Do You Prefer to be in Charge or to Trust a Pro?

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.

When it comes to investing, would you trust a professional to manage your investments or prefer to do it yourself? or you can embrace a mix of both? Especially in the stock market, do you have a flair for picking stocks and identifying the next ‘Magnificient 7’ or would you rather play it safe and invest in a diversified, pool of funds?

This week, let’s examine stock market investing and how to choose your preferred approach for investing.

Investing is a logical next step after saving and an important step in wealth creation. While your savings are limited by how much you set aside, your investment returns can grow your wealth significantly. If you save $100 per month, the most you can have in a year is $1,200 and in 5 years, $6,000. However, with investments and the power of compound interest, you can get much more than $6,000 in 5 years.

When it comes to stock market investing, you typically have two main options:

1. Directly picking stocks

2. Investing in pooled funds managed by professionals

Let’s break these down.

The Direct Approach

Under this approach, you have to set up a stockbroking account and decide on the stocks you want to buy. You also determine the quantities of each stock and the entry price (based on market price) that you prefer. The exit timing (when you sell off the stocks) and the selling price are also choices that are available to you. You are completely in control when investing directly.

The major issue with this approach is that it is time-consuming. Unless you are an equities analyst or genuinely enjoy ‘crunching numbers’ and reading reports, you may find this approach difficult. However, there are firms - some of whom are independent - who issue recommendations on what to buy for a fee or subscription amounts. This may reduce the need for you to research each company whose stock you’re interested in. However, you still need to decide to invest and also decide on the entry price, quantity, selling price, and timing.

This approach works better for people who enjoy doing or reading financial analysis, have time to manage their portfolio, and are willing to take on higher risks.

The Indirect Approach

This is for people who prefer a hands-off approach. Here, you invest in a professionally managed pooled fund. Professional fund managers aggregate funds from investors and then invest in stocks. Hence, these fund managers remove the need for investors to pick the stocks individually, and decide on other things such as quantity, entry and exit price, and timing.

Another great benefit of the indirect approach is that you can automate your investments to the fund regularly without transferring money to the fund regularly. For example, you can set up a direct debit on your account that sends $100 to the fund monthly and you can literally be investing in your sleep. This will help with consistency and harnessing the power of compound interest.

As you may have figured out, a major drawback is the lack of control over where your money is invested. The fund manager will invest the funds in line with the stated investment mandate of the fund and by signing up, you agree to that mandate.

While there are numerous ways to invest in the indirect approach - Mutual Funds, ETFs, and Index Funds, my favorite approach is the index funds. As I explained in this newsletter, index funds are a low-cost, diversified, and low-risk method of investing in equities. Next week, I will write about my favorite index fund which has returned consistent positive performance for decades. So, set your alarms, and do not miss out on that newsletter!

Does this mean that you can only stick to one approach? Absolutely No! You can maximize the benefits of both - ensuring consistent investments by automating transfers to pooled funds and taking calculated risks by investing in individual stocks. Both methods have appeals and drawbacks and can suit different people depending on their circumstances.

TLDR: Which One Should You Choose?

• Direct Approach (Stock picking): if you enjoy managing your investments and being in control, have time for research, and are comfortable with higher risk.

• Opt for Pooled Funds: if you value simplicity, diversification, and professional or automated management.

Feel free to send in your questions!

Act Now:

• Move some of your savings into investments this weekend

Reflect on This:

• Which approach is best for you?

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

Dee

P.S.: if this email was shared with you, please subscribe here and share it with anyone interested in learning more about investing in the stock market.

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