Think of things you value, such as your house or car. As years pass, they may no longer address your needs: You may outgrow your house, or the house becomes too big because your children have moved out. A car may break down too often as time goes on. At some point, your investments, too, may not meet your evolving needs and may require some updating. That’s where investment management comes in.
What is investment management?
Investment management means monitoring your portfolio’s assets to make sure they align with your financial goals. If any of your investments no longer meet your needs, you could adjust by selling some or all of those investments and buying different ones.
How does investment management work?
Investment management starts with formulating a plan that considers your financial situation and objectives, time horizon, and risk tolerance. In other words, ask yourself: What do you want your money to do for you? A few popular investing goals include buying a home, paying for a child’s college education, and funding retirement.
Then, ask: How long until these events happen? Short-term goals (generally 3 years or less) usually require different investments than long-term goals (more than 3 years), because you have less time to recover from inevitable stock market volatility.
Finally, your plan should consider how comfortable you are with risk. People with lower risk tolerance may feel better with more conservative investments. Examples of conservative investments could include fixed income products, such as bonds, and cash equivalents, such as certificates of deposit (CDs).
Once you buy investments, your plan can help guide how you handle your portfolio, like when you sell investments and what balance of investment types you keep. That could be especially important during periods of market volatility, when you may be tempted to make changes to your investments based on your emotions rather than objective analysis.
Types of investment management
Think of managing a portfolio like maintaining that house or car. You can do it yourself if you have the know-how, or you can outsource some or all tasks. The same goes for your investments. Here are the benefits and downsides to 3 types of investment management.
DIY
In this scenario, it’s on you to research investments, monitor the market, and buy and sell securities.
Pros
- You have complete control over all decisions.
- This approach may not cost you anything, with the exception of fees you might pay for certain investments, like mutual funds and exchange-traded funds (ETFs).
Cons
- Requires time for researching, monitoring, and maintenance
- Requires knowledge or a time commitment to learn
- Requires comfort and confidence with making decisions
Robo advisor
A robo advisor uses technology to manage your money after you share your preferences. Fidelity's robo advisor, Fidelity Go®, has no advisory fee for balances under $25,000 and then 0.35% a year for balances of $25,000 or more, which includes unlimited 1-on-1 coaching calls.
Pros
- Lower cost than a human advisor
- Can handle diversification (or spreading your money across different investments with the aim to reduce risk); market monitoring and analysis; and rebalancing, aka buying and selling investments to hit an ideal asset allocation. Note that diversification and asset allocation do not ensure a profit or guarantee against loss.
- May offer human support in addition to digital support
Cons
- Higher cost than DIY
- May require a minimum investment (Psst...Fidelity’s robo advisor Fidelity Go® costs $0 to open and $10 minimum to invest1)
- Requires comfort with technology, as many robo advisor services are online or an app.
- Other options may offer more services for more complex financial situations.
Dedicated financial professional
A financial professional can be a knowledgeable source of guidance tailored to your needs but may be a more expensive option depending on the breadth of the advice offered and the fee structure.
Pros
- Personalized service
- Low effort for the investor
- May offer multiple services, such as financial planning, investment guidance, and tax-saving ideas
- Potentially stronger investment performance, according to a study in The Journal of Retirement2
Cons
- Potentially the most expensive option
- May take time to find the right person for your needs and with availability
- May require a minimum investment amount
Here’s where to see Fidelity’s services if you’re interested in learning more about this option.
How often should I manage my investments?
Fidelity recommends checking in on your investments at least annually; after a big life event such as marriage, divorce, or the birth of a child; and after a major market change, such as a correction.
How to manage your investments
Here are the questions to ask yourself if you’re going the DIY route with investment management.
Do I have the right accounts?
For example, if you didn’t have a child when you created your investing plan but have since become a parent, have you considered a 529 account for education expenses or a UTMA/UGMA, a custodial account a parent manages until their child becomes an adult?
Related: 6 smart ways to save money for kids
If you switched jobs, do you have a plan for your old 401(k)? If your new job doesn’t offer a retirement plan, will you open your own, like an individual retirement account (IRA)?
Related: 9 types of retirement accounts
Am I contributing the right amount?
Maybe you’ve advanced in your career and can afford to invest more. One route is to opt into auto-escalation. Your employer might offer this option, which could increase your contribution by 1% each year without you having to reset it annually. In general, Fidelity suggests contributing 15% of your pre-tax pay, including any employer match, toward retirement savings. If you can’t swing that, consider contributing at least enough to capture your full employer match, if any.
Do I have an appropriate asset allocation?
Asset allocation is how your portfolio is divided among a mix of assets, as in X% in stocks, Y% in bonds, and Z% in cash. If you’re close in savings and time to your goal, such as paying for college tuition or funding retirement, or if you’ve become less tolerant of risk, you may consider allocating less to riskier stocks and more to less-risky bonds or cash. Just remember asset allocation doesn’t ensure a profit or guarantee against loss.
How are my investments performing?
The goal is for your investments to increase in value, but it can take time to see meaningful gains. Still, it’s worth it to see if you have underperforming investments—those that are earning below benchmarks for their asset class. For instance, you might judge a stock’s performance against the performance of a broad index—a group of investments that have a common feature—like the large companies on the S&P 500®.3 Based on how that index is doing, you might decide to sell some of your investments or buy more. Just know that if you sell investments in a taxable brokerage account for a profit, you’d owe capital gains taxes.
Am I appropriately diversified?
With diversification, if the value of one asset type in your portfolio goes down, another type may go up. That way, your balance may not drop as much as it would if all your money were in one asset type. It is also wise to diversify within an asset type. If all your stocks are concentrated in the technology sector, for example, and tech companies take a hit, so would your portfolio. By spreading your stocks across many sectors, the hit might not be as extreme. Diversification and asset allocation do not ensure a profit or guarantee against loss.
Do I need to rebalance?
If your investments have drifted away from your desired allocation because asset types have grown or dropped in value, you can rebalance. For example, if you started with 70% stocks and 30% bonds, but a market rally has 90% of your portfolio’s value in stocks, 10% in bonds, that may expose you to more risk than you’d prefer. You could sell stocks and buy bonds to correct the drift and get back to your desired split.
Am I paying too much in fees?
The investment management fees that some funds and financial advisors charge could hinder long-term growth, so it literally pays to know how much you’re paying. Depending on your plan, you may consider swapping a high-fee investment for one that costs less but performs similarly and still aligns with your plan and objectives.