Catch up on my journey through the AAII PRISM Wealth-Building Process! Read my first two blog posts in this series here.
PRISM is a five-step method for aligning my investment decisions with my goals, created by AAII Journal editor Charles Rotblut. The third step of PRISM focuses on the kind of oversight I want for my investments and helps to identify what type of investor I am when it comes to the level of involvement in my portfolio.
Charles mentions the importance of understanding constraints I have on my investments that could help determine how my portfolio will be managed. These constraints include how much time I want to commit to managing my investments, how interested I am in the details of what I’m investing in, my comfort level with selecting holdings, how much I feel supported by the education and resources at my disposal and what my plans are for the future of my portfolio.
I went through the worksheet provided to discover which of the investor types I identified with: fully hands-on, partially hands-on, index investor, fund investor, combo hands-on/works with a planner, bolt-on or adviser investor.
I want complete control over what I’m investing in, but I’m currently only investing in index exchange-traded funds (ETFs). Usually, those investors who want full control over their investments are picking individual stocks. My desire for this control is rooted in my environmental, social and governance (ESG) investing strategy: I don’t want to invest in big corporations that are treating the earth or humanity like garbage. The only other constraint I have is that my 403(b) retirement account is through Vanguard, limiting my options exclusively to Vanguard mutual funds. At this point, I’m still not comfortable investing in individual stocks. So, am I a fund investor?
It turns out that I identify closest with the index investor, since fund investors are investing in actively managed funds—meaning there is someone in charge of the fund making investing decisions. Index funds track a specific index, so there’s not as much investment turnover as there is with an active fund. This also keeps the cost of owning an index fund lower than an active fund.
Do I want a financial adviser? Now that I know what kind of investor I am in this context, I know that I don’t necessarily need a financial adviser to help me with index investing. I think about this every so often, as my parents always rave about their adviser. If I were more interested in active funds, I might consider working with an adviser to help me select some investments. The worksheet asks specifically what I would need professional help with, and the only thing I haven’t done on my own so far is estate planning.
The thought of even having an “estate” sounds pretty farfetched at this point! However and whenever I get to that stage, I know it will be best to work with someone who actually knows what they’re doing.
Given what I learned in this step of PRISM, I might consider adding some active ETFs to my portfolio some time in the future for more of a blended approach. That way, I could have a bit more involvement in what I’m investing in if I care to spend the time doing more research.
Follow along with me as I venture through the PRISM Wealth-Building Process and solidify my financial plan for the future!