Your Money|The Risks and Rewards of Self-Managing Investment Portfolios
The Risks and Rewards of Self-Managing Investment Portfolios
Ken Kavula, a retired high school principal in Genesee, Mich., has managed his financial life and retirement on his own.CreditCreditLaura McDermott for The New York Times
By John F. Wasik
WHEN Ken Kavula of Genesee, Mich., retired from his job as a high school principal at age 53, he decided to defy conventional wisdom and manage his own financial life — including his retirement accounts and a mix of stocks and bonds he had either accumulated on his own or inherited.
Fifteen years later, Mr. Kavula, now 68, has ridden the huge highs and crushing lows of the markets so well that he has enough to live off, for now, without even tapping some accounts.
Although he had no professional money management experience or investment credentials, he was far from a newbie to the complexities of financial management when he retired. He had been studying investing for years and had been a member of several investment clubs since the late 1980s.
"That gave me confidence I could make money on the money I had," Mr. Kavula said.
There are good reasons for retirees to manage their own financial lives: Saving money on fees is one benefit, and more closely aligning investments with personal goals is another.
But there is dangerous ground along the way: Taxes, estate planning, rules around gifting to relatives, timing of withdrawals from retirement accounts and other issues can be immensely complex and are getting more so.
Although retirement confidence has been rising somewhat since the end of the last recession, it's still shaky. A recent Deloitte Center for Financial Services studyfound that "45 percent of respondents felt 'very secure' in having enough savings and income to maintain a comfortable retirement lifestyle, a sizable jump from the 28 percent in Deloitte's initial survey in 2012."
For those who are reluctant to go it entirely alone, a growing alternative for retirees is the model of do-it-yourself investing done through so-called robo-advisers. After you enter your risk tolerance and other information in an online form, a software program automatically creates a portfolio of low-cost exchange-traded funds. It's a way to avoid paying commissions or being tempted by brokers pushing you into investments you do not quite understand.
Betterment, Personal Capital and Wealthfront started the robo-adviser model. Not to be outdone, more traditional firms have entered the arena. The discount broker Charles Schwab, for example, introduced its Intelligent Portfolios robo-adviser in March.
Yet the new generation of automated portfolio managers may not be suitable for retirees who have complex financial needs.
One of the biggest concerns that human advisers have when it comes to their algorithmic alternatives is how investors will use them during market downturns. Skittish retirees may make some costly timing decisions by selling at the wrong time.
"These programs are still in their infancy, said Tom Balcom, of 1650 Wealth Management in Lauderdale-by-the-Sea, Fla. "Will investors sell out and change portfolio allocations when they're scared?"
Another issue retirees can face is how to make withdrawals from retirement accounts in the way that minimizes taxes. Given the choice of withdrawing funds from a 401(k), Roth I.R.A. or a conventional I.R.A., for example, which would produce income subject to the lowest tax?
Few, if any, robo-advisers provide this service, and it is a difficult question for investors, although some automated options do provide tax-loss harvesting services to lower tax bills.
But financial transactions with large tax implications often need the guidance of someone with extensive experience in financial planning, especially for investors with multiple retirement accounts.
"I had a 62-year-old client who retired and went to a discount broker," said Carolyn Walder, a certified financial planner with Lifetime Wealth Planning and Management in Alexandria, Va. "They advised him to take his income from his I.R.A. instead of from his individual brokerage account, which had a lot of capital losses built up from the 2000 to 2002 tech debacle," Ms. Walder added. "That move cost him about $15,000 in taxes that he did not have to take. They were doing it all wrong."
But advisers might create more problems than they solve, in addition to costing more than the solo strategy. Roy Chastain, 69, who had retired from his job as a lawyer for the state of California, originally chose to work with a large brokerage adviser, but called it a "disaster."
"I didn't have a large portfolio, and they offered me products and limited advice," recalled Mr. Chastain, who lives in Sacramento. "They were more salesmen than analysts."
Like Mr. Kavula, he now manages his own portfolio of individual stocks, mutual and exchange-traded funds. He has been a member of an investment club since 1994.
A solution could be to combine do-it-yourself management with human help, by using an adviser to set up a portfolio that you would then monitor and control. This approach, using a mix of E.T.F.s and mutual funds, can save money in fees, but the price goes up if you give in to likely efforts from advisers to push you toward more active management.
"Brokers have an incentive to go to active management to add value," said Chris Chen, a fee-only adviser with Insight Financial Strategists in Waltham, Mass.
That often translates into higher fees and expensive mistakes. Mr. Chen said that when one of his clients was with another broker, "he paid 2.7 percent in fees, which included advisory and mutual fund expenses," he said. This compares "to about 1 percent to 1.2 percent annually for an E.T.F. portfolio that includes advisory fees and E.T.F. costs. A lot of decisions go into constructing a portfolio. There are so many moving parts."
Yet another option is a model that combines the call-in services of a financial adviser with the ability to use online tools. Such a hybrid model was recently announced by the Vanguard Group, the large mutual fund company.
Vanguard's Personal Advisor Services, available to clients with at least $50,000 in assets, charges a 0.30 percent annual advisory fee, in addition to mutual fund or E.T.F. management expenses ranging from 0.05 percent to 0.19 percent annually.
Still, there's nothing wrong with managing your own low-cost portfolio, as long as you understand the risk involved and can find help for any additional financial concerns. Before setting out on your own, it is wise to ask — and answer — several questions to determine what you'll need to complement your financial skill set.
"What's the complexity of your needs?" asked Robert Stammers, director of investor education for the CFA Institute, a group that represents investment professionals. "What's the cost of making a potential mistake?"
For example, what if you need to integrate an investment strategy with a tax and estate plan? You will probably need to work with an estate planning lawyer and financial adviser to ensure that everything aligns with your intentions.
You will also need to be honest about your ability to confidently stick to your investment policy, which is a written plan on how much risk you want to take in all market conditions. Will you sell when the market goes south or buy more stocks?
There are many tools online that will help you make the best spending, withdrawal and tax decisions on your own. One resource is the nonprofit group BetterInvesting, which provides educational support on stock investing and investment clubs, and which has chapters around the country.
But advisers say a little bit of hand-holding can go a long way, as can joining forces with other investors.
For his part, Mr. Kavula, who speaks across the United States to help educate investors, has joined clubs affiliated with BetterInvesting.
His advice? "Don't try to hit a home run and don't be greedy. Be patient on your way to investing. People heading in and out of the market won't be successful."
A version of this article appears in print on , Section B, Page 4 of the New York edition with the headline: The Risks and Rewards of Self-Managing Investment Portfolios. Order Reprints | Today's Paper | Subscribe