I was recently asked how much time it takes to be a do-it-yourself investor (as opposed to using a financial advisor to manage your portfolio for you).
My reply was that it takes a considerable amount of time, which is interesting because the actual management of a do-it-yourself portfolio hardly takes any work at all:
- Rebalancing once per year is usually enough,
- Contributions (or withdrawals) can be set up to happen automatically, and
- Tax loss harvesting aside, there’s little benefit to checking your portfolio very frequently.
In other words, managing a do-it-yourself passive portfolio consists mostly of patiently, willfully doing nothing. (I’ve always liked the term “benign neglect” that John Bogle uses in his Common Sense on Mutual Funds.)
So Why Does It Take Work?
It takes work because in order to be successful over the long haul, you’ll have to educate yourself. You have to educate yourself so that you’re prepared for two challenges that will arise.
Challenge 1: At some point in time, your portfolio will perform downright miserably. (Exactly how miserably depends on whether you have an aggressive or conservative asset allocation.)
You need to be prepared for that. You need to know why you chose your portfolio in the first place, and you need to know why a period of lousy performance doesn’t necessarily mean you chose poorly.
Challenge 2: Over the course of your investing career, there will be many times when somebody (whether a broker, a financial advisor, your neighbor, an insurance agent, an author, or somebody on TV) comes along recommending a different investment strategy. And that person will have data showing that over some particular period(s), his/her strategy performed better than your own portfolio.
You need to be prepared for that too. You need to be able to spot the flaws in their arguments so that you don’t give in and swap out your entire portfolio every time someone comes along with a different suggestion.
Education is Inoculation
Educating yourself about investing works to inoculate you against both the doubts caused by periods of poor performance and the numerous alternative-strategy sales pitches you’re sure to run into over the years. The more you know, the safer you are.
Hi. I'm Mike Piper, the author of this blog. I'm 
Mike,
Both challenges have happened to me- for #1 I found it helpful to remind myself that I am not planning on touching the $ for another 25 years, which is more than enough time for the market to recover.
For #2 I remind myself that the index route is the most likely strategy to give me the best gains. There are plenty of individual stocks that will trounce the indexes and there are plenty of individual stocks that will lose most of their value over the next 25 years. The problem comes with trying to pick which are which without a crystal ball.
-Rick Francis
Great post, Mike. Ironically, when it comes to do-it-yourself investing, success comes more from resisting the temptation to act than it does from the actions themselves.
Mike, as we discussed off-line, I can see rebalancing semi-annually or using the band approach as desirable in my situation — which is: a) stocks are now on a rise, b) I am mainly contributing to my 401k which is all in a Fidelity Spartan Total Stock fund as we don’t offer many funds with low expense ratios. As a result, my stock/bond ratio is quickly getting out of whack even after a reent rebalance.
“How do you decide when to rebalance?” I would do so if my ratio much exceeded 5% of target allocations.
Vanguard and Fidelity have restrictions in place, however, to prevent excess buying/selling from one fund to another.
As for peeking, I don’t mind doing that once a week or so just because it’s interesting. It doesn’t matter so much if you peek, so long as you don’t doing anything hasty after you peek.
So I recently went through and plotted out my percentages, made the purchases and now I wait. I guess the question that arises, is there is most likely going to be a correction of some sort in the market. When does it make sense to move funds out to avoid a drastic loss like we saw in 2008/2009?
Larry: Indeed. As we discussed, there are certainly some situations in which more frequent rebalancing is probably wise. And I agree that the “5% off target” trigger is probably a good way of going about it.
ChrisCD: I guess I’d say it makes sense to move money out of the market as soon as you’re confident that it’s in for a correction. I have no such predictive powers, so I just keep my stock allocation fully invested and take my lumps as they come.
I completely agree with you, Couch Potato. The market makes you hundreds of offers a day, and the financial media is no help at all in deciphering them. There are two pieces to buy and hold, and each one is difficult in it’s own way! I’ve found sticking to my strategy and holding on to the companies I believe in has worked very well for me.
Perhaps the most difficult question that a do it yourself investor has to answer is, what is the appropriate asset allocation now and how should it be adjusted as retirement gets closer.
One benefit of working with an adviser is that they will determine the initial allocation systematically and periodically re-evaluate to ensure that it remains appropriate. A good adviser will also act as an educator to help investors understand the implications of the things described in the challenges above and stay focused on their goal.
Great article,
Charlie Koch
Smart401k
I don’t think the education part takes long at all. Read “The Elements of Investing” by Malkiel and Ellis or “The Smartest Investment Book You’ll Ever Read” by Solin (both weekend reads) or a long list of many others. The message is basically the same in all of them. The key is whether the investor buys into the low cost indexing approach. Once you get it, understand the value of setting up an appropriate asset allocation, and embrace falling markets as a fire sale opportunity it takes very little time.
DIY Investor: I respectfully disagree, obviously. In my experience (which is nothing but anecdotal) one or two books doesn’t cut it.
That’s enough for the investor to get the main ideas and to say, “yeah, this makes sense.”
But people can make very convincing-sounding arguments in favor of using not-actually-very-smart investment strategies. In my (again, anecdotal) experience, having read one or two books isn’t enough to give a person a) all the knowledge they need to be able to see the flaws in all those strategies and b) the confidence that those are in fact flaws.