By Dr. James M. Dahle, WCI Founder
I have a lot of people interested in being a DIY investor asking me how to successfully do it. They feel like they need just a little bit more knowledge to tackle it without an advisor.
What is a DIY Investor?
A DIY Investor manages their finances themselves. They don't have a financial advisor aka a “money guy.” 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.
Why Be a Do-It-Yourself Investor?
There are really three main reasons to be your own investment manager.
#1 It's Fun!
The first is that DIY investing is fun. If you detest it, you may want to rethink doing this on your own because you are unlikely to learn as much as you need to learn and unlikely to pay as much attention to it as you should (which isn't that much, but it does require some attention).
#2 Control
You get to be in control. Personally, I have zero tolerance for someone else screwing up my stuff. No advisor cares about my money as much as I do. I also get to completely eliminate the risk of my advisor ripping me off, as this once happened to a dentist in my neighborhood who no longer has a nest egg.
#3 Save Money
Perhaps the most important reason to be a DIY investor is to save money. Good financial advice is expensive stuff. It is silly to mow your own lawn, clean your own house, and work on your own car to save money and then turn around and pay tens of thousands of dollars per year to have your money managed. You would be better off learning to manage your own money and paying someone else to do those other chores.
How much does advice cost at typical prices? Well, consider a doctor who decides to save $80,000 per year for retirement starting at age 30 and pays 1% of their assets to advisors each year. By the time they retire at 60, their portfolio will be $1.5 million smaller ($9 million vs $7.5 million) if they used an advisor. If they live another 30 years, their portfolio stays about the same size over those 30 years, and they take out 4% a year to live, they will pay the advisor another $2.3 million in retirement. The way I look at it, if you can learn to be your own competent investment manager, you can make up to $3.8 million worth of mistakes and still come out ahead! Think of managing your own money as a very well-paid hobby.
Although I'm against bad financial advice and against overpriced advice, I am in favor of good advice at a fair price. The financial advising industry isn't hosing everyone and not all advisors are charging 1% AUM fees. Some advisors are better than others, and I've compiled a list of fairly-priced advisors that I trust to help you when needed. If an advisor can help you save and invest in a reasonable plan and can keep you from doing dumb things with your money (like bailing out in a bear market), paying a reasonable fee can be worth millions of dollars to you.
More information here:
What Is a Financial Advisor? How to Choose the Right Fit
Start DIY Investing Slowly
Managing your own money is easiest if you start doing it at the very beginning when you have hardly anything to invest. Your financial life tends to be pretty simple at that point. Your taxes are easy. You have few investing accounts available to you. Your portfolio might only be four figures or a low five figures. Mistakes made on a portfolio that tiny are extremely inexpensive.
But even if you're a few years into practice, you can still start slowly. You don't have to fire your advisor the day you decide to be a DIY investor. You can watch what your advisor does, ask lots of questions, and learn. You can also manage a portion of your money on your own—perhaps just your Roth IRA or just your 401(k) or just a 529 or just your taxable account, and you can see how you do and how much you like it. If you are like most, you will find it to be a relatively easy task and will soon feel comfortable managing the whole thing.
Some Learning Required to Be a DIY Investor
There are a few things a DIY investor must learn, either as education before you start or as part of your on-the-job training. Just as there is medical terminology, there is a specific language of finance. The more you deal with it and read about it, the more natural all of these words will be to you.
In particular, you should learn everything there is to know about your own personal retirement accounts. Your 401(k) is unlike that of anybody else (except your co-workers). Read the plan document. If your 401(k) is at Vanguard, read about all the investing options and fees. Read the prospectus of any mutual fund you are considering investing in. Compare one fund to another using the Morningstar database. Look up all the funds in your 401(k) there, specifically to see what they are invested in and what their fees are.
The good news is that you don't have to know everything about tax law or investing. All you have to know is the part that applies to you. Once you've learned that, very little changes from year to year, so you can automate a great deal of it down the road. Read a few books. Follow a good blog or podcast. Participate in an internet forum or two. This stuff isn't that hard to learn if you have even a little bit of interest in it.
Another important aspect of a DIY investor's learning has to be market history. I'm constantly surprised, particularly during a market downturn, how many people seem to have no idea what has happened in the past. They're surprised when markets go down 8% or 15% or 25%. They worry they should be doing something or that there is a problem with their investing plan. Reading and learning about market history allows you to ignore stuff like that. Not only has it happened before, but it happens all the time and is largely irrelevant to meeting your investment goals.
For example, from 1900-2013, there were 123 “corrections” (where the stock market drops 10% or more from previous highs) and 32 “bear markets” (where the stock market drops 20% or more from previous highs). What's the takeaway message? You should expect a correction every year and a bear market every three years. If you have a 60-year investing horizon (30-year career plus 30 years in retirement), you should plan to pass through 60 corrections and 20 bear markets. This is what markets do. It should not be a surprise to you.
Of course, there is no guarantee that the future will resemble the past, but market downturns should not change your investment plan because that plan should assume there will be tons of market downturns during your life as an investor. But again, this learning can all be done upfront. You don't have to redo it every year.
Invest You Must
Some people seek out an alternative to investing in risky assets. Unfortunately, for the vast majority of us, that simply doesn't work. It's not even an option. You MUST invest and you MUST invest in assets with some risk. The reason why is that riskless assets simply don't pay enough to reach any kind of reasonable goal. If you decide you're not going to invest in risky assets like stocks or real estate and instead will stick with bonds, CDs, or whole life insurance, you will need to save 50% or more of your gross income every year just for retirement. That's just not an option for most of us. You need to take significant investment risk.
There are two components to that risk:
Shallow Risk
The first, sometimes called shallow risk, is simply the volatility you will see in the value of your investment account between now and the time you need to spend the money. Although this does cause some people to have trouble sleeping, it is relatively insignificant in the long run.
Deep Risk
The second risk, deep risk, is the concept that the value of your investments goes down and never comes back up due to inflation, deflation, confiscation, or destruction. For some reason, very few people lie awake at night worrying about those much more significant risks, and almost nobody lies awake worrying about the biggest risk of all—an inadequate savings rate. That's too bad, since that one is completely under your control.
Setting Appropriate Goals
The retirement savings game is a fairly simple math equation with a handful of variables. Start with a guess about how much income you will need in retirement. Don't worry about being perfectly accurate; you can adjust as you go. But look at what you're currently spending and adjust for those expenses which will go away at retirement and any new ones that might appear.
Let's say your guess is $100,000 per year. Then, subtract out any guaranteed sources of income, such as a pension or Social Security. Perhaps you're left with $70,000 per year. Now, multiply that number by 25. That's about how much you need to save for retirement. $70,000*25=$1.75 million. If instead you've only saved $300,000, you'll burn through that rapidly in retirement spending $70,000 of it each year.
Now that you have “your number,” you need to know how much to save each year. This depends on how long you have until retirement, how much you have now, and how much your investments can earn each year. Be sure to adjust your numbers for inflation. For example, if you invest aggressively, it is probably reasonable to assume your investments will earn 5% a year after inflation. If you need $1.75 million, want to retire in 15 years, and currently have $400,000 saved toward retirement, you can use the Excel PMT function to see how much you need to save each year. It looks like this:
=PMT(5%,15,-400000,1750000)= -$42,562.09
You need to save $43,000 a year to reach that goal.
Choose a Simple Asset Allocation
The next step for a DIY investor is to choose an asset allocation, a plan for how you are going to invest your money. Since you need a 5% real (after-inflation) return, you will need to invest aggressively. That means most of your money should be invested in risky assets like stocks or real estate. The exact percentages don't matter all that much, but you want something low-cost, diversified, and with an appropriate level of risk—high enough that it will reach your goals and low enough that you can tolerate the volatility. There are hundreds of reasonable asset allocations. Pick one you like, write it down, and stick with it. Perhaps this will be your plan:
- 25% US Stocks
- 25% International Stocks
- 25% Real Estate
- 25% Bonds
Certainly, you can make your investment plan more complicated, and there may even be some benefits to doing so. Each of these major asset classes has sub-classes, and there are entire asset classes not included in the above portfolio. But once you get beyond 7-10 asset classes, you're just playing with your money a la Scrooge McDuck. As Thoreau said, “Simplify, simplify, simplify.” You don't have to invest in everything to be successful. Don't get paralysis by analysis. Remember that you can always tweak your plan later.
Be sure to write down your plan and the reasons why you built it as you did. Then, if you have doubts in a bear market, you can refer back to your written plan.
More information here:
Best Investment Portfolios – 150 Portfolios Better Than Yours
Implement Your Investing Plan
Once you have reasonable goals and a target asset allocation likely to reach them, it becomes relatively easy to implement and maintain the plan. You obviously want to take advantage of any tax-advantaged accounts available to you. Let's say you put $20,500 into a 401(k) each year, your employer matches $3,000 of it, and you put another $6,000 for you and $6,000 for your spouse into Backdoor Roth IRAs. That is a total of $35,500. Since you need to save $43,000 per year, you will need to save another $7,500 per year toward retirement in a “non-qualified” or taxable account. Let's assume you currently have $20,000 in each of your IRAs now, $150,000 in your 401(k), and $210,000 in a taxable account, $60,000 of which is the equity in an investment property. Your investment accounts look like this:
- 401(k): $150,000 + $23,500 per year
- Your Roth IRA: $20,000 + $6,000 per year
- Spousal Roth IRA: $20,000 + $6,000 per year
- Taxable account: $210,000 + $7,500 per year
- Total $400,000
Since your desired asset allocation looks like this:
- US Stocks 25%
- International Stocks: 25%
- Real Estate: 25%
- Bonds: 25%
You can implement your plan like this:
401(k): $150,000
- 500 Index Fund: $100,000
- Bond Index Fund: $50,000
Your Roth IRA: $20,000
- REIT Index Fund: $20,000
Spousal Roth IRA: $20,000
- REIT Index Fund: $20,000
Taxable: $210,000
- Investment Property: $55,000
- International Stock Index Fund: $100,000
- Municipal Bond Fund: $55,000
This setup has a number of benefits. Most 401(k)s have at least one index fund, usually an S&P 500 index fund, and some kind of a reasonable bond fund. REITs have relatively high expected returns but are very tax-inefficient, so they belong in some type of a tax-protected account. They may not be available in your 401(k), so the Roth IRAs are a good choice. All of the investments in the taxable account are relatively tax-efficient. There are other ways to implement this asset allocation into this particular investment account setup, but this is certainly a reasonable way to do it. Your own personal investment setup will have to be individualized to you, but once you write everything down in this format, it isn't that hard.
If you need help, you can meet with an investment advisor who charges by the hour or post it on the forum or the WCI Facebook Group for some feedback and assistance. Like setting goals, coming up with an asset allocation, and educating yourself, most of this work is done up front and then can be mostly automated.
More information here:
How to Build an Investment Portfolio for Long-Term Success
Stay the Course!
Maintaining the plan simply means making the required contributions each year, purchasing additional shares (or investment properties) as needed, and rebalancing the account from time to time, usually with new purchases.
Once you have a reasonable investment plan, the most important thing, perhaps just as important as your savings rate and far more important than your asset allocation, is sticking with the plan through thick and thin over decades. No plan will work if you cannot stick with it. If you can't do so on your own but you can do it with an investment advisor, it will be worth the money you will pay the advisor to help you.
Other Resources for DIY Investors
- The White Coat Investor: A Doctor's Guide to Personal Finance and Investing
- The White Coat Investor's Financial Boot Camp: A 12-Step High-Yield Guide to Bring Your Finances Up to Speed
- The White Coat Investor's Guide to Asset Protection: How to Protect Your Life Savings from Frivolous Lawsuits and Runaway Judgments
- Fire Your Financial Advisor! A Step-By-Step Guide to Creating Your Own Financial Plan
- Physician Wellness and Financial Literacy Conference
- Continuing Education 2022 Course: The Latest in Physician Wellness and Financial Literacy
- WCI Forum
- WCI Facebook Group
- WCI Reddit
- List of Good Financial Books
What do you think? Do you think it is reasonable to be a DIY investor without an advisor? How did you come up with your investing plan? If you used to use an advisor and now do it yourself, what was the hardest thing about changing? What percentage of your colleagues do you think can handle their own investments competently? Comment below!
[This updated article was originally published in 2016.]
Great post. Not important, but you say “Don’t get analysis by paralysis.” I think what you meant was, “Don’t get analysis paralysis” or “Don’t get paralysis by analysis”.
Ha ha. I guess that’s the problem with being your own proofreader. Thanks!
From one DIY investor to another, you’ve certainly hit the high points. I managed to spread out my instructions over 20 Steps, but the message is the same. http://www.physicianonfire.com/20steps/ Read, set your asset allocation based on risk tolerance, implement it, enjoy watching it grow (most of the time), and enjoy the fruits of your labor.
By far, the most important step is the first one. Read. If you haven’t read at least a couple books (and I recommend The White Coat Investor as one of them), you really should.
Having a complete understanding of your personal / family finances is empowering. It takes some time, but most people I know spend far more time on fantasy football than I do on my simple investments.
Very comprehensive list. We individual invest and I will it’s definitely doable but not for everyone. Needing a financial planner is not a sign of failure which should be stressed. I had an article I posted on Monday that the average individual investor lags the market. This is because they fail to continue to follow their plan when the going gets tough and market time. Sticking to the plan when stocks are down 40 percent is the hardest part. If you think you can’t do that your better off paying the planner. If you think you can though, then keep it simple like suggested above. It’s possible to cover all your investment needs from a 3-4 fund selection of index funds and then just keep their percentages in sync with your contributions.
I agree with the do-ability of do-it-yourself, as long as we’re talking about a passive investing approach where low-cost index funds are our building blocks.
If someone wants to take an active management approach, however, do-it-yourself seems much less practical.
FWIW, my standard advice to clients who want to take an active management approach is to read David Swensen’s Pioneering Portfolio Management. That book describes the Yale Endowment fund’s approach to an actively managed portfolio and essentially gives an investor a playbook for taking an active management approach. (Spoiler alert: You need a lot more money and a lot more time than any of us possess to successfully go active.)
You know David Swensen doesn’t recommend individual investors do that, right? See his book Unconventional Success for details.
I think active management is usually a mistake, whether you’re doing it yourself or paying someone else to do it for you.
I do know that. 🙂
FWIW I’ve used the Swensen asset allocation formula for years and love his “Unconventional Success” book. It’s my favorite investing book.
Unfortunately, I’m afraid, with my earlier comment, I was not effective in trying to communicate my belief that a passive approach is absolutely DIY… and that an active approach is not absolutely not DIY because you have to do the sorts of things that the Yale Investments Office does to actively manage their endowment fund.
And then the follow-up point… which is this… to recommend the “Pioneering” book to anyone interested in active management because that book when read by an individual investor makes an incredibly strong case against active management. Most of us individual investors, for example, won’t even know about the alternative asset classes one needs to use as an active investor.
Jim, this has got to be the best post I’ve ever read on this subject. You’ve managed to encapsulate William Bernstein’s “Investor’s Manifesto” book in a single blog post.
I met a med school student last week who wanted my firm to “take care of my investments for her.” She’s smart, motivated and diligent, so I politely refused and sent her here and offered to give her some pointers along the way. I hope she’s reading this post. Hi Lin!
The important thing about doing it yourself—and learning by making small mistakes—is getting a feel for your own risk tolerance. While a good advisor will do their best to measure this risk tolerance at the outset, there is no substitute for experience, even if that experience involves making a few mistakes. it’s just an iterative process, so it’s better to start small and start early.
I also appreciate the fact that you’ve put forward the most valuable part of having an advisor or rather a planner: having someone to help doctors stick with the plan. And to that I would add “having someone help you make a plan” which can be far more complicated than simply managing a portfolio.
Thank you for your kind words.
I agree that the real bang for your buck in portfolio management is setting up the plan and sticking with it in a bear market. The rest is really just “financial chores.” However, the real bang for your buck with any advisor is the financial planning component.
Very good post. It seems hard at first but it is the most rewarding hobby you can have. Reading is the key. I am amazed at the amount of free personal finance info available on the web. In times past I subscribed to newsletters, newspapers, and bought lots of books. Now I buy an occasional book (including WCIs) and read the Wall Street journal. I read several blogs including this one and Physician on Fire. I also consolidated my nest egg to Vanguard a few years ago. It is very easy to use the portfolio analysis tool to see where to put new money and dividends and interest. This tool gives you info on stock/bond/cash percentages as well as growth vs value, small cap vs mid cap vs small cap, international vs domestic. I just plug in the gaps.
I agree. Lots of people ask how I learned all the stuff I know about personal finance and investing. 99% of it was found on books and the internet.
Fantastic post. Bravo
By the way, this should unquestionably become an “instant classic” and be filed under your “classic” posts for first-time readers to find easily
That’s very kind of you.
Your book list is excelent, though I’ll offer up one more suggestion. JL Collins’s The Simple Path to Wealth is excellent for beginners, and even current DIYers will find a few golden nuggets.
We gave a copy to my in-laws last month and helped them see through an advisor that was trying to scam them.
I use personal capital to track where my money is. Since I am relatively young (early 40s) most of my money goes in low cost vanguard index funds. I have sort of given up on re-balancing though, just not worth right now with capital gains in taxable.
My ROTH is for reits, small value and mid cap (all vanguard index funds)
401K for some bonds, TIPS but mainly Vanguard target funds.
You can do a lot of rebalancing without realizing capital gains. Also, sometimes if you don’t rebalance, the market will do it for you. 🙂
If you’re investing regularly rebalancing generally amounts to where to put new money, at least that’s the way it’s turned out for me.
I was going for 20% bonds/TIPS and 80% stocks (not counting rental property and REITS) in my investable portfolio. Stocks are both low cost US and international Vanguard index funds.
With my regular monthly investments, my bond ratio has fallen to like 13-15% or so, however I make that up with extra cash that has accumulated in my savings account due to increase savings. One day I will try to make more sense of it but right now I have been investing in stocks and at the same time trying to get rid of my 30 year mortgage as stocks seem to be pretty high
Technically a mortgage is a negative bond, so paying down a mortgage is in some ways similar to investing in bonds. Of course, it might be tough to remember that in a nasty bear market!
This the chapter that I had hoped to read in your book. If you do a 2nd edition, you should definitely include the contents of this blog.
Great suggestion. Thank you.
the dyi investor has to read bogle and malkiel to fully comprehend that passive index investing is the winning game
After that modern portfolio theory
most importantly-deciding on your personal asset allocation model and yearly rebalancing
as stated hiring advisors is giving away way too many hard earned dollars for no reason
no reason any educated individual cannot implement these simple guidelines
OK, I loved Random Walk… and John Bogle’s books have been great. But after reading these sorts of books for decades I think the best book I’ve read about passive investing is Swensen’s “Unconventional Success.” And the second best book may be Swensen’s “Pioneering Portfolio Management” because it tells what you need to do if you decide to go active.
no one should go ACTIVE-very foolish behavior
can you imagine the billions wasted on fees, loads, etc for underperformance
at least millions more are indexing, evidenced by 3 trillion in assets at vanguard
Contradictory post
WCI says to keep it simple and then makes recomendations about assett allocation (emerging markeet and REIT etc)
just buy 50% stocks and 50% bonds index funds and go enjoy life. This is all the diversification you will ever need
Another mistake / misconception that most folks have, including so caled professionals is to use the word “active management” when talking about pubically traded securities. These so called active managers are just trying to make predictions / speculate on the movement of a stock
True active managers are your real estate brokers who find you an excelent deal, or other experts who help you invest in private partnerships or farm land, etc. Now, to me these folks are the real actve managers who can add remendous value to your investment. However, you have to find the one who know what they are doing.
I suppose it might seem subtle, but I think this sentence from the post explains it well:
One think to keep in mind with Index funds is they follow the overall market. So, for example you wanted to retire in 2009. Your 401K or IRA etc would have been cut in about half. Meaning if you were planning to retire when the market was down you would not be able. For that reason I started investing more into individual stocks that were under valued. They tend to have their own cycle not totally tied to the over all market cycles. Granted I had to do my own investment research. But, it is will worth it the effort. I’ve gotten about a 36% gain over the past three years. Also, I don’t do bonds. I want to beat inflation to grow my wealth. Something to think about.
I like to think beyond just the investment portfolio and think more along the lines of a net worth allocation and that’s how I’ve setup my own “networth portfolio”: 50% stocks (two Lowe cost index funds), 10% Short term government bonds, 5% cash, 35% equity value in directly owned real estate which includes the equity in my house and one investment property. I keep this allocation fixed with new money only and don’t sell anything currently. The eventual goal is to reach a point where I can live off a 4% withdrawal rate of the stocks component only (i.e. A very safe overall 2% net worth withdrawal rate). The purpose of the 10% short term government debt is to provide 5 years of living expenses (2% x 5) in the face of a large stock market decline so that I am not forced to sell stocks during a downturn. The investment property and home are there for just safe keeping for passing onto the kids or unless other parts of the plan fail. I never understood not including home equity in your overall allocation as a paid off mortgage either imputes rent (this in effect giving you an income or decreasing your retirement cash flow needs whichever way you want to think about it) or gives you the option of using the equity or downsizing in case disaster on the 50% stock side.
In addition this approach of including my home also prevents me from buying a bigger home than reasonable for my overall net worth.
If 10% of your portfolio is 5 years of living expenses, I don’t think it matters much how you invest it. 🙂
Not there yet but that’s my goal. And really if I take out my house as you are “supposed” to do (about 30% of networth), a 2% withdrawal rate as used by me becomes closer to a 3% withdrawal rate which is close to the traditional recommendation and perhaps a necessary decrease for a low growth low return world.
I feel that several commenters here have missed an important point in this post. I keep seeing phrases about making sure your asset allocation matches your risk tolerance while (correct me if I am wrong) the whole point of the “Invest You Must” sections is that you have to tolerate a certain amount of market volatility whether you are comfortable with it or not. It has always annoyed me when I see these risk tolerance quizzes with questions like, “how would you feel if your portfolio suddenly lost 30% of its value?” Risk is necessary for returns and the question is not whether you can tolerate risk, but what kind you want to take. My risk tolerance quiz:
Which scenario is less daunting?
1. Seeing your portfolio suddenly lose 30% of its value while knowing it will probably rebound in the next year or two.
2. Severely curtailing your lifestyle so that you can save 50% of your gross income.
3. Working until you’re 82.
4. Living in public housing in retirement and taking all of your vacations at the YMCA.
I, along with Phil Demuth, agree with you. That said, it is far better to underestimate your volatility tolerance than to overestimate it. Selling low is a major financial catastrophe.
Arthur asks:
“how would you feel if your portfolio suddenly lost 30% of its value?
Well, depending on your immediate to mid term needs, unforeseen events and age, the answer is that most people would flee pretty shi$y.
One must never assemble an portfolio that may loose 30% of its value.
Actually, I didn’t ask that. I said I find it annoying when a “risk tolerance quiz” asks that. I would also say that you completely missed my point:
If you have a long investment horizon and don’t want to make excessive sacrifices, you *should* assemble a portfolio that may lose 30% of its value from time to time.
Indeed. The lower the risk, the lower the reward.
Also, a portfolio that can never lose 30% of its value is non-existent. You can make it less likely, but deep risk cannot be eliminated.
A lot of folks use the word risk incorrectly, I believe. I invested in one individual stock that went down 70% at one point from the price I paid. However, I ended up with a 989% APY when the comany was bought. If you can figure out the Intrinsice Value of the stock it is much easier to deal with the ups and down of Mr. Market. The market will always go up and down. That is how to can make more capital. The key is research. My 2 cents.
Great post WCI, should help a lot of people. What happened to your neighbor Dentist?!
Not sure, muddling through I figure.
Great post, thank you for sharing your thoughts! I personally a big fan of DIY investing. Paying for an advisor on a long term takes so big part of the profit away. At the same times successful DIY investing needs a lot of dedication from your side. You need to read a lot and stay disciplined. I had some early years when I didn’t meet those requirements and I paid my student money for it….
Fantastic post! Any comment about the implementation strategy in terms of DCA vs. Value Averaging vs. Lump sum? I am in my late thirties and I’ve accumulated a lot of cash in my retirement accounts and taxable accounts. With market at its currently levels I’ve been resistant to invest in the market. I am a long term investor and it shouldn’t matter, but its just very stressful to lump sum into a market at these levels. I’m considering lump sum investing over 12 months then going to a DCA strategy as Value Averaging seems overly complicated.
This post may help.
https://www.whitecoatinvestor.com/dollar-cost-averaging-is-for-wimps/
Basically, far too many people misunderstand what DCA is. DCA is only an option if you have a lump sum. Then you have the question of whether to DCA, and if so, in what manner, or to lump sum. In that discussion, lump summing is the right move most of the time and if you’re not comfortable with that, you should probably still lump sum, just into a less aggressive asset allocation.
What most people do, mistakenly calling it DCA, is to periodically invest. We simply invest when we have the money. But every time we have $5K to invest we don’t spread it out over the next 12 months to invest. We lump sum it. If we have $5K this month, we invest $5K. If we have $10K, we invest $10K. So while I lump sum our Roth IRA contributions every January, we get the “benefits of DCA” in that some years we buy more shares because the price is down and other years we buy fewer shares when the price is up.
As far as “at these levels” bear in mind that the market is usually at new highs because it usually goes up. If you never invested at new highs you wouldn’t be able to invest very often. I mean, look at a 15 year chart of the US stock market. If you aren’t going to invest “at these levels” the only times you could have invested was the end of 2002, about 6 months in 2008-2009, about a month in 2011, and February of this year. I invested at all of those times. I also invested at all the other times.
Value averaging has some merits, but introduces additional complexity and you are potentially giving up some returns in the long run due to the cash drag of the side account. I don’t do value averaging, but if that is something you want to do, I don’t think that’s unreasonable.
Great response. You eased my concerns. Thank you very much!
While you can be a competent to great physician by spending 8-12 hours a day on your craft, you cannot also become a competent investor or financial planner with a few hours a week.
In the same way that I should not self medicate, even after reading WebMD, physicians should not invest on their own.
Financial advisors aren’t doctors.
https://www.whitecoatinvestor.com/financial-advisors-arent-doctors/
The counter argument to yours is what a landscaper would say, “In the same way that I would not self medicate, even after reading WebMD, physicians should not mow their own lawn.”
Sounds dumb when you say it that way, doesn’t it? Just as a physician can become competent to mow his own lawn relatively easily, so can a physician become competent to manage his own money relatively easily. Will it take longer than learning how to mow your lawn? Of course. Will it take as long as it took to learn medicine? Not even close. The CFP designation you tout is a test that most who pass it only study 200 hours for. 200 hours is like 2 1/2 weeks of residency. Not exactly the same thing.
Chris
I understand your point entirely. It’s the same argument my financial guy that “handles” my retirement account used. Having reached FI, I am looking into the 7 courses required before sitting for the CFP exam.
It will give me something to do in my free time.
I agree that self-medicating is ill advised. I was a little slower than WCI. It took 4 years of medical school and 6 years of residency before I could write prescriptions confidently. That’s a bad ROI.
It sounds like you have had a bad experience. I am sorry for that. There are plenty of issues with our respective professions. However, I am not going to get into a food fight on your own website. Have a good day!
Yea, I’ve had lots of bad experiences. But that has nothing to do with what we’re discussing. You assert that financial planning can only be done well by professionals. I disagree and have plenty of evidence to the contrary. Doesn’t mean there is no role for a professional for many people, but I dislike the “doctor analogy” that is thrown out there way too often by those in your industry.
Im a big believer in this strategy:
25% US Stocks
25% International Stocks
25% Real Estate
25% Bonds
By keeping it simple you can do very well. I have friends who have invested in fancy hedge funds and I have done better with this simple strategy!
I also like that portfolio and use it in examples all the time.
I think hedge fund just have too high of a fee structure. The 2/20% of your AUM is not worth it. Think about it, you pay 2% even when you lose money. If you make money you pay 22% in fees.
Not sure your math is correct. If you make money, you don’t pay 22% in fees under a 2 and 20 arrangement. Let’s say the investment made 12%. You pay 2% so that leaves a 10% return. The manager takes 20% of that, or 2%. So you get 8% and they get 4%. That’s still a lot, but it’s not 22%.
I am in my mid-thirties with no children. I’m a partner in a private practice group, but live small and save over half of my post-tax income yearly. Would you still recommend the above asset allocation from someone in my position?
Does the real estate portion of the above allocation include investment properties, your own home, REITs or combination?
Thank you!
If you save over half your post-tax income yearly you can probably use just about any reasonable asset allocation and do just fine.
Does the real estate portion include REITs, investment properties, your own home or a combination?
Who are you asking?
I personally would include REITs and investment properties only, not my home. That’s a consumption item.
I use betterment for my post tax money. You can do goal based investing
Their asset mgt fee is 0.15% for portfolios > 100k and there is an option to do tax loss harvesting, which they say saves 0.5% each year – so it pays for itself.
The website is really easy to use…they use vanguard funds.
For my IRA/403B/457b/SEP – its all through vanguard…VFIAX 100% stock.
Any reason you chose 500 Index over the Total Stock Market Index, or for that matter, a Life Strategy fund with some international stocks and some bonds in it?