What is self-directed investing?
Editorial staff, J.P. Morgan Wealth Management
- Self-directed investing refers to when an investor chooses to invest and manage their own portfolio without an advisor’s assistance.
- Self-directed investing generally has lower costs than investing with an advisor, but it requires you to do your own research and monitor your portfolio without assistance.
- Before beginning your self-directed investing journey, make sure you’ve defined your investment goals, risk tolerance and time horizon, are familiar with investment product basics and have set aside money specifically for investing. Consider consulting with your legal and tax professionals as well.
What is self-directed investing?
Self-directed investing is exactly what it sounds like: an investment approach where you manage your investments independently, rather than with the help of a financial advisor. Many wealth management firms, including J.P. Morgan Wealth Management, offer self-directed investing options that give you complete control over your portfolio.
These platforms often feature tools, screeners, educational resources and research to help you build a portfolio aligned with your financial goals, risk tolerance and time horizon. However, as we’ll explore further below, having a basic foundation of investing principles can potentially give you a significant advantage when starting your self-directed investing journey.
This article provides a general overview of self-directed investing and does not cover all possible scenarios or account types.
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Self-directed investing vs. advisor-directed investing
Self-directed investing | Advisor-directed investing |
|---|---|
Level of control | |
Full control over your portfolio, with all investment decisions made by you. May be suitable for those who prefer a hands-on approach. | Relies on the financial advisor’s guidance to manage investments, offering a more hands-off approach for the investor. |
Costs | |
Typically, lower fees are incurred as there are no advisory service costs to consider. | Generally involves higher costs due to fees for personalized advice and comprehensive financial planning. |
Knowledge required | |
Relies on the investor’s personal expertise, which may vary. Best supported by a strong understanding of investment products and market trends, demanding continuous learning and research. | Reduces the burden of knowledge as you can leverage your financial advisor’s advice to guide your investment strategy and navigate market fluctuations. May be especially beneficial during periods of volatility. |
Time commitment | |
Requires significant time for learning, monitoring market trends, conducting research and managing your portfolio directly. | Saves time as the financial advisor handles daily portfolio management and monitoring. |
Self-directed investing: Pros and cons
Like any other investment method, self-directed investing has its own advantages and drawbacks.
Pros of self-directed investing:
- Complete control: You have full control over your portfolio, allowing you to buy, sell and trade at your own discretion.
- Variety of options: Self-directed investors have access to the full range of investment products and account types available to them.
- Lower fees: Generally, a self-directed account can save on commissions and other account fees, compared to working with a financial advisor.
- Educational resources: Many self-directed investing platforms offer tools, screeners and educational resources to help you with investment selection and portfolio building aligned with your financial goals.
Cons of self-directed investing:
- Steep learning curve: This may be especially challenging for new investors, as you need to learn and understand various considerations such as account types, investment options and timing for buying and selling.
- Less insight: As a self-directed investor, you will generally have less access to qualified guidance and specialized market data.
- Extensive planning: Self-directed investing tasks you with careful financial planning, with significant time spent researching, analyzing and making projections based on your financial situation.
Ultimately, the case for self-directed investing versus working with a financial advisor comes down to how much autonomy you want in investing, how confident you feel in managing and adjusting your portfolio’s asset allocation when needed, and how willing you are to pay advisory fees.
Are you ready for self-directed investing?
If you’re considering self-directed investing, answering a few common question may help you make a decision.
How much do I want to invest?
This answer will vary widely depending on your current finances and financial goals, both short- and long-term. Many people will consider creating three to six months of emergency savings and paying down any high-interest debt before they consider investing. Ultimately, you’ll want to choose an amount that feels manageable to you. Misunderstanding your risk tolerance or investment strategy can lead to suboptimal decisions. It is crucial to have a clear understanding of your financial situation and goals.
What are my financial goals?
As is the case with any investing method, it’s imperative to consider your ultimate goals. Getting clear on your financial goals – both short- and long-term – can help you build more relevant, comprehensive investing strategies. Whether you’re just graduating from college or approaching retirement, different investment strategies will make sense for different people. Investing without clear goals can be difficult because you don’t have a target to help define what you need.
What’s my risk tolerance?
Once you know your financial goals, you’ll also need to be clear on your risk tolerance, which refers to how much investing risk you’re comfortable with. Your risk tolerance typically depends on a mix of your age, financial circumstances, goals and personal investing philosophy. A quick (but not foolproof) way to gauge your risk tolerance is to consider how comfortable you are with volatility. If market swings make you nervous, you might want to invest in less risky assets that are typically less affected by volatility. This can impact your goals as well.
What’s my time horizon?
Time horizon denotes the length of time you plan to hold your investments. Frequently, time horizon and risk go hand in hand, as people with a longer time horizon can often afford short-term market swings and might therefore have a higher risk tolerance. Knowing how long you plan to be in the game can help inform your investment strategy. For example, consider the difference in your time horizon for retirement versus purchasing a house.
Your financial goals, risk tolerance and time horizon all impact each other, and you need to consider your portfolio as these factors change with your life.
How much do I know about investing?
Once your finances are better positioned for self-directed investing, consider brushing up on general investment principles. Even reading basic education articles can help you grow your knowledge and stay in the know. Many self-directed investing platforms offer educational resources to get you started and help you along your journey. Understanding how different investment products work and the basic principles of investing can help provide the confidence to get started. Regularly reviewing your investment portfolio and strategy can help ensure they remain aligned with your financial goals and risk tolerance, especially as market conditions and personal circumstances change.
The bottom line
Self-directed investing can be a viable option for any investor who understands their financial goals, risk tolerance and time horizon as well as the investments available to create a portfolio. There are plenty of self-directed investing resources available to help you start off on the right foot. Moreover, it’s not an either-or choice, because having a self-directed account doesn't mean you can't work with an advisor as well. In fact, many people prefer to use both methods!
Frequently asked questions about self-directed investing
No. Self-directed investing allows you to invest in a wide range of asset types and accounts without any need for an advisor. However, a financial advisor can offer specialized guidance, personalized investment strategies and help with complex financial decisions while potentially saving you time and hassle. That said, they do charge fees that should be considered when calculating returns.
Investing without a financial advisor generally starts with understanding the basics of investing and setting financial goals. To get started, you’ll typically need to choose a brokerage platform that supports self-directed investing and develop a strategy aligned with your personal financial objectives. Many self-directed investors purchase a mix of securities and aim to regularly monitor and adjust their portfolios based on market conditions, while others might prefer a more passive approach, depending on their personal goals.
A self-directed investment account is a type of brokerage account where you make all decisions regarding purchases and sales of securities. It offers full control and flexibility over your investment choices, typically allowing for a wide range of assets. However, it requires you to take on the responsibility of researching and managing your own investments.
With a self-directed individual retirement account (IRA), you can typically invest in a variety of assets beyond traditional stocks, bonds and mutual funds. This flexibility helps to diversify your portfolio according to your individual strategy and preferences – though it requires careful research and management to ensure compliance with regulations and continued alignment with your financial goals.
Yes. A self-directed IRA can invest in a private business, but there are strict regulations set by the Internal Revenue Service (IRS). A qualified tax professional or legal professional can provide guidance.
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Editorial staff, J.P. Morgan Wealth Management
