Since 1995, I've been a do-it-yourself investor (DIY investing). It all started when I saw my father trading stocks on his Charles Schwab online account. I was hooked and asked him to teach me.
The introduction led me to trade stocks during college. Sometimes I'd win, sometimes I'd lose. Thankfully, my portfolio was only about $3,000 at the time. Therefore, even if I had lost all my money, it wouldn't have been the end of the world.
Throughout my 13 years working in finance, I continued to invest on my own. I found DIY investing to be incredibly fun, especially sitting on the trading floor of a couple of major Wall Street firms. Every day was a new day to potentially make money!
Over time, I gradually started focusing more on asset allocation instead of individual stocks. My career was growing and it was simply too hard trying to consistently outperform the markets.
One time, I was taken into an office and scolded by the lead Managing Director for trading too much. I had whipped around about $12 million worth of trading volume in a month! This incident finally made me realize that trading too much was a career-limiting move.
The more I focused on asset allocation, the easier it was to manage my own money. For me, spending money hiring a financial advisor felt like a waste of money because I worked in finance, got my MBA, and was an investing enthusiast. DIY investing is easier and cheaper than ever. The key is to maintain your discipline.
Traits Required To Be A DIY Investor
I understand not everybody has a finance background or is an investing enthusiast.
However, in the process of writing my book with Penguin Random House, I was made to realize one of Financial Samurai's primary goals is to help empower people to better manage their money on their own. After all, DIY investing can save you a lot of money in financial advisory or management fees over time.
My editor said I've personified DIY investing based on the investing content I've written since 2009. Therefore, if I haven't encouraged people to invest more on their own based on the knowledge they've accumulated, then this site wouldn't have grown.
Traits Needed For Successful DIY Investing
Here are five key traits to have if you want to become a successful DIY investor.
- Discipline. As a DIY investor, you must consistently save and invest your cash flow. You must consistently stay on top of your investments to make sure your capital is properly allocated. If you have a tendency to not pay your bills on time, DIY investing is probably not for you.
- Enthusiasm. Every morning you should be interested in checking the latest financial news. Not only do you enjoy paying attention to the latest economic and government data, but you also like to read about company-specific data. Without enthusiasm, you will eventually lose the discipline to consistently invest your cash flow. You might let your asset allocation go way beyond your risk parameters and blow yourself up.
- Hunger. You don't need to have worked in finance or get an MBA like I did. But as a DIY investor, you need to have an insatiable thirst for knowledge. Your hunger to learn goes hand-in-hand with your enthusiasm for investing. You believe there's always a money-making opportunity out there.
- Humility. As a DIY investor, you will inevitability lose money. The key is to recognize when you are wrong and make adjustments. Staying humble during good times is extremely important to manage your risk exposure. It is the investor who confuses brains with a bull market that often gets destroyed. Being self-aware is huge for DIY investing.
- Optimism. In order to take risks, you need to generally be an optimist who thinks things will work out in the end. Without optimism, you will have a tendency to hoard cash, rent for life, never ask out your crush, or start that company. A DIY investor believes they can make just as much money for themselves as a financial advisor or robs-advisor can.
How To Start DIY Investing
Let's say you've decided DIY investing is for you. You open up an online brokerage account and are ready to make your fortune. Before you put capital to work, you must fill your head with knowledge.
1) Understand risk and reward.
Generally, the greater the potential reward, the greater the risk and vice versa. Hence, you should understand the historical returns for various risk assets. Please read the following two posts:
2) Quantify your risk tolerance.
Now that you know what the historical returns are for the main risk assets, you must try and quantify your risk tolerance. A lot of people think they have a higher risk tolerance than they really do.
Therefore, I've been able to quantify risk tolerance in terms of how much time is required to work to make up for potential losses. Read:
3) Decide on your financial objectives.
Once you get a good understanding of your risk tolerance, you must then decide on your financial objectives. Common objectives include saving for a down payment, paying for college, and retiring with a large enough nest egg. Your financial objectives will give you the reasons for investing. They will give you the motivation to take risks.
Before our son was born in 2017, my financial objective was to generate enough passive income to provide for my wife and me. She had engineered her layoff in 2015. I wasn't very motivated to make more money because my wife and I lived relatively frugally.
Once our son was born, my motivation to provide shot through the roof. To earn greater returns I took more risks. Four years later, we've been able to boost our consistent passive investment income by about $100,000.
4) Understand your investment options.
There are so many investment options to choose from, it can be very overwhelming. However, as a DIY investor focused on asset allocation, you can narrow your investment options to a handful of ETFs, index funds, and REITs. You can also allocate a small percentage to individual stocks if you are an investing enthusiast. Here are the most common ETFs.
S&P 500: SPY, IVV, SPLG, VOO, VTI
Treasury Bond: IEF, TLT
Municipal Bond: MUB
REITs or Real Estate ETFs: VNQ, IYR, AMT, SPG, PSA, EQR, DRL
For 80%+ of investors, investing in these low-cost ETFs should be good enough.
One good way to help construct your portfolio is to sign up for any robo-advisor for free. Fill out a short questionnaire about your goals, risk-tolerance, age, and so forth. From there, the robo-advisor will spit out a recommended model portfolio based on your situation.
You can also play around with the assumptions. Below is an example where I dialed back my risk tolerance from 10 to 2 to see how the portfolio would differ. As you can see in the New % column, the allocation to TIPS and Municipal Bonds increases by 43%.
Ultimately, I decided my risk tolerance was closer to a 7. Robo-advisors are a great sanity check for DIY investors. The models are based on Modern Portfolio Theory. Of course, you can always let the robo-advisor do all the work for you for a small fee.
5) Allocate your assets according to your age, work experience, or financial objectives.
Now that you have listed out specific reasons for investing, it's time to put money to work. The easiest way to start investing is by following an asset allocation model by age or work experience. Therefore, please read the following:
- Recommended Net Worth Allocation By Age Or Work Experience (takes into account real estate and X factors)
These two posts have been painstakingly revised over the years to help DIY investors allocate their capital in a risk-appropriate manner. These models won't be solutions for everyone. But they should work well for ~80% of the DIY-investing public.
For example, at age 30, you might decide on a 70% stock and 30% bond allocation. Therefore, you could easily construct a two-ETF portfolio comprised of 70% SPY and 30% IEF.
Therefore, you sell your entire bond ETF exposure to help come up with the down payment of your first home. From there, you resume investing more of your cash flow into stocks and bonds.
Again, you can use a robo-advisor's recommendations to help you construct your model. However, I've found robo-advisors tend to stick strictly to stocks and bonds. If you're interested in real estate or alternative assets, you won't find any guidance there.
6) Decide your percentage between passive and active investing.
Over time, you may really get the hang of DIY investing. Or, you may simply have an incredible amount of enthusiasm for investing. With more confidence, you decide to allocate a portion of your capital towards individual stocks, REITs, private eREITs, alternatives, commodities, and active funds.
You may outperform the broader market in the short run with your active investments. However, you understand the odds are against you in the long run given most active fund managers underperform their respective indices. But you try anyway because you have hope. You also see people getting rich every day.
The maximum percentage of capital allocated towards active investing I recommend is 50%. 50% is for people who invest professionally for a living. For the majority of DIY investing enthusiasts, I recommend allocating no more than 20% of your investment portfolio to active investing. Please read:
DIY Investing Is Easier During A Bull Market
Back in 1999, I remember getting interviewed by some guy who worked at Arthur Andersen. He asked me what I was interested in. I told him I loved investing in the stock market. Then I naively started blabbing about some recent investment wins.
He immediately responded, “Bulls make money. Pigs make money. Pigs get slaughtered.” He then got up and thanked me for my time.
I must have come across as a know-it-all 22-year-old for him to say this to me. Obviously, I didn't get the job. I was bummed as Arthur Andersen was one of the most desirable companies that recruited at William & Mary at the time.
In a way getting rejected was a blessing in disguise because Arthur Andersen started going bust in 2002 after it was convicted of obstruction of justice during the Enron accounting scandal. Phew.
In a bear market, DIY investing can feel much more stressful. If you are also investing family money, you will feel the stress even more. You may feel like you are letting your partner and children down as their portfolio's sink in value.
The only good thing about investing during a bear market and rising rates is that it's actually easier to generate more passive income. For example, you can buy Treasury bonds yielding 5%+. Your dividend stocks will also have to pay higher dividends to stay competitive.
Be Careful To Not Go Overboard As A DIY Investor
As a DIY investor, I have lost money many times before because I bought too soon, bought too late, or sold too late. In the past, I also invested a much larger percentage of my portfolio than appropriate in individual names that sometimes went sour.
Today, I am a grizzled veteran who continues to invest my own money. I recommend focusing on asset allocation first and foremost. A proper asset allocation is what will determine most of your gains.
You don't have to be a great investor as a DIY investor. You just need to be a good-enough investor with the appropriate risk metrics.
If you decide to be a DIY investor, please remember the saying the Andersen Consulting guy told me. Don't confuse brains with a bull market. DIY investing is much easier during good times. It is during massive corrections, like the one we saw in March 2020, where a great DIY investor shines.
Further, are you really a great investor if all you're doing is performing inline with the broader market? I say no. You're a responsible investor, but not a great investor.
DIY Investing Is Scalable, But A Price
One last thing about DIY investing. If you learn how to invest your own money, you can then proceed to help invest your partner's money and other people's money. In other words, your investing skills has scale.
Just know that managing multiple portfolios takes time. And if there is a market meltdown, you will feel more stressed given other people are depending on you. If you underperform too greatly, you will also feel pressure.
The more money you manage for a loved one, the more stressful DIY investing will be during turbulent times. Therefore, I suggest keeping your DIY investing services within your household.
Recommended DIY Investor Free Tool
Finally, if you want to be a DIY investor, stay on top of your investments with Empower's free financial tools. It analyzes your portfolio's composition, highlights where you can reduce fees, and points out issues you might not suspect.
For example, below is a snapshot after I ran the Investment Checkup feature on my old 401(k). It identified the Fidelity Blue Chip Growth Fund had a high expense ratio of 0.74%, which I wasn't aware of. As a result, I swapped it out for a similar Vanguard fund to save ~$700/year in fees.
Personal Capital's free tools have come a long way since I first started using them in 2012. The better you can track your finances, the better you can optimize.
Invest In Real Estate More Strategically
As a DIY investor, I love investing in both physical real estate and real estate online. In fact, 50% of my net worth is in real estate.
Real estate is my favorite way to build wealth because it is a tangible asset that is less volatile, provides utility, and generates income. Stocks are fine, but stock yields are low and are much more volatile.
I've personally invested $810,000 in private real estate in the heartland to earn more passive income and diversify my expensive San Francisco real estate holdings. The long-term trend is relocating to lower-cost areas of the country thanks to technology and work from home.
Check out my two favorite private real estate platforms.
Fundrise: A way for both accredited and non-accredited investors to diversify into real estate through private eFunds. Fundrise has been around since 2012 and has consistently generated steady returns, no matter what the stock market is doing. The real estate platform has over 400,000 investors and manages over $3.5 billion.
CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations, higher rental yields, and potentially higher growth due to job growth and demographic trends.
My real estate investments account for roughly 50% of my current passive income of ~$380,000. Earning income 100% passively is my goal as a busy dad of two kids who doesn't want to go back to work!
Invest In Private Growth Companies
In addition, consider investing in private growth companies through a fund. Companies are staying private for longer, as a result, more gains are accruing to private company investors. Finding the next Google or Apple before going public can be a life-changing investment.
One of the most interesting funds I'm allocating new capital toward is the Innovation Fund. The Innovation fund invests in:
- Artificial Intelligence & Machine Learning
- Modern Data Infrastructure
- Development Operations (DevOps)
- Financial Technology (FinTech)
- Real Estate & Property Technology (PropTech)
Roughly 35% of the Innovation Fund is invested in artificial intelligence, which I'm extremely bullish about. In 20 years, I don't want my kids wondering why I didn't invest in AI or work in AI!
The investment minimum is also only $10. Most venture capital funds have a $250,000+ minimum. You can see what the Innovation Fund is holding before deciding to invest and how much. Traditional venture capital funds require capital commitment first and then hope the general partners will find great investments.
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