How to Become a Do-It-Yourself Investor
It's not as hard as it seems.
At a party a few weeks ago, a friend turned to me and said, "I'd love to invest on my own, but I don't even know how to begin." You can't really blame her: She faces myriad investing choices, layers of fees, and the possibility of losing her shirt when things go wrong. That's why so many investors flock to financial advisors, attracted to the peace of mind that their guidance can offer. To be sure, many advisors offer valuable services, but others are less helpful. In fact, many academic studies have shown that investors working with advisors have fared worse than those who go it alone. That's partly because unwitting investors can end up with second-best portfolios, because brokers are sometimes paid to hawk certain funds over others. Higher fees also hurt. Advisors generally add sales charges or annual fees on top of those charged by mutual funds. So, all things considered, it often makes sense to grapple with your portfolio on your own. Not only is it generally cheaper, it's not much more difficult, and you don't have to worry whether your advisor is looking out for your best interests. In this article, I discuss three ways that investors can get started without the middleman or the associated fees.
The Bunny Slope
For those in search of simplicity, target-date retirement funds are about as low maintenance as it gets. Available at most of the larger fund shops, including Vanguard, T. Rowe Price, AllianceBernstein, and Fidelity, these all-in-one funds own a mix of stock and bond funds and slowly shift more heavily toward bonds as they approach their target dates. So, if an investor aims to retire around 2050, he or she would simply select a fund with that target date and the fund takes over from there. Of course, these funds aren't restricted to just retirement purposes. Investors with any long-term goals could easily use a target-date fund to meet their needs.
It bears mentioning that not all target-date funds are created equally. Some are stuffed full of mediocre underlying funds or charge egregious expense ratios. Even those that pass muster aren't right for everyone. Some, such as Vanguard's stellar lineup, take a more conservative tack, and others, such as those from T. Rowe Price, have more assertive portfolios. For a complete look at the ins and outs of these plans, take a look at this article by my colleague Chris Davis.
Marta Norton does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.