Self-directed investing—that is, managing one's own portfolio—makes sense for savvy retirees who want more control and lower investment fees. It's especially logical for the newly risk-adverse: people who are not trying to break the bank but protect their nest eggs from breaking, as many did during the market meltdown. But taking direct responsibility for your investments is not for everyone. Follow this guide to see if there might be at least a sliver of Warren Buffett in you.
What's y our investment IQ? You need not be another Sage of Omaha to be a great manager of your own portfolio. But you do need a basic understanding of stocks, bonds and alternative investments. "You need to put as much energy and investment into your own education as you do into your investing," says Lee Barba, head of thinkorswim Group, an online broker that offers extensive education programs through its Investools affiliate. The tax consequences of your investment actions are often the deciding factor in making the best choice, so you need to know the tax treatment of your investment-account contributions, investment earnings, and distributions. You'll also need time to get comfortable with the language of buying and selling, especially since most of your investment activity will be taking place between you and a computer screen.
Online access and computer skills. If you're not comfortable with the Internet and a personal computer, your odds of being a good self-directed investor are not great. Self-directed investing includes accessing and managing your investment accounts online. It also means doing a lot of online research to regularly test the assumptions of your financial plan and to make fact-driven changes to your plan and your investment holdings as needed. Without the Internet, you wouldn't have the ability to be the sophisticated neighborhood wunderkind of Wall Street.
An online broker. You need a company to make your trades and hold your investments. These days, that means a firm with powerful Web skills. There are many to choose from, and you can read extended "how to" and "what to look for" lists on their Web sites. At the end of the day, are their fees competitive? Do they make the trades you request in a competent manner? Is their Web site easy for you to use? If you need telephone help, do they provide it promptly? Is your customer account information accurate and up to date? Do they have other services you want, such as online banking and credit cards? J. D. Power has customer ratings of 15 self-directed investment firms.
A long-term plan. You should know where you're headed before becoming a self-directed investor. How much money will you need in retirement? Why? How much do you need to be setting aside right now to meet that goal? What's your tolerance for risk? Loads of Web help exists to help you build and manage a retirement investment program. But most people don't make the effort. And even during the worst recession and market decline since the Great Depression, most retirement-plan participants have not changed their behavior. Unless you do the work to build a good plan, take the time to regularly review your investment performance, and are willing to adjust your portfolio as needed, you probably should leave investment decisions to someone else.
Patience and discipline. Following a plan can be tough when volatility in investment markets is the norm, not the exception. But self-directed investors need to realize that their retirement account is not a penny stock they're trying to double or triple in the next week. Take a deep breath, take a long view and then stick to your plan. "Those who seem to do the best realize that it takes a commitment," says Barba.
Time. It takes time to keep up with changing economic conditions and investment markets. But the good news is that retirement investment plans should not executed with a day trader's mentality. Setting up your self-directed accounts will take study and time. But once you've made your initial investments and automated any regular contributions into your account, do not spend excessive time reviewing your holdings. Active traders aside, most people need to log into their account for an hour a week to monitor investment performance and make any needed tweaks. Once a quarter, you should consider rebalancing your portfolio, taking gains from your winners and putting those funds into other sectors of your portfolio.
"Learnability." So, it's not a real word. Neither is "drinkability," but I'm happy to match linguistic skills with Bud Light. The point is that taking responsibility for managing your investments includes seeking out all sorts of information that can affect your investment choices, financial plan, and ultimate goals. No one is going to call you with these nuggets out of the goodness of their heart. You've got to have a willingness and aptitude to seek out and master new things. You've got to have learnability. "The most common problem we have is people thinking it's going to be easier than it is, and getting bogged down and not getting past the first step" of the investor-education program, Barba says.
Family unity. Involve your spouse, children, and other family members. That doesn't mean you call them before placing a trade. It does mean they understand and, hopefully, share the goals of your financial plan, and they support the decisions you make to realize your dreams, and theirs. So maybe you don't really need a family plurality to make and manage good investments. But you need it to sleep well at night, and what's the point of financial independence if the people you love don't want to talk to you anymore?
Corrected on 05/29/09: An earlier version of this article misspelled the name Lee Barba.