For those who are early in their investment journeys, it can be daunting to know where to begin. Most people know that starting early, saving enough, and holding diversified portfolios is the key to building wealth over the long run whether this is to buy a home, pay for retirement, a nice vacation, or other long-term goals. However, the sheer variety of investment products, financial services, and types of companies to choose from can be overwhelming. Additionally, difficult stock market environments can also cause investors to lose confidence. Asking yourself a few simple questions can help you find the investment style that best suits your needs.
Perhaps the most important decision facing a new investor is whether to have their investments managed by a professional or to take a DIY approach. While the ideal types of accounts differ from person to person, the choice often comes down to managed versus active accounts. There are pros and cons to each approach depending on the investor’s needs.
Managed accounts are any investment accounts that are primarily overseen by a professional manager such as a financial advisor or service. With the investor’s input, the advisor will help to construct an appropriate asset allocation based on the investor’s goals, needs, and risk tolerance. They will also identify the proper investments and maintain these portfolios over time by managing risk, rebalancing, and more.
In contrast, active accounts allow investors to buy and sell individual stocks, bonds and other investments directly. An investor can open these accounts and make their own trading decisions, usually online. With limited or no guidance, investors will make all their own decisions. This means that investors with active accounts should make certain they understand the basics of investing and the risks they may be taking.
Thus, there are a few important questions to ask yourself as you choose how you manage your investments. First, how much investment background do you already investor have? For example, when starting out, you will need to make basic decisions such as how much of their portfolio to allocate to stocks versus bonds, or other investment types.
An active account can provide greater flexibility in deciding this exact mix. However, it also requires a greater level of knowledge and investment sophistication. This is where managed accounts can be more appropriate for those just starting out since they can help you to determine the right allocation from the get-go.
Second, how complex are your financial goals? The more complex your goals and objectives, including spending needs, big upcoming purchases, tax requirements, and so on, the more likely it is you can benefit from proper guidance, advice, and other financial services. Even if you have relatively straightforward needs, having help to determine the right portfolio based on their risk tolerance and return objectives can be helpful. In some cases, using a managed account can be a “set-it-and-forget-it” approach that keeps you on track through different market environments, reducing the urge to make dramatic portfolio adjustments at exactly the wrong times.
Third, how much time do you want to spend on investment activities? While active accounts and trading platforms may provide research and analytical tools to help you make investment decisions, you will ultimately be responsible for managing your portfolio. This naturally requires a great deal of time and effort, not to mention the willingness and interest in tackling complexity. This is another reason that active accounts may be good choices if you already have investment experience and would like to have full control.
Getting started with investing can be daunting but it doesn’t need to be. If you are earlier in your investment journey, managed accounts can be a great way to get going and learn the basics. More importantly, you can rely on a professional asset manager’s experience to build your portfolio and stay on track to achieve your financial goals.