Last Updated on January 28, 2025
Overview – Is Portfolio Management Something You’re Capable of Doing?
With more ways than ever to get involved in investing, hopeful investors-to-be will inevitably find themselves asking a simple yet fundamental question: “Should I manage my portfolio or leave this task to someone else?”
This is one of the first questions that must be answered before anyone can hope to start an investing career. Why? Because it will fundamentally dictate almost everything an investor does throughout their career.
Both approaches are equally valid and, to varying degrees, can even be pursued simultaneously. Before deciding which approach to take, or to what extent to pursue them concurrently, there are many important factors to consider.
Before Deciding Which Approach to Take, Know Yourself First
Before attempting to answer the big question, investors-to-be must do some preliminary work before making their decision, which is to have a clear understanding of themselves first.
In the context of our discussion, a “clear understanding of yourself” means having a thorough understanding of your aptitudes, behaviours, strengths, and weaknesses.
What things am I naturally good at? How do I behave in different circumstances, particularly under pressure? What strengths can I leverage and what can I hope to improve on? Do I like taking control of my affairs or delegating that responsibility? These are just some of the many questions that may be worth asking.
The better an investor-to-be answers these introspective questions, the more confidently they can make their portfolio management decision. Some people will find that, in answering these questions, they’ll lean more towards one approach than the other – though this is no guarantee that they will choose that approach.
While performing good introspection is an important step, it only represents half of the battle. Several other factors must also be considered before choosing which portfolio management approach is best. In the following sections, we will go over what these additional factors are and how they align with an investor’s traits.
Reasons to Manage Your Portfolio Yourself
As the internet continues to become more universally accessible, technology becomes increasingly widespread, and with seemingly endless online options to choose from, managing your portfolio yourself has never been easier.
Many people are drawn to the DIY investing approach for a variety of reasons.
Those who choose to manage their portfolios are usually the types of people who take pride in making their own major decisions and are more than comfortable with setting their own goals. They value independence, enjoy managing other personal/professional affairs, and aren’t afraid of taking accountability for their mistakes or lapses in judgment.
People who feel that they have the emotional discipline needed to make rational decisions under most circumstances, have a strong eye for detail, and are willing to put in the time needed to pore over countless documents may be best suited for the DIY approach.
Finally, some people simply find it intellectually rewarding to manage their portfolios, and would much rather seize this satisfaction for themselves than have some external party do so.
If investors do choose to manage their portfolios, there are important caveats to keep in mind.
First, the success (or failure) of a DIY investor’s portfolio depends solely on them. Sure, there are external factors that can influence a portfolio that cannot be controlled, but how investors respond to these external forces, along with the strategies they deploy and the decisions they make, is entirely up to them. Investors who choose to manage their portfolios don’t have the luxury of pointing fingers when things go poorly.
Second, some investors-to-be choose to manage their portfolios based on the belief the investments they choose can beat the market. While that may be the case for some investors, this isn’t a blanket generalization – there are plenty of self-managed portfolios that post average or below-average returns.
Finally, as an investor’s portfolio continues to grow in size and scope, they may find it more difficult to allot the necessary time and energy needed to properly maintain and grow their portfolios, especially if other responsibilities in their life demand similar levels of attention.
Reasons to Let Others Manage Your Investment Affairs
Just as there are a multitude of options for people to manage their portfolios, so too are there many ways for people to have their money managed by someone else. After all, not everyone is interested in managing their investment affairs, and that’s fine.
Arguably the most appealing reason for having someone else look after your portfolio is that it’s a much more “hands-off” approach to investing. Not everyone has the time needed to choose which strategies to deploy or which investments to analyze, nor does everyone want to manage yet another responsibility in their life when they already have so many.
This by no means suggests that people who choose to let others manage their investments are “lazy” or “incompetent”, it simply means they want to use their limited time, energy, and motivation on other endeavours that are perhaps more meaningful to them.
Just because someone doesn’t want to actively manage their portfolio doesn’t mean they can’t put their surplus capital to productive use. Whether it’s a mutual fund, index fund, or simply entrusting their capital to a close friend or family member, entrusting their capital to someone else to maintain and grow is still a sensible move.
Additionally, some people may choose to let others manage their investments as a temporary measure before deciding they’re ready to take on the responsibility themselves. Just because someone else manages your money doesn’t mean you can’t one day take the reins.
Just like before, there are certain things to keep in mind when you leave the responsibility of portfolio management to someone else.
In an attempt to bring in more clients, some hedge fund and mutual fund managers promise superior returns if you leave your capital with them, citing their credentials and experience. However, just because you leave your capital in the hands of a “professional” doesn’t mean superior returns are guaranteed. To make matters worse, some of these funds may charge exorbitant fees, reducing whatever net returns you can claim.
Additionally, because people who leave their capital in the care of fund managers exercise very little control over the day-to-day affairs of their portfolios, they must implicitly trust that the strategies these managers deploy will prove to be effective, which may or may not be the case.
Also, some people leave their capital in the hands of someone else believing they can achieve a state of “passive investing”. However, as we’ve discussed before, a state of 100% “passive” investing is virtually impossible to achieve because there will always be some work involved or decisions that need to be made.
People who choose to let others manage their investment affairs must still decide which funds best suit their needs, ascertain what the fund’s investment strategies are (and decide if these strategies can effectively grow their money), and understand what sort of investments they plan to make using their capital.
Combining Both Portfolio Management Approaches Is a Valid Option Too
While many investors choose to manage their portfolio or let someone else do it, this doesn’t mean these two portfolio management approaches are mutually exclusive. Rather, it’s possible to pursue both simultaneously, and in some cases may even be more beneficial than just going with one option. It’s not unheard of for investors to pursue both options to various degrees.
For example, imagine you’re an investor who self-manages a portfolio comprised mostly of Canadian and American investments. However, you’ve recently decided to expand your investment horizons and have taken an interest in deploying your capital in the EU.
You currently know very little about the sorts of investments that are worth pursuing in the EU, but you don’t want your euros to sit around idly while you figure out what’s worth analyzing. So, you decide to put your euros into a few EU-focused index funds for now while you familiarize yourself with potential EU investments.
While you actively manage your Canadian/American portfolio, you entrust your EU investments in the hands of index funds, granting you the geographical diversification you want without too much hassle.
This is just one of the many different combinations of how to actively manage some of your investments while letting another portion of it be managed by someone else. If done right, this can prove to be a highly effective strategy, and can even be more effective than just solely pursuing one portfolio management approach.
Is There an “Optimal” Approach to Portfolio Management?
Whether it’s actively managing your portfolio, having someone else do it, or some combination of the two, is there an “optimal” approach to portfolio management?
Not necessarily. Both approaches (or a combination of the two) are equally valid and, as we looked at earlier, appeal to different investors for a multitude of different reasons. Investors can achieve the success they want regardless of the specific portfolio management approach they take.
Many investors will discover that they will have more success with one approach over the other, or if they choose to pursue both, will have more success focusing on one more than the other. Figuring out which approach works best isn’t always immediately clear, but after some time starts to become more obvious.
Wrapping Up
Before starting their careers, every investor will need to answer the question, “Do I want to manage my portfolio or leave it to someone else?”
Both reasons are equally valid and can be equally effective in achieving an investor’s goals. It primarily comes down to what an investor’s individual aptitudes, strengths, weaknesses, and tastes are. It’s also possible to pursue both approaches simultaneously, and in some cases can be more beneficial than solely pursuing one.
Because both approaches, whether pursued separately or simultaneously, have the potential to be equally effective, there is no “optimal” choice to go with. The “optimal” choice, if there is one, depends solely on an investor’s circumstances and what they want to achieve.
