For ten wonderful years, I worked for one of the best—if not the best—financial education company. I spent my time teaching people one-on-one, teaching live and online workshops, building and writing courses and many other things. My goal, as well as the goal of the firm, was to help people take control of their financial future themselves.
During that time I learned three very important principles that I tell clients at every opportunity. I was always afraid to tell people these things because it was like throwing a bucket of ice on them to wake them up. Despite sometimes very negative reactions, I never stopped telling people the truth. These principles have never been written down before, but they should be.
So attention self-directed investors! Here are three things you must know when taking control of your own portfolio (For related reading, see: Don't Let Fear of Losing Keep You Out of Stocks.)
When you start the educational process, it’s important to know that you will not become an expert, despite what anyone says, overnight. It will most likely take several years for you to reach a point where you can do it on your own. If you have expectations that are different than this, you will be disappointed and most likely quit after six months of trying.
You Can't Be an Expert at Everything
The last thing that you can't become is a jack-of-all-trades, a master-of-none. A perfect example of this is our own firm. My expertise is options trading and sector rotation. That is what I’ve focused on for the last 10 years of my career. My partner’s expertise is bottoms-up value investing (à la Warren Buffett). He’s been perfecting that strategy for more than 20 years. If either one of us were to deviate from those areas, our clients would ultimately suffer.
As you begin down the path of managing your own money, it’s imperative that you find one or two areas of the market to become an expert in. Leave all the other strategies, as attractive as they are, behind. (For related reading, see: Why Investors Can Be Their Own Worst Enemy)
This Is Not a Game
Let me explain what I mean. Let’s say you are motivated to manage your own money. You fire your investment advisor because he hasn’t called you in three years and you say, “I’m going to do this myself!” So you take your $500,000 away from the advisor and you start your education. While you go through the educational process, your $500,000—well, it just sits there in cash. You may get up the courage to buy one stock (which is probably something you shouldn’t do), but most of it just sits in cash accomplishing nothing.
I’ve seen this thousands of times. The last thing you can afford to do is take your money out of the market while learning something that will take you years! Albert Einstein said, “compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t ... pays it.” Taking your money out of the market as you learn is taking this whole concept of compound interest and throwing it out the window.
The better approach would be to find an advisor who you trust. Give them 90% of the $500,000 to manage and take the rest to practice and learn with. Giving them the 90% allows that money to be invested and working for you. When the time comes—maybe two years, maybe five years down the road—when you can outperform the professional, then and only then should you take the rest of your money, the 90%, and start managing the whole portfolio yourself.
Unfortunately I have seen many people—too many—fail as a result of ignoring these three principles. As you consider managing your own money, or if you are currently managing your own money, I do wish you the best of success. During my 10 years educating people about the market, there wasn’t a greater feeling than seeing someone that I taught over the years actually succeed. (For more, see: Behavior Finance: How Bias Can Hurt Investing.)