We think they understand finances, but do we really? Our growing national debt, persistent student loan crisis and high rate of household credit card debt suggest that our collective financial literacy leaves something to be desired.
This overconfidence leads a majority of the country to forego assistance from trained financial professionals. A study by CNBC and Acorns found that 75% of people in the US manage their own finances — a grand undertaking for anyone, especially when dealing with high net worth.
There are myriad benefits of using a financial planner or advisor. For those whose answer to “Do I need a financial advisor?” is no, however, it’s important to avoid diving into your financial matters with hubris. Without real experience and expertise on which to lean, most investors will eventually succumb to their emotions — leading to significant losses and even financial ruin. Approach investment and financial literacy with clear eyes and armed with a sustainable game plan.
Harsh Realities
Investing and anxiety tend to go hand in hand. Markets can’t be controlled by desire or hope, and our inability to manage something as important as finances can lead to imprudent and irrational decision making that doesn’t benefit us in the long term. That’s why anyone who needs a financial advisor often turns toward those who can help manage wealth.
Financial professionals can provide an unbiased, objective assessment of an investor’s risk tolerance, which is critical to establishing an appropriate asset allocation. Advisors can help investors overcome personal “blind spots,” ensuring investors approach the market and their finances pragmatically instead of personally.
Moreover, modern financial advisors have access to powerful planning tools that allow them to forecast various scenarios that investors might encounter. The average American can only plan for a fraction of these. Is it possible to invest for success without access to these tools or the aid of a financial planning professional? Sure, but it won’t be easy.
Before deciding to learn how to invest by yourself, you must consider your financial situation. People who have highly complex needs (e.g., high net worth individuals, entrepreneurs, etc.) might find it impossible to plan extensively without the benefits of a registered financial planner. Investors with fewer complex circumstances and the time and access to financial knowledge can — and do — succeed over time. It’s critical, however, that solitary investors avoid overestimating their financial literacy.
Investing Without an Advisor
The overconfidence that accompanies a false sense of financial expertise typically leads to poor investment decisions. These investors tend to trade more, ignore financial red flags in their own lives, and adopt a reactive rather than proactive approach to dealing with issues related to spending and saving.
Investing on your own is risky, but it’s possible if you’re relatively young and don’t expect to have any dependents in the near future — or if you already possess high financial literacy. With that in mind, here are a few tips for managing your money without the help of a financial advisor:
1. Turn off the news. Whether markets are plunging, rising, or barely moving, talking heads always find something to get up in arms about. It might be tempting to indulge in the 24/7 cycle of financial news coming from your television or computer screen, but embrace one of the principles of long-term investing by remaining unmoved. Acting at the whim of 24-hour news will cloud your thinking and expose you to recency biases that can threaten your financial health.
2. Focus on the process instead of performance. Automate as many transactions as you can, including your monthly savings, bill payments, and other recurring items. Don’t require yourself to be proactive all the time to make these things happen. Use the extra time you have to focus on your long-term budgeting and investing plan to achieve the goals that matter to you. Invest in things that make sense from a fundamental perspective rather than assets that are performing well now.
3. Don’t compare yourself. You’re not the only person thinking about financial literacy and investment at all times, but you are the only one you should be thinking about. Your friends, family members, and co-workers might be eager to give or receive portfolio advice, but remember that they’re in different financial situations. What makes sense for them probably won’t make sense for you — and vice versa. Your concerns as an investor should be improving your own financial circumstances.
When investing without an advisor, your objective shouldn’t just be to figure out how to invest by yourself. You should aim to make consistent and unemotional financial decisions that help your wealth to grow over time. Everyone faces losses in the markets, but a strategic and deliberately executed process can ensure that those losses aren’t permanent.
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Matthew Blume is a portfolio manager of private client accounts at Pekin Hardy Strauss Wealth Management (https://pekinhardy.com/), where he also manages the firm’s ESG research and shareholder advocacy efforts. A CFA charterholder, Blume earned a B.S. in Electrical Engineering from Valparaiso University and an MBA from Northwestern University’s Kellogg School of Management.
This article is for informational purposes only and is not intended as an offer or solicitation for business. The information and data in this article does not constitute legal, tax, accounting, investment or other professional advice. The views expressed are those of Matthew Blume as of the date of publication of this report, and are subject to change at any time due to changes in market or economic conditions. Pekin Hardy Strauss Wealth Management cannot assure that the strategies discussed herein will outperform any other investment strategy in the future, there are no assurances that any predicted results will actually occur.
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Equities Contributor: Matthew Blume
Source: Equities News
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