DIY Investing – 4 Questions

I am often asked by prospective clients why they should work with an investment advisor. This question usually comes up after I have explained the differences between active and passive investing and why Cascade Wealth uses only passive investment strategies. At this point, most people are convinced that they should have a passive portfolio. It seems pretty simple. The goal is to capture the returns of the market and minimize expenses. There is no active management. No effort to beat the market. No trying to pick the next hot mutual fund. Just build a portfolio using low cost index and passive funds and keep an eye on it. … So, why would anyone want to pay an advisor for this?

I respond to this question by asking four questions. I tell these people that if they can answer “yes” to each question, then they probably don’t need an investment advisor.

1. Are you capable of learning how to passively manage your own investments? This requires understanding basic investing principles. It also involves learning a bit about Modern Portfolio Theory. The concepts are not extremely difficult to grasp. But becoming knowledgeable and competent takes some capacity for math.

2. Do you have the time to learn how to build your own portfolio? Do you have the time to monitor it and adjust it when necessary? The initial construction of the portfolio is important to the ultimate success of the portfolio over time. You really need to get that right. But you also need to monitor the portfolio over time. Passive investing is not neglectful investing. Also, will you systematically rebalance the portfolio when appropriate?

3. Will you enjoy managing your investments? We tend to avoid the things we do not enjoy. So, if you are not interested in managing our investments, you will probably not put in the effort that it requires. On the other hand, I do get concerned about those who are a bit too enthusiastic about managing their investments. They are prone to tinkering with things when it is not necessary.

4. Can you manage your emotions and make rational decisions about your investment regardless of what is happening in your personal life and in the world around you? This is the most important question. I meet many people who are able to answer the first three questions in the affirmative. But when they ponder their past experiences with investing, they realize they have not been able to keep their emotions out of the process. I believe a good investment advisor adds the value to client relationships by helping them manage the emotions we all feel towards investing.

Those who can check all four boxes probably can manage their own accounts and experience satisfying long term results.