As you build your personal wealth (by increasing your personal income, automating your savings, and cutting your biggest expenses), you’ll need one more piece to make your financial plan a success and achieve your goals: to properly invest your savings.
Investing puts your money to work for you and increases your overall earnings, which drives your wealth-building engine even more…
But investing properly isn’t necessarily simple or easy. There are risks involved (which we tend to avoid), and so many options available that we often feel paralyzed by the choices and take no action, or defer to a professional (financial advisor), who often charges hefty fees for their services.
While many personal finance and investment writers will advise you to manage your own investments entirely, I would argue that in some cases it does make sense to hire a financial advisor (disclosure: I am not a financial advisor).
When to hire a financial advisor (FA) or financial planner
- Are Very Risk Averse (especially when thinking about money)
- Have a very limited understanding of the financial world
- Have a very limited amount of time to dedicate to self education on investing
- Have opportunities to earn more by working/consulting than the cost of hiring an FA
If any of those sounds like a match, then you can look into hiring an FA. But you want to choose a good one, meaning someone trustworthy and with a reasonable fee structure. Unfortunately, some financial advisors/planners just try and sell you their company’s products or push you to make trades so they earn commission. I don’t blame them, they have to make a living, but it’s not ideal from the clients point of view.
When choosing a financial advisor, you’ll want to consider their qualifications and pay structure. This article from the Wall Street Journal gives some good tips on finding and choosing a high quality financial advisor/planner:
When to manage your own investments
If you don’t feel like you strongly fit with any of those descriptions above, and you feel comfortable learning a little about the investment world and managing your own money, then read on for my take on some investment strategies.**
The investment world can be murky and complex, with a wide array of investment options available. For the do-it-yourself investor, it’s generally advised to diversify your holdings (so as to limit your risk exposure to any single investment or asset class), and to choose your asset allocation based on your risk tolerance, long term goals, and time horizon.
Your risk tolerance is a deep part of your own personal character… Are you the type of person who can see an investment lose 10%-20% and be comfortable holding on to make it to better times? Or does even the thought of a 2% loss keep you up at night in cold sweats? Most people fall somewhere in between. For each investment idea I outline in Personal Wealth Basics, I will clearly indicate the level of risk I perceive the investment to have.
Long Term Goals
Do you want to try to retire early with a multi-million dollar nest egg? Or are you comfortable working till 65 or 70 and retiring on a modest income during your golden years? Your investing style and investment selections need to take into account your goals, with bigger targets requiring more aggressive investments. But always keep this in mind: there is a direct relationship between risk and reward, and any investment with potentially high returns has a correspondingly high level of risk, and could drop in value.
The younger you are the more risk you can take with your investing, because you have a longer time to make up any potential losses. On the other hand, if you’re retiring soon, you shouldn’t be investing your entire nest in something risky like small cap equities, because you’re gonna need those savings soon, and a drop in value would really hurt. So younger, more risk; older, less risk.
You should now ask yourself where you fall in relation to the categories above, and how that will affect your overall investment strategy. Classify your overall risk/reward profile on a scale of 1-10:
1: Extremely Conservative,
5: Conservative/Risk Balance (Moderate Risk)
10: Risk Seeking
In upcoming articles I will cover a range of asset allocation options for different risk/reward profiles, and a number of specific investments on the riskier end of the spectrum that have potentially higher returns.
**Disclaimer: I am not certified as a financial advisor, and all investments mentioned are subject to a number of risks. You need to do your own research before making any investment decisions.