5 Hidden Costs of Managing Your Own Money – And When to Get Professional Help
Are you ready to start investing but don’t want to pay to hire a financial adviser? You may be considering handling your investments by yourself. If so, you’re not alone. Around 34% of Americans choose to manage all their own investments, according to a 2022 eMoney Advisor survey. And around 30% say they rely on friends and family for financial guidance.
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But is this truly the most cost-effective solution? According to financial experts, here are the hidden costs of managing your own money.
1. Internal Investment Fees
Jason Noble, a financial advisor at Prime Capital Investment Advisors with 18 years of experience, finds that many investors forget to factor in their underlying investment expense ratios or their strategy’s trading costs.
“I see this a lot within 401(k)s and 403(b)s,” he said. “For instance, when I first met one couple, I found their average expense ratio on their 403(b)s was 1.98% a year. They had no idea that was the internal cost as they would have had to read through pages of disclosures to find that information, and if they had found it, they would have needed to know how to read it.”
These extra costs can have a substantial impact on your financial investments over time, so watch them carefully.
2. Not Rebalancing Your Portfolio
Rebalancing your portfolio is when you sell when prices are high and buy when they’re low, Noble explained. For example, if half of your portfolio had been stocks and half had been bonds in 2010, your portfolio would have eventually shifted to 75% stocks and 25% bonds because of how much faster stocks grew over the years.
“If you didn’t rebalance and went into the 2022 market, your portfolio would be overexposed to stocks, causing the risk to drift higher,” he said. “With higher risk, you have a higher potential for upside return and higher risk for losses.”
3. Not Diversifying Your Portfolio
Carlos Legaspy, president and CEO of Insight Securities and author of “Going for Broke,” said one of the biggest pitfalls he sees investors make when managing their own money is not diversifying sufficiently.
“It’s hard to know the whole world of investments, so people tend to buy only what they know,” he said. “As a result, they can miss out on other opportunities, sometimes in other countries or markets.”
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4. Hidden Costs of Asset Location
You may know that you want a mix of stocks and bonds in your portfolio, but asset location determines where you invest your stocks and bonds, explained Noble. You can save on taxes by choosing certain types of accounts over others.
“From a tax perspective, an ideal portfolio construction would minimize the impact of taxes by holding tax-efficient stocks inside taxable brokerage accounts while holding taxable bonds, actively managed mutual funds, real estate investment trusts, and commodities inside tax-advantaged accounts,” he said. “Smaller Roth IRAs might have more aggressive investments than larger traditional IRAs.”
If you find it difficult to determine which accounts give you the best tax advantages, it may be time to reach out to a professional for help.
5. Your Time
Noble said hiring a financial professional can also help you regain one of your most important assets–your time. After all, your schedule is likely divided up between being with friends and family, doing hobbies you enjoy, working, doing chores, and running errands. Managing your own money can take time from each of those important activities.
“Evaluating an investment position, rebalancing your portfolio, and considering asset location, expense ratios, and diversification in different asset classes while keeping your emotions in check takes time,” Noble said. “The cost of this is different for each person, and they will need to determine whether they’re willing to pay that cost.”
When To Reach Out to a Professional for Help
Legaspy pointed out that there’s nothing wrong with managing your own investments. And the more you understand about investments, the better you can communicate with your financial adviser.
However, if you want to go this route, it’s best to only use your “play money”–that is, the money you don’t mind risking or losing. This way, your financial adviser can still help you make the most of your long-term investments.
“The largest cost of managing your own money is the cost of an irrational decision,” he said. “In our daily lives, we hire all kinds of professional services, from doctors to plumbers. Financial services are no different. An investment adviser–which is different from a broker–is a fiduciary, and the advice has to be in the best interest of the client.”
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