5 hidden costs of managing your own money—and when to get professional help

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Are you ready to start investing but don’t want to spend money on a financial advisor? You may be considering handling your investments yourself. If so, you are not alone. According to a 2022 eMoney Advisor survey, about 34% of Americans choose to manage all of their investments. About 30 percent said they rely on friends and family for financial guidance.

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But is this really the most cost-effective solution? According to financial experts, this is the hidden cost of managing your own money.

1. Internal investment costs

Jason Noble, a financial advisor at Prime Capital Advisor with 18 years of experience, has found that many investors forget to consider their underlying investment expense ratios or the transaction costs of their strategies.

“I see a lot in 401(k)s and 403(b)s,” he said. “For example, when I first met a couple, I found that their average expense rate on their 403(b)s was 1.98% per year. They didn’t know it was an internal cost because they had to read through the disclosure pages to find out That information, if they find it, they will need to know how to read it.”

Over time, these additional costs can have a significant impact on your financial investments, so watch carefully.

2. Not rebalancing your portfolio

Noble explained that rebalancing your portfolio is when you sell when prices are high and buy when prices are low. For example, if your portfolio was half stocks and half bonds in 2010, your portfolio would end up being 75% stocks and 25% bonds because stocks have grown so fast over the years.

“If you don’t rebalance and go into the 2022 market, your portfolio will be overexposed to equities, leading to increased risk,” he said. “The higher the risk, the higher the potential for upside returns and the higher risk of loss you have.”

3. Not diversifying your portfolio

Carlos Legaspy, president and CEO of Insight Securities and author of “Going Bankrupt,” said he thinks one of the biggest pitfalls investors make when managing their money is not diversifying enough.

“It’s hard to understand the whole investing world, so people tend to only buy what they know,” he said. “As a result, they may miss other opportunities, sometimes in other countries or markets.”

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4. Hidden costs of asset location

You probably know you want a mix of stocks and bonds in your portfolio, but asset location dictates where you invest in stocks and bonds, Noble explained. You can save tax by choosing certain types of accounts over others.

“From a tax perspective, the ideal portfolio structure would be through holding tax-efficient stocks in a taxable brokerage account, while holding taxable bonds, actively managed mutual funds, REITs and commodities in a tax-advantaged account , to minimise the impact of the tax,” he said. “Smaller Roth IRAs may be more aggressive investments than larger traditional IRAs.”

If you’re finding it difficult to determine which accounts will give you the greatest tax benefit, it may be time to seek professional help.

5. Your time

Hiring a financial professional can also help you regain one of your most important assets—time, says Noble. After all, your schedule is likely to be divided into spending time with friends and family, doing hobbies you enjoy, work, chores, and running errands. Managing your own money can take time away from every important activity.

“Assessing investment positions, rebalancing portfolios, considering asset location, expense ratios and diversification across different asset classes, while managing emotions takes time,” Noble said. “Everyone has a different cost and they need to decide if they are willing to pay that.”

When to seek professional help

There’s nothing wrong with managing your own investments, Legaspy points out. The more you know about investing, the better you can communicate with your financial advisor.

However, if you want to go this route, it’s best to use only your “play money” – money that you don’t mind risking or losing. That way, your financial advisor can still help you get the most out of your long-term investments.

“The biggest cost of managing one’s own money is the cost of irrational decisions,” he said. “In our day-to-day lives, we employ a variety of professional services, from doctors to plumbers. Financial services are no exception. Unlike brokers, investment advisors are fiduciaries whose advice must be in the best interests of their clients.”

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