What is Self-Directed Investing?

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What is self directed investing? How do it yourself investing works and why it might get you better returns in the long run.

A subtle and pernicious pitfall in the investing world is that lots of people want to make money off of you. Sometimes it's worth paying for advice, but other times people will say or do anything to take dollars out of your wallet. Sometimes this is deliberate (penny stock pump and dump scams) while other times it's a product of a broken system (exorbitant broker fees).

In the end, Trendshare's philosophy is that you earned your money. It's your responsibility to decide what you invest in and why and whatever you earn from investing is your reward for thinking and working hard.

It should be no surprise that this site celebrates the idea of self-directed or do-it-yourself (DIY) investing.

What is Self-Directed Investing?

Self-directed investing is the activity of individual investors trading stocks, bonds, funds, and other securities on their own behalf. While they often use discount brokers and online trading, they don't rely on other people choosing what and when to buy and sell. These DIY investors display several common behaviors:

  1. The desire to craft their own investment plans based on their interests, capacity for risk, and long-term goals
  2. The confidence to make their own trades, regardless of the sentiment of brokers, advisors, or the broad market
  3. The willingness to perform their own research and the ability to act on that information

Rather than paying an investment manager 1% of your entire portfolio's value every year plus commissions and fees to make a couple of trades for you, you decide what to invest in and why. This could be as simple as passive investing in one or two really good index funds or as involved as actively investing in a handful of great individual stocks. It's all up to you.

Why Does DIY Investing Matter?

Think about it this way; what's important to you? Perhaps you're 23 years old in your first professional job and you have 35 or 40 or 45 years before you think you want to retire. If you start now, the magic of compounding will let you double your money many times over, if you find a good rate of return on your investments. You can afford to be a little risky now, because a down year here or there won't sideline your long term plan.

Alternately you could have just become a parent and want to set aside money to help pay for your child's college education. Taxes are an issue and keeping your principal safe is a goal. Your time span is 18-20 years, and you still have to pay for diapers, shoes, insurance, braces, music lessons, and countless other things in the intervening time. How do you maximize your investment?

You may even have just retired, with the requirement to start taking money out of a tax-privileged account. You don't need to spend it right now, but there's no point in putting it in a money-market fund where you're losing money due to inflation. What should you do?

Every one of these situations—and more—can benefit from you understanding your goals, knowing what you can handle for risk, and making a good plan to do what you need to do.

This is your livelihood; why give that responsibility to someone else to manage?

Can Self-Directed Investing Really Work?

At worst, the simplest passive investing strategy of buying the S&P 500 index fund can get you an average return of 6-10% per year over time. That's a good return for doing almost nothing, and you'll pay a fraction of fees as if you let a professional money manager make a lot of trades for you.

If you go further into picking individual stocks with the value investing favored by Trendshare, you may exceed that return dramatically in many years. (It's possible to find stocks that double, triple, even quadruple in value. This is not a guarantee, but market inefficiencies do exist and you can find them if you do your research.)

Put another way: if professional money managers are so good at picking great stocks, why are they charging you to invest your money and not trading their own money?

This isn't a quick approach. It requires work. You need to learn how the market works, how stocks work, and how to find great companies with great potential and good prices. Yet that's all doable, without getting a degree in finance or starting to talk like an MBA.

Self-Directed Brokerage Accounts in your 401(k)

You may not know this, but your 401(k) at work may offer you the option to direct your own investments. A self-directed brokerage account lets you bypass the fund choices your employer offers and make your own financial decisions.

This isn't available to all 401(k) holders, and it's not the same as having your own independent brokerage account, but you keep the tax-benefits of your employer-sponsored plan and the benefits of your own research and choices!

To see if your employer's plan offers this feature, contact your 401(k) plan administrator.

If you've switched jobs, you may have rolled over an existing 401(k) into an IRA (or you may have the option to do so). This means your money is under your control through your own self-directed brokerage account. This can be a great opportunity for you to set up and manage your self-directed IRA.

Make DIY Investing Work for You

Successful self-directed investors do a few things:

  1. Make a plan. Write it down.
  2. Trade when it makes sense; don't trade just to trade.
  3. Regularly evaluate your positions and your plan.

You don't have to settle for the few offerings a broker has for you; the entire wealth of the world's stock markets is open to you: stocks, bonds, commodities, ETFs, REITs, government bonds, whatever. You're not beholden to a mediocre fund with expensive prices; you can get exactly what you want at the lowest pricing in the industry.

All it takes is the desire to regain control of your own money—to put it to work for you. Start with our how to invest guide and go from there.

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