Can I Analyze My Own Investments or Should I Pay an Advisor?
The Internet, 24-hour news, regulatory disclosures and online discount brokers have allowed an increasing number of investors to take charge of their own portfolios. However, technological changes, globalization and other forces have made corporations more complex, which makes the analytical process more difficult and time consuming. This tradeoff between complexity and control is at the heart of whether you should analyze investments yourself or pay an adviser to do it for you.
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Factors
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Researching investment alternatives takes time and a certain level of analytical financial skills. There is also the opportunity cost of spending time researching investments when you can be engaged in something more profitable, as well as the fee for an investment adviser. The quality of the analysis is also an important consideration, meaning that you should pay an adviser for producing superior research to what you can do yourself. If you're confident in your analytical abilities, there's no need to seek outside help.
Self-Directed Investing
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Self-directed or do-it-yourself investing gives you control over the composition of your portfolio and the timing of trade executions. Be prepared to spend a couple of hours every day reviewing company reports, industry news, economic data and other financial news. Stock analysis requires a critical approach to information, regardless of the sources, and distinguishing between hype and fact. The financial reports are available on the investor relations sections of corporate websites, but you must have a basic understanding of financial statements and financial ratios to evaluate this information. Some of the information may not be free, such as access to certain financial websites and industry demand forecasts, which can add to your costs.
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Adviser-Assisted Investing
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The fee structure may determine the quality of the advice you receive from an adviser. Commission-based advisers may have an incentive to recommend mutual funds and other financial products that pay higher sales commissions, rather than recommending products with the best prospects of achieving high returns. Fee-based advisers, especially if the fee depends on the investment returns, usually have a stake in recommending securities with the highest return potential. However, paying a high management fee is not a guarantee of high investment returns. If it were, mutual funds would consistently beat major market averages and would never produce negative returns.
Combination Investing
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There is a third option, which combines the best attributes of the other two choices. In this hybrid option, you retain control over the portfolio composition, but you outsource the analysis and recommendation to a financial adviser with a reputable investment management company. You can also invest in mutual funds only, thus benefiting from professional money management and asset diversification, while maintaining control over your assets. This will reduce your time commitment because evaluating mutual funds takes less time than going through the financial statements of potentially dozens of companies.
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