How to become a self-directed investor

This is the first in a three-part series on self-directed investing from Navexa.

Do you trust your financial future to someone else, or do you take charge yourself?

It’s a fundamental question you have to answer on your journey to building wealth.

If you’re just getting into investing, or you’re considering taking over control of your portfolio for the first time, there’s a lot of information to get your head around.

In this series of posts, we aim to introduce you to the ideas, skills and discipline involved with taking ownership of your own portfolio.

Never has grasping the principles of self-directed investing been more important.

According to Canstar, ‘we are in the midst of the most significant shift of power in the finance world of the past decade’.

What is this shift?

It’s the rise of the self-directed investor.

Generation X and Y will control about 70% of financial assets within the next 10 years.

We’ll control these assets amid unprecedented trends using new technology and services as we create wealth and build our financial future.

So, will you leave your investments and wealth building to a third-party advisor or manager?

Or...

Take ownership of your portfolio management

“The better you understand yourself, the better you’ll become. You’ll be better. You’ll do better.” — Jocko Willink

Managing your own portfolio is a way of taking direct control of your financial future.

You choose what to buy, what to sell and when to buy and sell it.

You choose your asset allocation.

You choose the types of stocks you invest in.

If you have a vision for how you want your life to be — especially when you retire — then it makes sense that you should steer your investments instead of paying someone else to do so.

But, it only makes sense if you have...

The time, the inclination and the discipline.

Portfolio management requires focus and energy.

But when you look at how those whose full-time job it is to manage other people’s money perform; you can see why it can be worth taking ownership.

This article from Liberated Stock Trader reveals that more than 60% of fund managers failed to beat the wider market over a 12-month period.

Over three years, a staggering 92.91% failed to beat the market index.

Now, if the market is rising, it’s not the end of the world if a fund manager fails to beat it.

If stocks rise 10%, you theoretically increase your portfolio’s value by the same amount.

The thing is, you’ll pay the advisor or fund manager a percentage for achieving nothing more than the broader market did anyway.

Worse, you’ll pay them for a return that is actually below what you would have made simply investing in an indexed fund.

And worse still...

You won’t gain the knowledge and understanding that comes from taking ownership of your own investing.

As retired Navy SEAL commander, Jocko Willink, points out, the better you understand yourself, the better you’ll do.

In other words, by taking ownership of your own investments rather than paying someone else (who probably won’t beat the market)...

You can directly guide the investments that will determine your financial future.

Are you ready for that?

Great. Next, you’ll want to...

Learn From The Portfolio Management Masters

“Someone is sitting in the shade today because someone planted a tree a long time ago.” — Warren Buffett

Taking ownership means you will need to take guidance from others who have done the same.

You can save yourself having to learn hard lessons by studying those who’ve learned them before you.

You will have at least heard the name Warren Buffett.

The finance world generally regards Buffett as the king of investing.

Buffett followed the principles set out by Benjamin Graham to amass a multibillion dollar fortune.

If you’d invested $10,000 with Buffet’s Berkshire Hathaway in 1965, that investment would now be worth more than $50 million.

But more amazing than the gargantuan long-term gains the man has achieved are the simple principles he has followed to get them.

Buffett researches his investments in depth, sticks to a proven formula for selecting sectors and companies, and doesn’t let emotion or hype dictate his decisions.

He’s also deeply patient, claiming his favourite holding period for an investment is ‘forever’.

He has built his wealth by thinking about the long term.

His mentor, Benjamin Graham, is the man behind the ‘value investing’ idea so central to Buffett’s success.

This is the idea that an investment should be worth a lot more than you pay for it.

Graham believed in fundamental analysis. He looked for companies with strong balance sheets, little debt, above-average profit margins, and ample cash flow.

In other words, good companies with favourable outlooks. Simple, right?

Buffett and Graham are just two investing masters you can learn a lot from.

But the list of intelligent, wealthy investors willing to share their knowledge is long and worth diving into as you create your own strategy.

Check out Ray Dalio, John Templeton and Peter Lynch (and feel free to suggest your personal favourites in the comments!)

Three questions to ask yourself before becoming a self-directed investor

OK, so you know you’re living in a time of massive change.

Generation X and Y are becoming the dominant forces in the financial markets.

The way we invest — our values, objectives, the tools and tech we’re using — is changing rapidly.

Financial advisors and mutual funds tend not to deliver great returns (especially when you take their fees into account).

The masters like Buffett and Graham prove that self-directed investors can flourish if they deploy strategy, patience and critical thinking in a disciplined fashion.

You want to take ownership and start managing your own portfolio.

This great article from Forbes suggests you ask yourself four key questions before you take the reins.

Are you truly motivated to become a self-directed investor?

This isn’t as simple as yes or no.

Rather, define the precise nature of your motivation.

Maybe you’re taking control back from a financial manager and want to maintain a certain performance level while saving on fees.

(Consider that a $1 million portfolio might cost up to $12,000 in fees a year.)

Perhaps you want to test out a particular strategy to boost your returns and take on more risk.

Or, maybe you’re looking to invest in a specific area of the market you understand and are passionate about.

Whatever your motivation, be clear about it from the outset of managing your own investments.

Will you make the time to manage your portfolio?

Managing your portfolio isn’t a full-time job.

But it will take a serious commitment of both time and energy.

If you’re just learning about investing your money and implementing a strategy, be patient and prepared to dig in — especially at the start.

Your investing style will also affect how much time you need to commit week to week.

If you’re a buy-and-hold type of investor, you might not need to keep tabs on your portfolio as much as you would if you were a day trader.

Either way, understand that taking ownership of your investments like this requires a significant time commitment.

What knowledge do you already have — and how much will you learn as you go?

You don’t need a finance degree to manage your own portfolio.

But, you do need to be able to interpret large amounts of information — about the markets, the business world, your own financial goals — to make good decisions.

Don’t invest beyond your current level of knowledge.

Seek guidance from those more experienced.

Use second and third opinions to your advantage.

But most of all...

Turn every experience you have managing your own portfolio into a lesson you can implement next time you make a decision.

Taking ownership of your invested wealth means making a commitment to learning all the time.

I hope this first part in our self-directed investing series has been helpful to you.

Read the second part in this series: Choosing An Investment Strategy & Assets For Your Portfolio

Navarre is the Founder of Navexa — a portfolio analytics service made for Australian investors.

Navarre left a lucrative corporate developer job to combine two of his passions; investing and entrepreneurship. He created Navexa because he couldn’t find a portfolio analytics service that met his own high standards. Now, he’s focused on helping as many Australians as possible get more from their portfolios through the smart and creative use of data.

Follow Navarre on Twitter and connect with him on LinkedIn.