If you’re new to the world of investing, you’ve likely encountered terms like index funds and ETFs, which have recently gained significant popularity. These are examples of “directed investments,” appealing for their hands-off approach, low costs, and other benefits. On the other hand, there is the traditional method of investing, where individuals research and select their own stocks, ETFs, and other assets. Combining both stocks and ETFs can create a hybrid investing model that offers flexibility.
So, which approach is better, and is there one superior way to invest? Let’s dive into each strategy to understand the differences and help you decide which approach might work best for your goals.
Self-Managed Investments
- Control: With a self-managed investment approach, you have complete control over your investment decisions. You choose which assets to buy, sell, or hold, and you manage the entire portfolio yourself. Of course, this autonomy also means that the decisions you make may not always be the right one, but that is part of investing.
- Decision-Making: As part of this autonomy, you also get to make all the decisions related to asset allocation, diversification, and timing. This approach requires a good understanding of the markets, financial tools, and investment strategies.
- Tools and Platforms: You typically utilize online brokerage platforms or trading apps to access a diverse range of investment vehicles, such as stocks, bonds, exchange-traded funds (ETFs), and mutual funds.
- Responsibility: The responsibility for researching, analyzing, and managing risks lies entirely with you. You are accountable for both the successes and failures of your investment choices. Control freaks may like it this way, while others may feel like others should make these decisions for them.
- Cost: Generally, self-managed accounts may have lower fees compared to other managed accounts because you are not paying for professional advice or management. This doesn’t necessarily mean that there are no transaction fees
Directed Investments
- Control: In a directed investment account, you maintain control over your investments while working with a financial advisor or investment manager who provides guidance. Increasingly, this support may come from robo-advisors, which offer automated guidance based on your investment profile.
- Decision-Making: While you retain the final decision-making authority, your advisor assists in making informed choices aligned with your financial goals, risk tolerance, and market conditions. They may recommend specific investments, asset allocations, or strategies, but you ultimately have the flexibility to opt out of any recommendations you find unsuitable. This ensures the final decision always remains in your hands.
- Tools and Platforms: Typically, directed investment accounts are provided by financial institutions or investment firms that allow you to collaborate with your advisor, whether human or automated.
- Responsibility: You share the responsibility for investment management with your advisor, who performs research, monitors the market, and makes recommendations. Often, this advisor support is a blend of human advisors and robo-advisors working behind the scenes to refine the ETF or investment portfolio by adjusting allocations, adding exposure to certain markets, or reducing exposure in specific regions as needed.
- Cost: Directed investment accounts generally incur higher fees than self-managed accounts due to the expertise and personalized advice you receive from an advisor or advisory team.
Summary
- Self-Managed Investments: You manage your portfolio entirely on your own, making all investment decisions independently.
- Directed Investments: You manage your portfolio with the guidance of an advisor who provides recommendations, but you still make the final decisions.
The choice between self-managed and directed investments depends on your level of expertise, comfort with decision-making, and how much time and effort you’re willing to dedicate to managing your investments. Given how more and more people are shifting to index investing and ETFs, directed-investments may be something to look into as someone new to investments. On the other hand, if you have been investing for years and know what you are doing, individual stock picking may be your path, which is part of self-managed investing.