Managed vs. self-directed investing
What kind of investor are you?
June 21, 2024
We’ve gotten quite a few calls recently from Managed Investing clients who’ve seen the incredible performance of companies like Nvidia (up 180% this year), Abercrombie & Fitch (up more than 100%), and Meta (up close to 50%). They compare those numbers to the TSX, Nasdaq, and S&P 500, which have risen an only-unimpressive-in-comparison 5-16% on the year, and wonder if they’re missing out by investing only in managed portfolios that track the major indices. They want to know if they should take more specific control over what they’re investing in.
It’s a fair question (although chasing returns is a potentially disastrous approach to wealth building). And while our specific advice depends on the investor, we generally answer the same way: you don’t have to choose between handling your own investments or paying someone else to do it for you. One or the other works for a lot of people, but a combination of the two works for a lot of people, too. What’s right for you depends on your personality, comfort levels, and goals.
Here are the basics behind each investing approach — and how you might want to combine them.
DIY (or self-directed) investing
This type of investing gives you total control. You choose how much you want to invest and what you want to invest in. There’s no manager, so you don’t pay management fees on the account. But that also means everything falls on you: research, rebalancing, and, ultimately, responsibility. Self-directed investors also tend to make more behavioural mistakes. Over-trading due to overconfidence, panic selling, and buying based on FOMO just don’t happen in managed accounts.
Benefits:
- You can easily invest in specific companies and industries that you care about.
- All of your money goes toward investments, as opposed to fees.
- The hands-on experience means learning more about companies and investing itself, which you may find engaging.
Managed investing
This is when you let a professional decide where to invest your money, based on your needs. You tell them about your goals, timeline, and appetite for risk, and they get to work on building and optimizing your portfolio. You’ll pay management fees, but in exchange, there is a lot less for you to worry about.
Benefits:
- All the work, from strategizing to rebalancing, is done for you.
- There’s no required knowledge, so there’s no barrier to entry, which can be beneficial to those just starting out.
- Research (including this study from The Brad M. Barber School of Management and this take from the Index Fund Advisors) shows that investors who receive advice and management tend to outperform those who opt to self-manage.
If you’re a self-directed investor…
Adding a managed component to your portfolio — even just a relatively small one to give you a sense of things — can help make sure a portion of your finances are aligned toward your specific timeline and goals. You get the benefit of having someone else do the work for you, without giving up control over the majority of your portfolio. You also get the chance to see how it feels to tune out the noise of the markets, knowing that you don’t have to react to every little bit of news — or any bit of news at all. If you like the experience (and the results), then it can be worth considering increasing the size of your managed position.
If you’re a managed investor…
Taking control of some of your investments may help you avoid those FOMO moments and can be a great way to get more involved and interested in investing. Our advice is to start with a very small portion of your overall investments, maybe 5% to 10% of your investable assets. You want an amount that wouldn’t derail your financial goals if you lost it. Be ready to do a lot of research, and have a plan in place to minimize risk. Maybe most important, diversify. This is essential — and it can be easy to forget when you’re working on your own. Diversification makes you less exposed to major losses if, say, humans learn to fly and the auto industry goes kerplunk, taking your automotive stocks down with it.
In the end, the right balance for you is up to you. Personal finance is personal. It really is a matter of picking the investment strategy that you’re most comfortable with, because that’s the one you’ll stick with.