I have been reflecting a lot lately regarding investments and the direction I want my investments to take. For although I have adopted a Dividend Growth Investing strategy, the funny thing was that I lacked a plan that I believed in. I had invested in several companies but I began to act like a trader which started to make me become frustrated and realize no gains or benefits. I had developed my strategy however as others pointed out in the comments there were a number of ideological flaws. I also found that my strategy became too complicated for me to follow. This resulted in a lackluster desire to pursue something in which I seriously wanted to pursue. As a result, I decided to return to the basics. I started to have a conversation in my mind with myself about investing. I found this exercise to be quite enlightening and believe that any individual who plans to manage their own investments rather than via a financial consultant/manager should ask questions like the ones I did regarding the decision they are about to make. I have also found it important to write it out in order to reinforce it in my mind as well as be able to return to it later on. This article invites others to add additional questions that one should ask or consider when you are planning to manage your own investments.
WHAT TO TALK ABOUT?
Because I felt like I lacked a plan or that I had hit a brick wall in my investing desires, I believe one should ask "Why do I want to manage my own investments?" This will help put things into perspective. This review will either reinforce your decision or it will help you cool off and rationally decide if you want to keep investing with or use a financial consultant. This will be a critical choice and not one to be taken lightly. It will place the responsibility of your financial investment future squarely on your shoulders. Depending on your age, you may have the opportunity to recover if you find that managing your own investments is right for you, however someone with less time to invest before say retirement may not have the time needed to ensure a suitable nest egg at retirement (assuming that you have losses from your investment choices and the loss of compounding and dollar cost averaging over time).
"Can I really do this on my own?" is another important question that needs to be asked. There are a series of sub-questions that help to answer that question such as "Do I have the desire and energy to do what it takes to invest by myself?", "Do I have enough time?", "Am I willing to make mistakes?" and "Do I have patience with myself as I move forward in this journey?" I found that these questions really helped me explore the type of person that I am and really take an inventory of where I am right now in life. I was able to answer yes to these questions, but if anyone of them was answered no, I would have to seriously consider the consequences that could result.
"Am I willing to learn and study?" I feel that we need to ask ourselves whether we are prepared and able to learn what is needed in order to manage our own investments. Most people do not have a financial background. I certainly do not. Managing your own investments means you need to learn about finance: the terms that are used, financial records, fundamental and technical indicators, etc… You will have to be able to sift through information that is aligned with your goals, plans and interests as well as eliminate the noise and enticements that would derail you from achieving your goals, plans and interests.
"Will I become frustrated, overwhelmed, frightened or confident about my developing abilities?" or "Do I have the mental strength to persevere?" You need to know yourself and your personality. These questions are important due to the amount of information out there in the world as well as the many types of investing strategies and options. Having started to manage my own investments this year, I believe that one of the most difficult psychological impacts upon one's resolve is the balances of your investments. I have seen some of my stocks sink deep into the red and others fly high in the green. I was quite pleased when I bought McDonald's (NYSE:MCD), Johnson & Johnson (NYSE:JNJ), Rogers (NYSE:RCI), Omega Healthcare Investors (NYSE:OHI) at low prices and have seen the capital gains increase very well with a very nice margin of safety, whereas others like Digital Realty (NYSE:DLR), Valassis Communications (NYSE:VCI), Chambers Street Properties (NYSE:CSG) and Vitamin Shoppe (NYSE:VSI) have seen some deep losses. There is a psychological battle that each person who manages their own investments is confronted with. Can you handle the sight of losing money? If you are the kind of person that checks their balances daily, then you need to ask yourself whether you can hold the course even if your investments are in the red for the moment. Having someone else manage your finances shelters you to some degree as black and white numbers on paper in your monthly reports are not nearly as damaging or impactful as red and green figures found in the balances section of your brokerage account. Managing your investments brings you to the "front lines" so to speak and psychologically speaking, there is a need for a strong mind to maintain the course if you know that what you have invested in is still a wise investment despite the pull back (as it could just be momentary). This psychological impact is difficult as you will feel in the early stages that anything that goes green is a great investment and anything that goes into the red is a poor investment and that you made a mistake. You may want to sell when you are losing money or when you are making money. You need to know how "red and green" indicators affect you. Making your investment moves should be based on rational thoughts rather than emotional outbursts.
Now, there are several other questions that one could ask such as "Which investing strategy do I choose?", "What do I buy?", "How do I pick my investments?", and "What is my risk tolerance?" All these are excellent questions and are meant for another article as you need to answer the ones I listed above first before you begin asking yourselves these questions. If you are ready to move on to these specific investment questions it hopefully means you have had your conversation with yourself and are convinced that managing your own investments is something you want, are willing and are prepared to do.
So, here is the conversation that I had with myself regarding the questions I have listed in this article.
Q: Why do I want to manage my own investments?
A: You began reviewing the financial situation of your family and you found you were left wanting. Monthly expenses appeared excessive, the Tax-Free Savings Account (TFSA) appeared to making very little money despite a fair sized balance and the Mutual Fund statements made no sense. To make matters worse, your mutual fund investments had been doing very poorly either losing money or just scraping by. You learned that the mutual funds you had invested in had an average management expense ratio of about 2.5% which was eating away at your contributions. You felt you could do more and could be making more.
Q: Can I really do this on my own?
A: One of your strengths is a desire to learn new things. You have the ability to research and analyze information and draw your own conclusions. When you begin a new "project" you put lots of energy and concentration into understanding every facet and explore a broad array of options in order to come to your own supposition. When it becomes important to you, you put aside activities that waste time and focus on what needs to be done. Although you desire to be perfect at everything you embark on, you are willing to accept mistakes in the short term in order to achieve "success" in the long term. Although your impatience may make it difficult for you to accept your mistakes and the time it may take to learn what is needed to manage your own investments, you realize that not everything can be learned in a day and that this journey will be long term rather than short term.
Q: Will I become frustrated, overwhelmed, frightened or confident about my developing abilities?
A: You would be foolish to say that you may not experience one of these feelings at one point or another however you have the capacity to recognize what you are feeling, discover the source and use reason to keep an objective perspective. Even when feeling one of these ways, it is only short term (even when feeling confident as humility must prevail in order to remain objective).
BONUS Q: Why did I choose Dividend Growth Investing as my new investing strategy?
A: You were reading the Mr. Money Mustache blog in order to inspire your family to be more frugal and save as much money as possible. In an article, you read how Mr. Money Mustache is retired at age 35 and that he invests in things that pay dividends such as stocks or ETFs. You came across other sites that explained dividend growth investing and had free e-books that explained the strategy. You felt enlightened and liberated at the prospect of controlling your own financial situation and being able to receive a much better return for your investments that you currently receive.
Your eyes were opened to information you had never before considered. Before you believed the stock market was nothing more than Russian roulette and you secretly rejoiced when you saw the fat cats on Wall Street lose huge amounts of money during the financial crisis. You thought that all stocks on the stock market were "risky" and that it took a financier in order to invest in it. You then realized that not all stocks are the same. Dividend growth investing is different and is tailored much more to your lifestyle. You work full time from 7:30 till 3:30 in a well-paying job. You are unable to make split second transactions or actively trade on the market during the day. You would lose lots of money, your job or both if you tried to become a day trader. Your wife and young children require your energy and attention when you get home. You do not have time to pour over the day's market activity, conduct in-depth technical analysis or attempt to find the next Google (NASDAQ:GOOG) or Apple (NASDAQ:AAPL). When all is said and done, you may have 1 hour to yourself at the end of the day. You will on occasion have days where the family will not be there however these times are not always consistent and predictable. Having read authors such as David Van Knapp, David Corsetti, David Fish, Chuck Carnevale and Chowder, you felt that this investing strategy does not require as much time as other investing strategies (not to say that it will not take time but may be less labour intensive). You believe this strategy can provide for your future retirement needs with returns that exceed your traditional mutual funds while reducing market volatility by having the option of selecting specific stocks that meet your level of comfort or risk profile.
When starting the journey of managing your own investments one should have it all mapped out in their minds why they want to do this and have a serious conversation with yourself before making any important financial decisions. Although I covered some questions there are others in which I probably missed. I welcome all your comments, thoughts and particularly other questions that you may or feel that should be asked by yourself when considering managing your own investments.
Disclosure: I am long MCD, JNJ, CSG, DLR, RCI, OHI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.