Self-Directed Approach to Investing: Facts and Benefits

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Are you planning to adopt a self-directed approach to investing? Self-directed investing has become more accessible and affordable thanks to the emergence of online and mobile-centric brokerage firms. 

Also known as do-it-yourself investing, self-investing enables you to build and manage your investment portfolios directly online. What you prefer to invest in and when you want to purchase, sell, or trade assets in your portfolio is up to you. 

More investors are using self-managed accounts because of flexibility and autonomy in investment decisions. Based on the recent Cerulli Edge—US Retail Investor Edition, 69 percent of affluent investors used self-directed accounts in 2021. It nearly doubled from 35 percent in 2015. 

Although self-directed investing is more accessible and popular, it doesn’t mean actively managing your portfolio is the right decision for you. It still depends on your goals, experience, and risk tolerance. 

To help you make a more informed decision, this article explores several facts and benefits of investing using a self-directed brokerage account

What You Need To Know About Self-Directed Investing

Actively managing your portfolio can be appealing. However, a deeper investment knowledge is critical to maximize your returns and minimize financial losses. 

Like traditional investing, a self-directed approach also comes with certain risks. The notable difference is you have to do it all yourself. Managing your investments alone can lead to costly mistakes if you’re a novice investor. 

With self-directed investing, you will assume complete responsibility for asset allocation, transactions, and other investment-related decisions. You will execute these using an online brokerage or discount brokerage. 

You may also utilize automatic trading tools and robo-advisors. Still, the decision on where your money goes primarily rests with you. That’s why having enough investment experience and online trading is crucial before choosing this self-directed approach. 

When you opt for self-directed investing, you must spend hours reading market reports, comparing financial assets, and acquiring fundamental knowledge of Forex and other markets. The process of managing your portfolio can be intimidating. But knowing the following basics can be a great start. 

Different options for self-directed investing

Where should you invest your money? Whether through a direct or discount brokerage, self-directed investing has a wide variety of investment selections to supplement a retirement plan’s offering, such as: 

  • Mutual funds
  • Stocks
  • Bonds
  • Certificate of deposit (CD)
  • Exchange-traded funds (ETFs) 

Only proceed with one of these self-directed investment options if you’re entirely comfortable with it. Many investors don’t feel confident determining which country, region, or industry to invest in. It’s a common problem among self-directed investors. 

That’s why fund providers started offering all-in-one ETFs. It helps simplify the decision-making process for self-directed investors, particularly those who lack the time or expertise to manage a complex portfolio actively. 

As the name suggests, ETFs are a collection of investments like equities or bonds that track the performance of a specific index. 

When you invest in an ETF, you have access to a bundle of assets that you can buy and sell during market hours. This can help diversify your portfolio while potentially reducing your risk and exposure. 

Investing in EFTs enables you to purchase a product that realigns with your risk tolerance. 

Simultaneously, it allows you to depend on the ETF provider to reallocate your portfolio in various countries and industries to respond to evolving risks or interest rate changes. 

Steps to begin with self-directed investing

Researching different types of investment products and monitoring the market movements are crucial when embarking on self-directed investing. But you can start with the following steps: 

  • Devise an investment strategy and delve into the fundamentals of asset classes. 
  • Determine the amount you want to invest. 
  • Examine the types of investments you want to include in your portfolio. 
  • Assess the advantages and risks of those investments. 
  • Select an online brokerage platform.
  • Understand the associated fees.
  • Apply for a self-directed brokerage account.
  • Reevaluate your portfolio regularly.

How You Can Benefit From Self-Directed Investing

Before trying self-directing investing, you should know how it can benefit you. Besides complete control and increased flexibility, many investors opt for a self-directed approach to investing for the following advantages: 

Comes with lower costs

Self-directed investing can be a cheaper way to invest. Since you don’t have to pay management or advisory fees, buying and selling your investments often comes with lower costs. There may be general trading charges. But generally, you’ll pay lower commissions as you don’t need to pay fees to a registered professional. 

More opportunities for diversification

With a wide range of investment selections, self-directed investing provides more opportunities to diversify your portfolio. It allows you to allocate your assets based on risk tolerance and financial goals. This tailored investment choice can help you spread risks and balance returns. 

Potential for greater returns

Since you have the autonomy to pursue your investment strategies, you can also earn greater returns with self-directed investing.

Passive investments are known to perform better than actively managed funds. However, many high-profile self-directed investors were able to outperform the market and earn billions by carefully managing their portfolios. 

Take Better Control of Your Investment

Self-directed brokerage accounts demand constant monitoring and attention. However, a self-directed approach to investing can be a great way to keep more of your money in your investments when appropriately managed. 

You have the freedom to build wealth on your own terms. Since you take the role of an advisor or portfolio manager, it also enhances your knowledge about the market, which is crucial in any investment.