DIY or Passive Investing, Which Path is Right for You?

Hi Reader,

Welcome to The Money Series and if you are new here, thank you for signing up. Personal Finance can feel ambiguous and overwhelming, but I am here to help simplify the journey.

Do you have personal memories or tales of any loved ones investing in the stock market and losing money? Did those experiences make you wary of investing in stocks? Is this you?

This week, the US stock market has witnessed significant sell-offs, with individual investors offloading their holdings amid fears of inflation, interest rate hikes, and geopolitical tensions. In contrast, institutional investors seize the opportunity to accumulate stocks at lower prices, taking advantage of the market's volatility.

Despite these fluctuations, individual investors must understand that market downturns can also present opportunities. Last week, we discussed the importance of starting early and maximizing the benefits of compound interest. Today, we will delve into investing in equities (or the stock market), exploring both the DIY and passive approaches. Whether you want to take control of your investments or prefer a more hands-off strategy, staying informed and making decisions that align with your long-term financial goals is essential.

Understanding Equities

Let’s start with the basics. A stock, also known as equity or shares, represents ownership of a fraction of the issuing corporation. For example, buying shares of Apple means you own a portion of the tech giant. There are two main approaches to investing in stocks: DIY Investing and Passive Investing.

DIY Investing

This Do-It-Yourself approach involves opening a brokerage account, funding the account, selecting stocks you would like to invest in, and when to buy or sell. In this hands-on approach, the key steps include:

• Open a brokerage account. Select a stockbroking firm and open an account with them. You should choose a stockbroking firm with a user-friendly platform, excellent customer service, low fees, and a solid reputation.

• Fund your stockbroking account. Transfer funds via bank transfer or other mechanisms.

• Pick your stocks. Whether through proper research on stocks or the word-on-the-street method. Typically, you should have a strategy for stock selection. Do you want to buy stocks of companies that pay regular dividends, companies with the potential for high future growth, or companies that have been around for a long time, and you expect to remain stable for a long time?

• Learn, Monitor, Review. You may have to follow financial and company news to ensure that you stay informed of developments on the companies whose stocks you have invested in and decide whether and when to sell your shares in the company.

Pros🙂: hands-on approach, customization (you can tailor your portfolio to your convictions and preferences), complete autonomy over the stocks you invest in, and the timing of entry and exit.

Cons😕: time-consuming, costly to manage, more likely to result in un-diversified or under-diversified investments, investing in few companies puts you at risk if some of the companies fold up.

Passive Approach

This approach involves investing in funds that pool money to invest in a large, diversified portfolio of stocks. These funds are professionally managed and do not require individual investor participation. Popular options include Mutual Funds, Exchange-Traded Funds (ETFs), and Index Funds.

• A Mutual Fund pools money from multiple investors to invest in a diversified portfolio of securities such as stocks, bonds, and other assets.

• An ETF holds a collection of assets such as stocks, bonds, or commodities and trades on stock exchanges similar to individual stocks.

• An Index Fund aims to replicate the performance of a specific market index (e.g., S&P 500*) by holding the same or a representative sample of the securities within that index.

These investment vehicles allow individual investors to gain exposure to equities without active stock picking. There are some similarities and differences between these three which we will review over the subsequent newsletters. But for now, let’s highlight the pros and cons of this passive method.

Pros🙂: Diversification (funds invest in a wide range of stocks), professionally managed, convenient and less time-consuming, lower costs

Cons😕: lack of control and autonomy, some actively managed funds may charge high fees 

Which Approach to Choose?

Unless you work actively in investments or have a keen interest in stock picking, starting with the passive approach might be best. Investing in well-diversified, low-fee funds can provide stability and reduce risk. Similarly, using an investment vehicle can allow you set-it-and-forget it, especially when you automate regular money flows to the fund. Deciding what to buy under the DIY approach may be risky and leaves your wealth to the fate of a few companies.

Regardless of your choice, remember that investing in equities is a long-term game. Only invest money that you can leave in the stock market for at least 3 - 5 years.

Always remember that the single biggest risk when it comes to investing is not investing at all.

Feel free to send in questions and comments; they might influence the next newsletter!

Act Now:

• If you haven’t already, decide on your investment approach and take the first step.

Reflect on This:

• Is investing in a few trending stocks better than investing in a portfolio of stocks?

Till next week, I am rooting for you, money-ly!

Dee

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*The S&P 500 index also known as the Standard & Poor's 500, is a stock market index that measures the stock performance of 500 of the largest companies listed on stock exchanges in the United States. It is one of the most commonly followed equity indices and is often considered a benchmark for the overall health of the U.S. stock market and economy.

Disclaimer: This does not constitute financial advice. Please conduct your research or consult your financial advisor for important financial advice.