You’re Smart Enough to Manage Your Investments

Managing investments doesn't require a professional.

A lot of new investors suffer from limiting beliefs. This isn’t helped by the financial industry that is determined to make investing as complicated as it can.

Investors are inundated with jargon. An alphabet soup of accounts — IRAs, 401(k)s, HSAs — make it hard to get started. You have individual stocks, mutual funds and ETFs, small-cap and large-cap stocks, value and growth. All of these confusing terms might have many investors thinking: Am I smart enough to do this?

Yes, you are.

Investing really isn’t that hard. At least it isn’t once you simplify it down to the essentials. It doesn’t require expertise or special skills. Many financial advisors make you think you need to invest in a dozen funds and stay on top of all the latest market news. You don’t need to do either of these things.

Anyone can build a portfolio with two index funds: one that covers the total U.S. market and one that covers the total international market. As you get older, you can add a third fund: a total U.S. bond market fund to stabilize your portfolio and preserve the wealth you’ve built over the years. You should start thinking about adding bonds in your 40s and definitely in your 50s. But if you’re an investor in your 20s or 30s, you want as much of your money invested in growth assets as possible.

When deciding where to put these investments, you should prioritize tax-advantaged accounts like the Roth IRA and a 401(k) if your employer offers one. Otherwise, you can use a regular taxable brokerage account.

Let’s put a portfolio together using specific index funds. These are ETFs from Vanguard, the leader in low-cost index funds. They’re like stocks, but they contain thousands of individual stocks in one package. We’re using ETFs because they're low-cost and available anywhere you can buy individual stocks, not just Vanguard.

Vanguard Total Stock Market ETF (VTI) - 75%

Vanguard Total International Stock ETF (VXUS) - 25%

So if you have $100 to start investing, open a Roth IRA and put $75 in VTI and $25 in VXUS. You’re now investing in a diversified portfolio, and it only took two funds. Every time you want to invest new money, put 75% in VTI and 25% in VXUS.

Let’s say you’re an older and more conservative investor. You’ll now want to throw in bonds:

Vanguard Total Stock Market ETF (VTI) - 60%

Vanguard Total International Stock ETF (VXUS) - 20%

Vanguard Total Bond Market ETF (BND) - 20%

I should note that 401(k)s come with a more limited menu of investment options than a Roth IRA or taxable brokerage account, but chances are you can find some fund options to approximate this portfolio. You can always add more international to your allocation, or less. There’s no one-size-fits-all investment strategy, but this comes pretty close.

There are great benefits to managing your own investments. A lot of professional advisers charge you enormous fees to invest in a portfolio of 10 or more funds, but you’re still essentially getting this three-fund portfolio you can easily recreate yourself with lower fees and less complexity. Many advisors also sell commission-based products, so you’re not necessarily getting the best funds for you. And robo-advisors often give you a limited selection to choose from. The DIY route gives you control.

There’s also the mistaken notion that professional money managers have special skills that allow them to beat the market portfolio. This isn’t true. Most professionals can’t beat the market, so why pay them to try?

The best portfolio is one composed of market-cap-weighted funds. These are funds that simply track an index rather than attempt to invest based on an active strategy. This means that if Apple represents 5% of the whole U.S. stock market, Apple will make up 5% of a total U.S. stock market index fund, like VTI. These funds are designed to capture the performance of the market, which has returned on average about 7% each year over long periods.

There are many complicated financial situations a professional can help you with. Investing doesn’t have to be one of them. Almost everyone is better off creating a portfolio without the help of a professional. Once you overcome the initial hurdles — figuring out what accounts do what, knowing what to invest in (I’ve covered the ideal investing order of operations here) — investing is simple and hands-off.

And yet, new investors still suffer from limiting beliefs. Many are under the misguided perception that investing is like gambling. If investing is determined by chance, why bother?

Would-be investors think investing is time-consuming. The good news is that it’s not that either. After the initial education phase, the only time commitment is buying investments when you get paid. Or even better, by setting up automatic 401(k) deductions, you only have to set it up once.

Some people think they’re just fundamentally bad with money. If they feel like they can't manage a budget, how are they going to invest?

And one of the biggest fears revolves around risk. People think investing is too risky, so they don’t bother. Or maybe they put a lot of money into one stock and lost it all. But investing in a diversified portfolio of index funds is not risky over the long term. In fact, not investing is the real risk.

Overcoming these limiting beliefs is a prerequisite to managing your investments. But don’t be fooled into thinking you can’t do it or that managing investments is something that only an experienced professional can do.

Don’t be intimidated by the jargon and investment options. Focus on simple, diversified index funds and as you learn you’ll get more comfortable adjusting your portfolio if you want. But you can’t go wrong just sticking with a two- or three-fund portfolio.

Every new investor will make mistakes, and it’s natural to be anxious about investing in the beginning. But the key is to start with some basic knowledge about index funds, reduce your fees and learn from your mistakes as you go.