How to Create a "Do it Yourself" Investment Management Portfolio

DIY portfolio management reduces investing expense. When an investor moves from a full price broker to an online broker it reduces commission cost. Making your own buy/sell decisions eliminates the need for a manager and gets rid of the management fees, annual fees, quarterly fees, inactivity fees, planning fees and……. Well you get the picture. But it could also be a trap of your own making.

For many investors the only way to invest is to find a good money manager and get help. (Consider the Vanguard Star fund(VGSTX) or the Dodge &Cox Balanced(DODBX) or invest in index funds like the Fidelity Spartan Equity Index (FUSEX) or Vanguard 500 Index (VFINX) for great "assisted" diversity) But for those intrepid souls who want to explore the possibility of DIY portfolio management there are some important things to consider.

There are logical steps you should take to create your own successful investment portfolio:
• First determine what you are saving for. The usual goals are education expenses, to buy a new home, or retirement.
• Make a firm plan for the time frame of the investment. When will the children need college money, when do you plan to buy that dream home, how long is it to retirement.
• Figure out how much you can comfortably afford to invest now and remember that you can change that amount later if you choose to increase it.
• Remember that all investments carry some degree of risk. You could lose part or all of your initial investment. It is important to understand what your risk tolerance is. The lower the risk of a particular security the lower the expected return, and the higher the risk the higher the expected return.

Before you begin the next step, (which is to actually put together the portfolio) you need to examine who you are and what your time constraints are. You need to examine; discipline, emotions, time constraints, knowledge level, and perseverance.

Discipline: When you look at your finances and see tons of credit card accounts up to, or near the limit, you should hear alarm bells going off somewhere near the piggy bank. If you have no financial discipline with your household accounts and credit cards you won't be able to successfully manage your own portfolio. A professional portfolio planner will be able to tell you exactly how much you need to be investing on a monthly basis to meet your goals. The planner can also arrange for the funds to be automatically deducted from your paycheck so you are investing before impulses to spend the money elsewhere can derail your plan.

Emotions: The irrational behaviors people display in relation to money and investments can fill volumes. You need to know your own trigger points intimately and be able to control or overcome them to make DIY investing work for you. Making bad investment decisions can be a result of fear of losing the investment, fear of making a faulty decision, or just second guessing the choices we have already made. Bad decisions also happen in the opposite extreme when you are flushed with excitement and thrilled by the success of rising values. The rush of an upsurge in the market may give you the feeling of invincibility that gamblers feel when the cards seem to be coming their way. If you cannot rationally stick to your investment strategy even when your emotions are running rampant then you probably should not try to manage your investments without professional management help. The market does not take your emotions into account.

Time Constraints: Assembling and managing your investment portfolio is a full time job. Monitoring your own securities performances in relation to the market trends takes time and financial expertise. If you still work full time or have other full time commitments you will not have time to do justice to managing your investment accounts. If you are retired you have to weigh whether you want to spend your retirement managing your money or enjoying it.

Knowledge: Building and managing an efficient portfolio (matched perfectly to your risk tolerance, the amount of money you wish to invest, the time you need to invest it to reach your goals, and the amount you hope to realize) is both an art and a science. If you are your own planner, your job is to assess your own risk tolerance and then design a portfolio that matches the highest returns possible to the risk you are willing to take. It is not a job for a beginner; but having made that point, you do not stay a beginner if you are willing to learn and evolve. In November of 2005 the National Association of Securities Dealers made the Mutual Fund Expense Analyzer available online (http://www.nasd.com) . This nifty tool lets investors determine the expenses associated with a huge listing of funds and exchange traded funds. It can also estimate and graph values over time periods specified by the investor so you can see a running total of expenses you would pay during each period. http://www.investingonline.org has a tutorial for helping you under stand the first basic steps to signing up as an individual trader online. The SEC has a site (http://www.sec.gov/edgar.shtml) that contains details for investors on a company's financial information. There are also tutorials at the SEC sites for different aspects of securities trading.

Perseverance: This category is actually linked to the emotions category. It is important to be able to hang on for the long haul when the stocks dip. The surge of fear investors feel when they see their securities beginning to slide often propels them into a premature trade out of the market. If you have done all your homework and your picks are good ones then hang on through the rough patches and in the long haul the market will reward you.

Begin your DIY experience with the understanding that gut feeling and guesses will not work. Continue with the understanding that investments need time to work. Learn what financial analysis is and how to do it. Screen your stocks based on the data you find in prospectuses, and internet sites. Build a strategy and discipline yourself to work it without emotion. Increase your knowledge and bolster your perseverance.

If you still feel you want to manage your own portfolio follow these rules:
• Start with a small amount, no more than you can afford to lose, once you gain some confidence and expertise you can increase the amount you invest. If you have less than $25,000. to invest the best way to diversify and balance your assumed risk is in mutual funds rather than individual stocks.
• Be sure your portfolio includes stocks, bonds and cash. Some new investors get focused on large cap stocks and forget how important it is to diversify.
• If you already have professionally managed mutual funds, keep them. It is ok to start managing part of your money on your own if you do not put your entire retirement plan at risk. Use money that is not already invested. Invest as much as you can in your company's 401(k) plan. This also works to shelter your income from taxes because your contribution is invested before taxes are taken out of your salary.
• When you do your own portfolio you still have to trade with brokerage houses. Be sure you are fully aware of any charges the online brokerage firm will be making. The online brokerage houses may charge less than a full service broker but if you do a lot of trading, charges will add up very quickly.
• Include Certificates of Deposit, Bonds and money market accounts in your portfolio. Tax-Free Bond Funds give you lower returns but they are also very low risk.
• Buy index funds instead of managed mutual funds to take advantage of lower fees.
• Calculate your probable tax costs first so you have some idea what capital gains taxes will be.
• You must learn what the different "orders" are and how to use them. Market Order is a buy or sell order, you have to watch these closely because if the market is fast moving the price could be many dollars from where you placed your order before it is executed. A Limit Order does just what it sounds like; it limits the specific price you will be willing buy or sell a share. A buy limit order can only be executed at the limit or below and a sell limit can only be executed at the limit or above. Stop Loss orders limit the amount of money you will lose if your security starts a serious slide. When the price reaches your stop loss level it is automatically sold.
• Remember that knowledge is power and the more information you gain the better choices you will make. It is your responsibility to learn about financial analysis so learn how to read the company prospectus (this is usually available on the company website), learn how to find information about the company at the EDGAR site (the SEC's public information on securities site).

(Information obtained and adapted 2/7/06 from http://www.investingonline.org )

The fees and commissions paid to professional financial advisors is to pay for their time and experience in researching and analyzing the securities they recommend to you for investment purposes. It takes an enormous amount of time and energy to sort through all the thousands of securities available. It also takes a huge amount of financial expertise to analyze all the nuances of the market and the performance of a specified security.

I am one of those people who believe you can manage your own investment portfolio. I do have some caveats: First you need to know what steps to take before you begin because prat falls are only funny on the old black and white film strips. Second you should have an advisor or confidant who can help you weather those attacks of fear when the market gets shaky. The advisor can also temper your enthusiasm when the market is sizzling. Third; never stop learning because not only is knowledge power; it is also wealth.