When it comes to choosing investments, there are tons of variables. Therefore, when beginners dive head first into the investment game, they’ve got some big decisions to make. However, lately, there have been several online platforms that do the choosing for you. Today, we’re going to look at the pros and cons of choosing your own investments as well as allowing a company to choose them for you. Hopefully by the end of this whole thing, you’ll be able to tell which option is better.
Choosing Your Own Investments
Choosing your own investments has been the natural way to invest for the longest time. In this case, you dig through the market to figure out which stocks are of interest to you. Keeping diversification in mind, you choose several different options that eventually become your portfolio. So, let’s look into the pros and cons of this option…
Pros – When it comes to diversification, this option makes it very easy. You can go through, and gauge the risk and reward of each different option, finally choosing the few that you think will be best. Also, in many cases, the fees are much less overall when choosing your own investments. Finally, this is a great option for those with a specific plan that they intend to follow, as you can pick out exactly what investments you want to take part in while passing on others.
Cons – There are tons of investment options out there. It could take tons of time to dig out what you believe to be a good investment. For investors on the go, this could turn into a huge problem. Also, when it comes to beginners, you may not know where to start. The resulting confusion may result in a loss of time and money.
Overall – Picking investments one by one has been the primary way to invest since stocks were created. That being said, the old saying goes, if it ain't broke, don’t fix it! Although, it may take tons of time to get your hands on the right investments, it is a method that has been proven time and time again!
Investing In The Bucket System
OK, so bucket system isn’t the actual name for this. I’m not quite sure if there really is a universally recognised name for this system. None the less, companies like Betterment choose the investments. In turn they open shares of those investments to everyone in a bucket like system. Although you can change the allocation of your money in stocks and bonds, you’re not able to choose the stocks and bonds that are invested in. Essentially, you’re trusting the company you’re working with to do that choosing for you. Let’s jump into the pros and cons…
Pros – Lets face it, the investment process takes time. In the case of investing in the bucket system, that time is no longer a factor. You don’t have to go digging through different investments to find those that work for you. Another thing I really like about these types of investments is that you’ll notice most of the companies that do this are backed by investors with tons of experience that choose the buckets. Therefore, if you’re a novice, you don’t have to rely on what little understanding of the market you have. You can rely on more experienced investors and trust that your money is in good hands.
Cons – There’s a lot to be said for having the ability to diversify by choosing your own investments. Unfortunately in this system, you can’t necessarily diversify the way you want, you’ve got to go with what the company chooses. Also, if you think that an investment in the bucket is too risky, you can’t avoid that investment…you just have to deal with it!
Overall – Overall, I think this is a great way to go for both novice investors and busy investors. As a matter of fact, I fall into the busy investor category, and I use Betterment just because of that. Although, I can’t exactly choose the stocks that I want personally, I don’t necessarily have the time to do that anyway.
So Which Option Is Better?
Well, that really depends on the type of investor you are and the goals you have. However, in my humble opinion, bucket investments are great for newbies as well as investors on the go. On the other hand, if you’ve got a decent level of experience in investing, as well as the time you’ll need to dig through and pick the right investments, hand picking your stocks is probably the best way for you to go.
Author Bio: This post has been brought to you by Joshua Rodriguez, a staff writer over at ModestMoney.com. Check out his recent comparison of the best online brokers, including his review of Prosper Loans.