially a buy-and-hold strategy. That means you need to have a strong enough stomach to handle the losses that will come with a bear market, trusting that the process will deliver respectable gains over the long haul. (See also: 9 Costly Mistakes DIY Investors Make)

2. DIY with help

You could subscribe to an investment newsletter that takes a rules-based approach to implementing an investment style you agree with (value, momentum, etc.). This process is DIY in that you maintain your own account at the broker of your choice and you make the trades, but it's "with help" in that the newsletter tells you exactly what to buy or sell.

This is more expensive than a pure DIY approach because you have to pay for a subscription to the newsletter (from as little as $100 to more than $1,000 per year). Newsletters typically aim to beat the market through a more active process, providing buy and sell recommendations based on objective, rules-based criteria designed to identify undervalued, high-momentum, or otherwise attractive investments. They can also better protect you from being swayed by emotion because a trusted outside authority is guiding your decisions.

3. Work with an adviser

Here the key is understanding the adviser's process. First, does he or she work as a fiduciary? That means the adviser has formally agreed to only recommend investments that are in your best interest and to disclose all fees and commissions. Next, how does he or she make investment decisions? Again, you're looking for objective rules you understand and agree with and the adviser's discipline to follow the rules.

Working with an adviser is usually the most expensive process you could employ (typically, you'll pay 1 percent of the value of the portfolio they manage for you). However, it may also provide the best protection from yourself. For one thing, a good adviser acts as a therapist during times of market stress, talking clients out of emotional buy or sell decisions. For another, the adviser typically has direct control over your portfolio; you don't. (See also: Ask These 5 Questions Before Deciding On a Financial Adviser)

Each of these processes could guide you through any market. But you have a role to play as well. Here are two ways you can tip the scales further in your favor:

Manage your expectations

The market ebbs and flows and so will the performance generated by even the best investment process. Your willingness to accept some down months, and even some down years, will go a long way toward helping you stick with your chosen process.

Having some sense of what to expect will help. If you're taking a DIY approach, you can see how various allocations have performed over the years (see Vanguard's portfolio allocation models). By the same token, you should understand how a newsletter's strategy, or an adviser's, has performed during past bull and bear markets.

While past performance won't tell you exactly how each process will perform in the future, it can help manage your expectations. That may not make riding out a downturn easy, but it should make it easier.

Tune out the noise

Adopting a trustworthy investment process will not silence the headline writers, investment analysts, or your coworkers who like to brag about their latest investment conquest. However, it should help you turn down their volume and keep you focused on following your chosen process. (See also: Want Your Investments to Do Better? Stop Watching the News)

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This article is from Matt Bell of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

5 Ways to Invest Like a Pro — No Financial Adviser Required

Matt Bell — Mon, 17 Apr 2017 09:00:09 +0000

Investing can be intimidating. There's a unique language, with expense ratios, ETFs, and dollar-cost averaging — oh my! And there's a lot at stake, like your retirement. (See also: Beginner's Guide to Reading a Stock Table)

However, at the risk of sounding like a home repair store commercial, you can do this and we can help. With the following five keys, you'll be well on your way toward becoming a confident, successful, do-it-yourself investor.

1. Commit to the market

The stock market has been on a tear. Since bottoming out in March 2009, it nearly tripled in value by the end of 2016. And since the start of this year, it has only climbed higher. Unfortunately, for many people, it doesn't matter. According to a recent Gallup poll, about half U.S. adults are not investing in the market.

Some waffle. They're in when it seems safe; they're out when trouble strikes. But pros don't waffle. They're in it for the long haul because they know that as a long-term investment, the U.S. stock market has delivered average annual returns of nearly 10 percent.

2. Know your goal

The most common investment goal is retirement. It that's your goal, make it as specific as possible. How much money do you want to have? By when? And how much do you need to invest each month in order to get there? These questions can feel overwhelming at times, but you need to answer them in order to get a clear picture of your path to a secure retirement. (See also: How Much Should You Have Saved for Retirement by 30? 40? 50?)

3. Determine your optimal asset allocation

While many of the headlines in the investment press are about which investments to choose, there's a different factor that'll have an even greater impact on your investing success. It's making sure you've determined your optimal asset allocation.

Asset allocation refers to how you divvy up the money you invest between asset classes, with the two most important ones being stocks and bonds (preferably, stock and bond mutual funds, since mutual funds enable you to hold a diversified "basket" of stocks and bonds).

Generally, when you're young, your portfolio should tilt more toward stocks. Yes, your portfolio will experience sharper ups and downs, but you should have the time to ride them out, and a higher-risk portfolio should lead you to higher returns. As you get older, you would be wise to reduce stock exposure and increase your allocation to bonds. (See also: The Basics of Asset Allocation)

4. Choose an investment selection process

Pay no attention to headlines touting "This Year's Top Mutual Funds" or "Why You Must Own Gold Now." And tune out all hot tips from your brother-in-law or coworker. What you need is a trustworthy investment selection process.

You could keep it super easy by choosing a target-date mutual fund. These funds have years as part of their name, such as the Fidelity Freedom 2040 fund. Just choose the fund with the year closest to the year you intend to retire. Its stock/bond allocation will be what the mutual fund company thinks is the appropriate mix for someone with that much time until retirement, and that allocation is automatically made more conservative over time. Target-date funds aren't perfect, but they get a lot of the big picture decisions right.

If you prefer a more hands-on approach, you could do your own research and choose index funds to build a portfolio that reflects your optimal asset allocation.

Or, you could subscribe to an investment newsletter, some of which cost far less than the fees charged by financial planners. Investment newsletters usually offer a number of different strategies and then tell you what to invest in. You're still a do-it-yourself investor. You maintain your own account and make your own trades, but you follow the investing process outlined by the newsletter. (See also: Should You Trust Your Money With These 4 Popular Financial Robo-Advisers?)

5. Understand the terrain ahead

One of the most important roles a financial adviser plays is seen during market downturns. That's when the best become therapists, speaking calm words of wisdom into the lives of frightened clients. You could serve the same role for yourself with a little understanding of how the market works.

If you hear that the market turned in a great performance in a certain year, it's easy to make the mistake of assuming this wonderful result came about through a smooth, yearlong, upward ride. It doesn't usually work that way.

Expecting some turbulence can help calm your fears and keep you from selling when the market gets wobbly. (See also: Want Your Investments to Do Better? Stop Watching the News)

Taking all of the steps above will get you headed in the right direction. You have a plan. Now put your plan into action and stay with it. The longer you invest, the more confidence you'll gain and the more comfortable you'll become at being a do-it-yourself investor. (See also: The Only 4 Things You Need to Do to Start Investing)

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This article is from Matt Bell of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread: