Do-it-yourself (DIY) investing, self-directed investing or self-managed investing is an investment approach where the investor chooses to build and manage his or her own investment portfolio instead of hiring an agent, such as a stockbroker, investment adviser, private banker, or financial planner.
The DIY approach has pervaded many activities that were traditionally performed exclusively by institutions or trained professionals. A common approach to investing, for many investors, is to hire investment representation to build and manage their portfolios. The main duties of investment representatives are to provide ongoing advice, allocate money to asset classes and investment products, and to make portfolio management decisions.
Individual investors will often choose to manage their own investments rather than hiring outside representation. Common reasons for doing so include the avoidance of agency fees, dissatisfaction with the quality of service or the investment returns, distrust of the financial industry in general, or a desire to take control of the investing process.
In addition, the advent of discount brokerages, proliferation of free financial resources on the Internet, and the availability of online research tools have also contributed to a large increase in DIY investing in recent years. There has also been empirical evidence that spam e-mail aims to manipulate stock pricing by influencing would-be investors. [1]
A common misconception regarding DIY investing is that it mainly involves the ongoing research, selection and management of individual securities such as stocks or bonds. However, a managed fund, a group of securities packaged together as one investment product or “fund” and managed by a portfolio manager is available to simplify the investing process. Mutual funds, exchange-traded funds (ETFs), fund of funds (FoFs) and target date funds (TDFs) are examples of managed funds. Therefore, given the generous investment product landscape, DIY investors have various portfolio management options ranging from simple to complex.
DIY Investor Types
The DIY investing process is similar to many other DIY processes and it mirrors steps found in the financial planning process used by the Certified Financial Planning Board. Whether a DIY investor or a certified professional, investing in the stock market involves risk and unpredictable fluctuations. It has been said, "a blindfolded monkey throwing darts at a newspaper’s financial pages could select a portfolio that would do just as well as one carefully selected by experts." [2]
Without the use of investment representatives, DIY investors must concern themselves with various investment management activities and factors that relate to building and managing their portfolios.
Building
Managing
Taxes
A stock trade is considered a capital gain or loss and is subjected to a tax rate based on whether the stock was held for less or more than one year. Typically, the tax rate is lower for holding a stock for a year or longer. If held for a short-term, the tax rate is treated the same as ordinary income and is typically higher, with some exceptions such as property acquired by gift, property acquired from a decedent, patent property, or commodity futures. [3] Tax rates are subject to change each year and with new administrations.
The main negative effect of advisory and management fees is that they are generally applied regardless of the performance of an investment portfolio. This can substantially reduce an individual's wealth over time and is one of the primary reasons that many DIY Investors prefer do take control of their own investment funds. "Typical characteristics of the Do It Yourself (DIY) investor include contrarian points of view and modest budgets that can't afford professional advisors." [4]
The use of investment advisory services attracts fees that are paid indirectly or directly to the various stakeholders who facilitate the investment management process. This may include investment representatives, portfolio managers, brokerages, operating expenses, trading costs and miscellaneous items.
A DIY investor has the potential to reduce fees by eliminating the various middlemen located throughout the advised-client model by accessing investment products and securities through a discount brokerage.
As a result of reducing fees, DIY investors have the potential to increase their returns by retaining the expenses they would have otherwise paid to investment representatives, middlemen and financial intermediaries.
DIY investors may experience qualitative advantages when compared to advised-clients such as empowerment, independence and confidence.
Depending on the DIY investor type, time demands will vary. Either way, some DIY investors will value the time they spend managing their own investments, but others will not. As a result, some DIY investors will consider the demands on their own time to be a disadvantage in the DIY-investing experience.
The stock market does not have to follow fundamental or technical indicators. The individual decision-making process can be psychological and cause overreaction. Overreaction is when information is processed by the investor/market and acted upon in an unreasonable, illogical response. This causes unpredictability and will foil most conventional stock market predictions. [5] A DIY investor may not have the time or ability to appropriately respond to market overreactions thus suffering significant loss.
Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, which is the study of production, distribution, and consumption of money, assets, goods and services . Finance activities take place in financial systems at various scopes, thus the field can be roughly divided into personal, corporate, and public finance.
A hedge fund is a pooled investment fund that trades in relatively liquid assets and is able to make extensive use of more complex trading, portfolio-construction, and risk management techniques in an attempt to improve performance, such as short selling, leverage, and derivatives. Financial regulators generally restrict hedge fund marketing to institutional investors, high net worth individuals, and accredited investors.
An index fund is a mutual fund or exchange-traded fund (ETF) designed to follow certain preset rules so that the fund can track a specified basket of underlying investments. While index providers often emphasize that they are for-profit organizations, index providers have the ability to act as "reluctant regulators" when determining which companies are suitable for an index. Those rules may include tracking prominent indexes like the S&P 500 or the Dow Jones Industrial Average or implementation rules, such as tax-management, tracking error minimization, large block trading or patient/flexible trading strategies that allow for greater tracking error but lower market impact costs. Index funds may also have rules that screen for social and sustainable criteria.
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Fidelity Investments, commonly referred to as Fidelity, earlier as Fidelity Management & Research or FMR, is an American multinational financial services corporation based in Boston, Massachusetts. The company was established in 1946 and is one of the largest asset managers in the world with $3.9 trillion in assets under management, and, as of December 2022, their assets under administration amount to $10.3 trillion. Fidelity Investments operates a brokerage firm, manages a large family of mutual funds, provides fund distribution and investment advice, retirement services, index funds, wealth management, securities execution and clearance, asset custody, and life insurance.
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TD Waterhouse Canada Inc. is a Canadian financial services corporation headquartered in Toronto, Ontario and owned by Toronto-Dominion Bank. The company does business through several divisions, TD Direct Investing, TD Wealth Financial Planning, and TD Wealth Private Investment Advice. The TD Waterhouse brand was also formerly used for TD's American and British brokerages.
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The following outline is provided as an overview of and topical guide to finance:
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