Back in the 1980’s my wife and I bought our first home. It had been built in the 1950’s and, like any older home, needed some repairs and updates. Since we’d spent most of our savings on the house down payment, we didn’t have much money. So when it came to the home repair and improvement projects we figured out how to do them ourselves.
One of our first items was the old, dead oak tree in our front yard. The estimate to take it down and have it hauled away was more than we wanted to spend, so we thought we’d save some money by having the pros cut down the tree and we’d cut up the larger pieces for the city to pick up, or else use it for firewood. We rented a chainsaw but really could have used a chipper. After the pros took it down, the branches were shoulder high, filling our small front yard. Two weekends of hard work later, the project was done. Looking back, though, we didn’t have the tools to do the job efficiently and, if you considered the value of our time, we really didn’t save much money. But we really didn’t have any money, so there wasn’t a lot of choice.
We lived in the house for about seven years and there were a lot of other projects. We did a complete remodel of the kitchen, refinished the wood floors and did a lot of painting. Some projects came out well and saved us money. Others, like refinishing the wood floors, backfired and, after botching the jobs ourselves, required a professional to come in to fix. I hadn’t shopped the floor refinishing professionals before we did it ourselves and was embarrassed to find how affordable they were.
When it came time to move the family to a larger home, we hired professionals to build it and it worked out very well. We had more money then and had learned our limitations. The pros had the expertise, tools and experience to do the job efficiently and the results showed.
When it comes to building retirement portfolios, a lot of young people start off as we did with our first house. They don’t have money to hire a professional and their portfolios are so small that getting a better rate of return doesn’t amount to very much. They are better off saving a $1,000 fee than improving the return on their $5,000 portfolio by a few percentage points. As their portfolio grows, though, their mistakes can start to cost some real money. Coming up 5% short due to some missed opportunities or lack of attention costs just $500 on a $10,000 portfolio, but costs $20,000 on a $400,000 one. And compounding mediocre investment returns over the years can cost hundreds of thousands of dollars.
For larger portfolios, investment advice isn’t just affordable, it can be a great investment. Most of the best financial advisors have high minimum portfolio requirements, often $250,000, $500,000 or even more. But paying their annual fee, often around 1%, can be money very well spent. Vanguard did a study a couple years ago and determined that the average financial advisor adds “about 3%” annually in better investment returns vs. a do-it-yourselfer. Earlier this year, Russell Investments, a firm that manages over a quarter of a trillion dollars, estimated the annual value of an advisor at 3.75%.
So if you’re a small investor, the DIY route is probably a good place to start, but if you’ve accumulated $500,000 or more, it’s probably best to hire a pro. You’ll want one you can trust, but there are many good ones out there. For more on how to choose one, get our complimentary checklist.