Self-directed or do-it-yourself investing is where individual investors build and manage their own investment portfolios. In other words, they direct their investment strategy themselves. Self-directed investors, also known as do-it-yourself (DIY) investors, decide which investments they want to buy and sell, and when. Typically, they use discount brokers and online trading platforms to make their trades.
3 key advantages of self-directed investing
1. Pay lower fees
Self-directed investors can purchase investments and make trades through a discount broker and will typically pay lower commissions and fees because they don’t get advice about the suitability of the investments they choose to make for themselves.
2. Invest in what you want
Self-directed investors do their own research and make their own decisions. They have the satisfaction of controlling the investments in their portfolios.
3. Online trading is convenient
Self-directed investors can buy and sell stocks and other investment products from the convenience of a website or app. They also have access to research, stock quotes, trading information, and interactive investment performance charts. They can see how their investments are doing in real time.
3 key disadvantages of self-directed investing
1.You do it all yourself
Self-directed investors have to do their own research, decide what to buy, monitor it and decide when to sell. They have to develop and follow a disciplined investment strategy that diversifies their investments. They need to stick to their strategy and not follow their emotions, especially when markets are volatile.
2. It can be to trade too often
Because online trading is so quick and easy, self-directed investors can run the risk of trading too often. The added fees to buy and sell investments reduce investment returns.
3. Can make costly trading mistakes
Self-directed investors need to take the time to familiarize themselves with the online trading platform they’re using to avoid making costly trading mistakes. For example, in fast moving markets, it can be easy to end up buying or selling an investment at a much different price than intended.
What it takes to be a self-directed investor
- Do your own research
- Develop your own investment plan
- Keep up with the latest financial news
- Learn the basics of trading
- Understand the fees
- Feel confident making your own trades
- Regularly monitor and manage your investments
You can still manage your own trades, but discount brokers may provide information on their website to help you better understand different types of investments. Some discount brokers may also provide automated investment tools to help with financial planning or asset allocation. Learn more about the benefits of working with an online investment advisor.