Q. What do you think are good ways to ensure someone is really ready to take on their personal finances for themselves? From reading posts on The White Coat Investor Facebook Group, many people seem very educated about finances and are asking good questions. However, I also find that some who comment seem more confident than anything else. Other than continuing to read and learn, I wonder if there is a certain point where a person should know that they are capable of being a do-it-yourself investor rather than using the various types of assistance out there.

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A. I thought this was a great question and spent a long time thinking about DIY investing before writing this post. Hopefully, I answered it well, but if I didn’t, I’m sure you’ll let me know in the comments section.

# 1 You Don’t Have To Be Fanatical

Thanks to the reach of this website and podcast, I’ve interacted with literally hundreds of thousands of high-income professionals over the years. Many of those have used the information I have presented to learn how to competently manage their own finances. By doing so, each of them will save hundreds of thousands, perhaps millions of dollars in advisory fees over the course of their lifetime. However, this DIY financial planning and investment management thing is too often presented as a dichotomy–you either have a full-service advisor or you do it all yourself. In my experience, there are many, many people who have found a middle path. That path may involve using a good fee-only advisor to draw up an initial financial plan, answer some questions, and set up a portfolio for you. The path may involve using an advisor for a few years before taking over yourself. Sometimes the advisor manages one account while you manage another. Sometimes people just check in with an advisor periodically for a second opinion on what they’re doing. This is especially common as people approach retirement.

Of course, there are also people who don’t want to do it themselves at all. I met another one the other night, a residency-mate of mine. She has zero interest in finance. She will never read this blog post. Frankly, the best thing I can do for her is to make sure she’s getting good advice at a fair price. Yes, she’s going to end up paying a lot of money for this, but she will be far better off paying a fair fee than doing a poor job of planning and investing on her own.

So, the first thing you need to realize if you’re going to be a competent DIY investor is that you don’t have to DIY to be successful. You can work with a financial advisor and reach your goals.

# 2 You Find Investing Interesting

A major characteristic of DIY investors is that they find personal finance and investing interesting. Not necessarily thrilling, but there is a certain amount of a hobbyist mentality that seems to be required. If you have enough interest, you will develop the knowledge and discipline required to be successful. But there’s very little that can be done if you can’t find even a modicum of interest in this stuff.

# 3 You Can Write Your Own Financial Plan

Producing a written financial plan isn’t that hard to do. Many DIY investors are perfectly capable of doing so after reading a few good books and blogs and perhaps participating on some good internet forums for a while. Others need a little more help. Katie and I feel having a written plan is extremely helpful in reaching your financial goals, so much so that we spent two months of our lives putting together an online course to help you to make one. Many who don’t yet feel competent making their own plan will feel so after taking that course. However, others will need even more help and should hire an advisor to help them draft a plan, even if they don’t plan to continue to use the advisor.

If writing a financial plan seems easy to you, you’re probably ready to do it on your own. If that task sounds impossible, you’re not ready.

# 4 The Fees Become Onerous

Most DIY investors are really bothered by paying advisory fees. It’s not that these investors are cheap (although they often are), it’s that they simply don’t see value there equal to the price being paid. When you start looking at your advisory fees and they really start bothering you because you feel that any mistakes you might make are going to cost you less than you would be paying someone else to prevent them, you’re probably ready to do it on your own. I wish it were true that advisors never make mistakes either, but unfortunately, that’s far from the case, especially given the minimal requirements to call yourself an advisor.

I’m not talking about ridiculous fees here. If you’re paying five figures a year for financial services, you can almost surely get similar quality advice for less. But when an advisor offers to manage your portfolio for $2K a year (a VERY fair price) and you think “No way I’m paying that,” you’re probably ready.

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DIY camping on a 2,000-mile road trip from SLC to Cabo San Lucas.

# 5 When You Start Poking Holes in the Advice

After a while, many DIYers realize that they know more than many advisors. They start poking holes in the arguments and recommendations of the advisor. They can actually take a position and argue it well in many of the common debates out there such as:

Many of my readers have had this experience as they’ve tried to teach their advisors about the Backdoor Roth IRA or the Multiple 401(k) Rules. When they realize they’re paying to teach their advisor, they’re probably well on their way out the door, along with their assets.

Note that becoming furious at bad advice that you’ve been given is not enough to DIY. Just realizing you’ve been sold whole life insurance inappropriately and overcharged for advice isn’t enough, although that often provides the motivation to get to enough in more ways than one.

# 6 You Have Read Some Books

While it may be possible to become a competent DIY investor without ever reading a financial book, it seems unlikely to me. I’d put the bare minimum for my readers at four books – a book on personal finance, a book on investing, a book on behavioral finance, and a physician-specific book. Here are some recommendations.

# 7 You Know How To Answer Your Own Questions

When you first get started, you don’t even know what questions to ask. Then after a while, you know the questions but need some guidance to find the answers. I get these questions all day by email, Facebook, Twitter, and even in person. The next step is knowing how to answer the questions yourself. That might just be knowing who to ask, but more likely it involves knowing the language of finance so you can Google appropriately. It also involves a baseline level of financial knowledge so you have a framework into which you can insert the new information. It’s probably going to involve knowing your way around the various IRS publications and form instructions. You’ll know how to use the Morningstar database and mutual fund provider websites to learn about funds. You’ll have found some reliable forums and blogs that you can trust. Maybe you’ll even have built a network of trusted advisors or friends you can go to. But however you find the answers, you’ll know you’re competent to DIY when not knowing the answer to a question no longer fills you with dread and a desire to run out and hire someone to just do all this “money stuff” for you.

# 8 You Find Yourself Teaching

Here’s another common experience among DIY investors. They find they are spending far more time teaching than learning, whether in person or online. Many of them start blogs, do podcasts, or become fixtures on internet forums. They are often the “go-to” financial person in their group or residency program. If you feel like you could give a lecture to other doctors on the basics of personal finance and investing, you are probably ready to be a DIY investor.

# 9 Balance Confidence with Humility

The classic surgeon stereotype is that they are sometimes right and sometimes wrong but never in doubt. It takes a certain amount of confidence to take on a task like managing hundreds of thousands or even millions of dollars. If you don’t yet have that confidence, you may not yet be ready to be out on your own. Of course, you don’t want to be overconfident either. For example, if you think you have a working crystal ball that will show you future economic scenarios, interest rate changes, or market performance, you’re probably overconfident. A certain dose of humility about how much more there is to learn is helpful, but you don’t want to be so “humble” that you’re paralyzed from taking necessary steps. Many DIYers have commented to me that their confidence actually trailed their knowledge by about a year and that they should have fired their advisor about a year before they did.

# 10 You’ve Developed Discipline

While I believe that most people with sufficient interest will develop both the needed knowledge and discipline to be successful, you don’t really know how disciplined of an investor you are until you’ve suffered through your first bear market or economic downturn. I’m always amazed and worried to see brand new investors extolling the virtues of 100% stock portfolios and heavy doses of leverage. I think you are better off erring on the conservative side of asset allocations and leverage until you know yourself a little better. Then if your behavior in your first bear market is good, you can ratchet up the risk a little bit. If you’re like most though, you’ll probably find your risk tolerance is a little lower than you thought.

Underestimating your risk tolerance is no tragedy. Your return matters far less than your savings rate early on anyway. But overestimating it can be a financial catastrophe, especially late in an investor’s career. Risk tolerance is a lot like The Price is Right–you want to get as close as you can to your risk tolerance without going over. That would be a lot easier if your risk tolerance were stable. Unfortunately, we all have higher risk tolerance when we’re making money than when we’re losing it. The risk tolerance you care about is your risk tolerance AFTER you’ve lost years worth of savings.

I hope these ten suggestions can help you determine whether you are now competent to be your own financial planner and investment manager. It’s certainly a lot easier if you start earlier when the consequences are smaller. But it’s really the same game — later on, there are just more zeros at the end of the numbers. I’ve managed four, five, six, seven, and perhaps eventually an eight-figure portfolio. It really is the same thing. I used to get nervous to buy $1,000 worth of stock but now swing around six-figure amounts just to do some tax loss harvesting. With time, you become more and more competent. Well, at least until the last decade or two of life, but that’s a subject for another time.

What do you think? Are you a DIY investor? How did you know you were competent to do so? Were you overconfident at first, or underconfident? Comment below!