Do you have what it takes to be self-directed?

[Derek Petersen]

Do you have what it takes to be “Self-Directed” ?

This blog comes to you today from: My backyard! See photo at the end. Fully sponsored by me.

Part 1

A large majority of people should have their retirement funds in a managed planning relationship with a financial planner. This is true. This category of people invest all of their time, money, and energy into their families and work. They usually don’t have any time to look at financial reports or stay tuned into financial market levels. Family and work. Ok, maybe a little football on the weekends mixed in, well, actually Saturday and Sunday games, and well then there is Monday night football! Anyway, that really adds up!

There are people who want total control. Then there are those that want somewhere between total control and “professionally managed”. These folks want a better return and have a minimal threshold of financial curiosity to compel them to learn more.

And, there is a lot of in-between.

I would probably fall at the end of the spectrum on total control.

To compound is to minimize the number of years it takes to double my money. An 8% return will take you roughly 9 years to double your money. What if you worked a little harder, and were able to achieve a 12% return it would take you 6 years to double. I like to be 12-24% returns. If you dedicate enough time and experience you can probably hit 24%. That’s 3 years to double. So in a period of 30 years of compounding, the highest return got you 10 doubles, and the lowest 3 doubles. So 2^10=$1024 vs. 2^3= $8 . So if you started with $10,000, not including taxes, at the highest return you would have $10,240,000, so let’s just say $10 million. And the lower return you would have $80,000.

“Compound interest is the eighth wonder of the world. He who understands it, earns it…. he who doesn’t…. pays it”

-Albert Einstein

Therein lies the payoff for those that choose to pay attention to their investments…and understand compounding.

This is my summary on the Advantages and Disadvantages of Self-Directed Investing vs. Managed Retirement Accounts

The decision between self-directed investing and managed retirement accounts is a critical choice that individuals must make when planning for their financial future. Both approaches have their unique advantages and disadvantages, and understanding these factors is essential for making informed decisions regarding long-term investment strategies.

Self-Directed Investing:

Advantages:

• Autonomy and Control: One of the primary advantages of self-directed investing is the level of control it offers. Investors have the freedom to choose their own investment vehicles, such as stocks: Gold, Real Estate, Debt, stocks, bonds, ETF’s, and mutual funds, allowing them to tailor their portfolios to align with their risk tolerance and financial goals.

• Cost Savings: Self-directed investors often enjoy lower fees compared to managed accounts. By bypassing the fees associated with professional management, investors can retain a higher percentage of their returns over the long term. Cost savings compounded for 30 years becomes a mountain of retirement dollars.

• Learning Opportunity: Engaging in self-directed investing can be a valuable learning experience. Investors have the opportunity to deepen their understanding of financial markets, investment strategies, and economic trends, which can empower them to make more informed decisions. Eventually, if you weren’t inclined before, you will thrive on understanding business and the financials.

• Returns: If you have an adequate toolbox for creating above market returns, you should be able rocket past managed plans and funds.

Disadvantages:

• Time and Expertise: Successful self-directed investing requires time, dedication, and a certain level of financial knowledge. Individuals who lack the expertise or time to conduct thorough research may find it challenging to make optimal investment decisions.

Using me as an example, I have spent many nights and weekends studying, searching, closing, and operating financial assets. However, my guiding principals are to lean in to automation, processes and procedures, and ultimately a passive investing time commitment.

• Emotional Bias: Emotional decision-making can be a significant challenge for self-directed investors. Market volatility and unexpected events may trigger emotional responses that could lead to impulsive decisions, potentially undermining long-term financial goals.

As a remedy to this, see anything from Warren Buffet on investment approach. There really isn’t much emotions involved in Buy and Hold.

Managed Retirement Accounts:

Advantages:

• Professional Expertise: Managed retirement accounts are overseen by professional financial advisors who possess expertise in market trends and investment strategies. This expertise can be especially beneficial in navigating complex financial landscapes and adapting to changing market conditions.

• Diversification: Portfolio diversification is a key advantage of managed accounts. Professional managers can strategically allocate assets across a range of investment vehicles to reduce risk and enhance overall portfolio stability.

• Risk Management: Managed accounts often employ risk management strategies to protect investors from significant market downturns. Advisors may adjust asset allocations and investment strategies based on market conditions, aiming to preserve capital during challenging times.

Disadvantages:

• Fees and Expenses: The primary drawback of managed retirement accounts is the associated fees. Professional management comes at a cost, and these fees can erode a significant portion of investment returns over time. Think of the size of all of these compounding fees? A 1% fee on $10,000 compounded annually at 10% yields about $225,000 in 30 years.

• Limited Control: Investors who opt for managed accounts relinquish a degree of control over their investment decisions. Some individuals may find this lack of autonomy uncomfortable, especially if they have strong preferences for specific investment choices. With limited control over the investments you have a limited control over your risk.

In the choice between self-directed investing and managed retirement accounts, individuals must carefully weigh the advantages and disadvantages to align their investment strategy with their financial goals and risk tolerance. Ultimately, the decision should reflect a balance between the desire for control and the recognition of the benefits that professional expertise can bring to long-term financial success.

If nothing else, run a calculation of the amount of fees you will pay. If you are comfortable with the number and the total deduction from your retirement nest egg…. great. If not, time to start reading and learning.

Best,

Derek

Derek Petersen