Do-It-Yourself Investing
When seeing investing, the first decision is whether to manage your investments yourself or delegate them to a professional. DIY investing appeals to those who enjoy taking control of their financial decisions. Many such investors use discount or online brokerages due to their low fees and user-friendly platforms.
However, DIY investing needs education, skill, time, and emotional discipline. If these characteristics don’t align with your strengths, seeking professional assistance might be better.
Professionally Managed Investing
Wealth managers or expert advisors are usually selected for those who prefer to delegate. These professionals charge a percentage of assets under management (AUM) as their fee.
Although this option comes with higher costs, some investors value the convenience of having experts handle research, decision-making, and trading. The SEC’s Office of Investor Education and Advocacy advises confirming that your investment professional is licensed and registered.
Robo-Advisor Investing
An increasingly popular choice is robo-advisors. These automated platforms use algorithms and AI to provide personalized investment advice. They assess clients’ financial goals and risk tolerance and make suitable recommendations.
Offering a cost-effective solution with minimal human involvement, robo-advisors now go beyond investment selection to assist with retirement planning, trust management, and managing accounts like 401(k)s.
A Brief History of Investing
Early Beginnings
The roots of modern investing trace back to the 17th and 18th centuries, when communal markets connected investors and opportunities. Notable milestones include establishing the Amsterdam Stock Exchange (AMS) in 1602 and the New York Stock Exchange (NYSE) in 1792.
Industrial Revolution Investing
The First and number two Industrial Revolutions (1760-1840 and the late 19th to early 20th century) spurred economic growth and savings, enabling investments. Major banks like Goldman Sachs and Citigroup were founded during the 1800s, shaping the modern investment landscape.
20th Century Novelties
The 20th century presented groundbreaking investment theories like portfolio theory and asset pricing. New vehicles like hedge funds, private equity, REITs, and ETFs emerged. The Internet revolution of the 1990s democratized investing by enabling online trading and research.
21st Century Milestones
The 21st century brought both challenges and opportunities. The dot-com bubble’s burst, the Enron scandal, and the Great Recession (2007-2009) were defining events. These episodes highlighted risks and encouraged innovation, with discount brokerages and free-trading platforms like Robinhood making investing more accessible.
Investing vs. Speculation
Investing and Risk-taking both involve risk and uncertainty, but they differ in several key ways:
• Returns Sought: Speculators often aim for high returns, whereas investors seek steady, moderate gains.
• Holding Period: Investing generally involves more extended holding periods, often measured in months or years, while speculation tends to be shorter-term.
• Frequency of Activity: Risk takers make more frequent trades than traditional investors.
• Sources of Returns: Risk-takes rely solely on price changes, while investors may benefit from dividends or interest.
Proper risk management focuses more on position size relative to total capital than the volatility of individual investments. Speculation is considered riskier due to its higher frequency of risk-taking.
Example of Return From Investing
Imagine buying 100 shares of XYZ stock at $310 per share ($31,000 total) and selling a year later for $46,020. Without dividends, your capital gain would be:
If XYZ issued $5 in dividends per share, your total return would be:
This demonstrates how dividends can boost overall returns.