How Much Work Is Do-It-Yourself Investing?

I was recently asked how much time it takes to be a do-it-yourself investor (as opposed to using a financial advisor to manage your portfolio for you).

My reply was that it takes a considerable amount of time, which is interesting because the actual management of a do-it-yourself portfolio hardly takes any work at all:

• Rebalancing once per year is usually enough,
• Contributions (or withdrawals) can be set up to happen automatically, and
• Tax loss harvesting aside, there’s little benefit to checking your portfolio very frequently.

In other words, managing a do-it-yourself passive portfolio consists mostly of patiently, willfully doing nothing. (I’ve always liked the term “benign neglect” that John Bogle uses in his Common Sense on Mutual Funds.)

So Why Does It Take Work?

It takes work because in order to be successful over the long haul, you’ll have to educate yourself. You have to educate yourself so that you’re prepared for two challenges that will arise.

Challenge 1: At some point in time, your portfolio will perform downright miserably. (Exactly how miserably depends on whether you have an aggressive or conservative asset allocation.)

You need to be prepared for that. You need to know why you chose your portfolio in the first place, and you need to know why a period of lousy performance doesn’t necessarily mean you chose poorly.

Challenge 2: Over the course of your investing career, there will be many times when somebody (whether a broker, a financial advisor, your neighbor, an insurance agent, an author, or somebody on TV) comes along recommending a different investment strategy. And that person will have data showing that over some particular period(s), his/her strategy performed better than your own portfolio.

You need to be prepared for that too. You need to be able to spot the flaws in their arguments so that you don’t give in and swap out your entire portfolio every time someone comes along with a different suggestion.

Education is Inoculation

Educating yourself about investing works to inoculate you against both the doubts caused by periods of poor performance and the numerous alternative-strategy sales pitches you’re sure to run into over the years. The more you know, the safer you are.