For years, there was pretty much one investment playbook: If you weren't working with a financial advisor, you'd self-invest. Now, with robo-advisors there's an automated option too, and it can be tricky to pinpoint which strategy — or strategies — will work best for you.
To bring some clarity, we're sharing the ins and outs of each. Read on for details that can help you make a smart decision.
Many people also refer to self-investing as DIY investing, or do-it-yourself investing, and the concept is just what it sounds like; you are the one building and managing your financial portfolio. To get started, you sign up and open an account with a self-directed online brokerage. From there, after funding your account, you purchase and eventually sell stocks, bonds, mutual funds, certificates of deposits and other investments. The method comes with a mix of advantages and disadvantages.
Experienced and knowledgeable investors, McAlley says. And Lisa Whitley, a Washington, D.C.-based accredited financial counselor and chartered retirement planning counselor, agrees. "The right person to self-invest is someone with the discipline to sit on their hands when their emotions tell them to do otherwise," she says. "This means not only avoiding selling at the wrong time but also having the self-control to pass on concentrated, risky bets."
Obviously, every self-investor starts out as inexperienced, and if you're new to this, it doesn't mean you shouldn't try to self-invest. But the prevailing wisdom is that you never want to invest more than you can afford to lose. Experienced investors have seen enough market shifts to know that it often takes a lot of time and patience for investments to accumulate wealth.
Essentially an automated, algorithm-driven software program that offers financial planning and investment services, robo-advising takes the human element out of the decision making. The investor answers questions from a robo-advisor on an investing website and shares their financial goals. In response, the robo-advisor matches you to a portfolio that is appropriate based on your answers. Once you fund your account or accounts, such as a Roth IRA or mutual funds, it will automatically make your investments and, just as importantly, monitor them 24/7. There are upsides and downsides to this approach.
Someone who is serious about investing but has no interest in doing all of the work that goes into it themselves. If this is you, you can go with either a robo-advisor or a hybrid version that entails paying a little more for access to professional financial advisors who can answer questions. It also helps if you have a good sense of what type of financial future you want and can clearly articulate your investment goals, Whitley says. "Robots are pretty smart," she notes, "but they can't read your mind."
If you're on the fence about self-investing or using a robo-advisor, you can always dab your toe in both to see which suits your financial personality best, or even stick with a mix long-term. Eventually if you feel you need a professional's touch, you can always start working with a financial advisor on a regular basis.
Of course, the most important thing isn't whether you self-invest, use a robo-advisor or get advice from a financial advisor. It's that you're investing in building your future, such as creating wealth during your retirement years, in the first place.
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