Many people asking me about do-it-yourself (DIY) investing. Despite their initial interest, the usual result is for these investors to take no action and continue investing in expensive mutual funds. This has caused me to rethink how best to approach the subject. I now think that investors might be best to try easing into DIY investing rather than deciding whether to make one big jump.
To illustrate how these interactions between me and a curious investor tend to go, I'll describe the case of a particular investor and acquaintance of mine who I'll call Sam. Sam said he heard that I write a Money blog and wondered if I might advise him on whether he needs to change anything about his investments.
Sam had a financial advisor who he seemed to like on a personal level but didn’t make him feel comfortable about his investments. Sam couldn't understand much of what was on his multi-page account summary other than the dollar amounts that weren't going up as fast as he hoped. Sam owned several mutual funds with impressive-sounding names and impressively high MERs.
I looked up Sam's mutual funds for him to show him how they were split between stocks and bonds, and how much he paid yearly in MER fees to own these funds. Then I showed him how he could replace these mutual funds with index ETFs or index mutual funds that have the same mix of investments but are much cheaper to own.
Sam pondered all this information and asked a few more questions about the mechanics of opening a discount brokerage account and making trades. Then he froze and chose to do nothing. My efforts did little other than leave Sam with vague guilt that he should do something, but he was afraid to do anything. I'd like to think that he decided that his financial advisor was doing a great job and that Sam should stick with him, but that was definitely not the case.
I think what froze Sam was too many new things at once. He was uncertain about whether he had the temperament to handle DIY investing, he didn't know how to open the new accounts he would need, and he didn't know for certain whether low-cost funds really were likely to outperform his active mutual funds over the long run.
Instead of trying to decide whether to make all the changes at once, Sam would likely have been better off easing in slowly. He could have opened a single account with a discount broker and put a modest sum into it while continuing to hold his mutual fund portfolio with his advisor. Then he could have purchased a single ETF with the money and watched it for a few months (or longer).
Having become comfortable with some aspects of DIY investing, Sam would then have been in a much better position to decide whether to expand his DIY side or shut it down. So this will become my new mantra with people who ask me about their investments. I still prefer to explain things rather than tell people what to do, but I will suggest sticking just a toe into DIY investing first rather than trying to decide between doing nothing or plunging in all at once.