Introduction:
Contributing to a retirement account, or multiple retirement accounts, is an important part of retirement planning, but it is not the only step in the process. Saving for retirement may not be enough if you do not choose the right types of investments.
Understanding Your Investor Personality:
Every investor needs a plan that takes into account: the timeline, savings goals, other sources of income, risk tolerance, and your personality as an investor.
Understanding these factors will help you choose the types of retirement accounts to invest in and how to manage your investments. Will you be an active investor, involved in managing your accounts day by day, or do you prefer a passive approach to investing?
To decide what type of investor you will be (or want to be now), ask yourself:
- How do you like to make decisions?
- Do you take advice or prefer to do it yourself?
- How do you respond to obstacles, such as a market downturn?
- What is your risk tolerance level?
- How emotionally affected are you when making short-term or long-term decisions?
There are no right or wrong answers to these questions, but understanding how you make decisions, how you respond to stress, and how you manage the emotional side of decision-making will help determine how involved you are in managing your investment portfolio day by day.
What It Takes to Be an Active Investor:
Active investors want to be involved in designing their ideal investment portfolio. They are usually familiar with various investment options such as individual stocks, mutual funds, or exchange-traded funds (ETFs). They either know or are willing to learn how to determine target allocation weights for different asset classes, including stocks, bonds, cash, and real assets.
Active investors regularly monitor and rebalance their investment portfolios. They also understand how to create a portfolio that maximizes tax benefits and adjusts risk levels as they approach retirement.
If you are an active investor, you are likely to want to:
- Monitor and review account performance
- Conduct periodic fee analysis
- Allocate investments
- Research the details of individual stocks, mutual funds, and ETFs or other investments
- Create a tax-efficient portfolio
- Rebalance investments regularly
There are many options available for investors who want to do it themselves, including:
- Self-directed retirement accounts
- Low-cost brokerage firms
- Low-fee financial service companies
What It Takes to Be a Passive Investor:
Passive investors typically look for a simple investment solution. They may be less knowledgeable about the structure of individual stocks, mutual funds, or ETFs. Therefore, passive investors are more likely to seek out mixed asset allocation portfolios.
These investment alternatives rely on professional guidance to set up an investment portfolio strategy and automatically rebalance it. This approach suits those who prefer a “set it and forget it” method of portfolio management or those who plan to make rare changes.
It is beneficial for the passive investor to use a low-cost investment strategy focused on asset allocation. This will generally perform better than trying to pick high performers from previous years or spreading contributions across all investment options in a 401(k) plan.
If you are a passive investor, you are likely more comfortable with:
- Not checking your accounts regularly
- Not selecting your own investments
- Using a pre-mixed balanced portfolio or target date funds
- Setting limits for updates or changes to asset allocation
- Rebalancing your accounts appropriately
- Working with a financial advisor
Common options for passive investors include:
- Target date retirement funds
- Asset allocation funds
- Professionally managed portfolios
- Online investment platforms or robo-advisors
- Passively managed index funds
Using a Financial Advisor:
Both active and passive investors can benefit from working with a financial advisor. These professionals can help you manage your investment options and understand how those investments fit into your overall financial picture.
If
You would prefer to have a financial coach, consider working with a certified financial planner who is paid only by clients and not through commissions or brokerage fees.
Many employers and banks also offer free or discounted financial wellness programs or sessions with a financial advisor. These programs can help you manage your investments, savings, spending, budgeting, and more to create a healthy financial life now and in the future.
Conclusion:
Both active and passive investors can benefit from working with a financial advisor. These professionals can help you manage your investment options and understand how those investments fit into your overall financial picture.
If you prefer to have a financial coach, consider working with a certified financial planner who is paid only by clients and not through commissions or brokerage fees.
Many employers and banks also offer free or discounted financial wellness programs or sessions with a financial advisor. These programs can help you manage your investments, savings, spending, budgeting, and more to create a healthy financial life now and in the future.
Moreover, both active and passive investors should have an Investment Policy Statement (IPS) as a strategic guide for their investment program.
Source: https://www.thebalancemoney.com/are-you-hands-on-or-hands-off-investor-4141170
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