The Difference Between Direct and Indirect Investing

a woman holding a phone with a credit card

Investing is a great way to grow long-term wealth and achieve financial security, helping you achieve your financial goals now and in the future. However, there are two different types of investing to choose from - direct investing and indirect investing. The two offer distinct advantages and disadvantages, making it important for investors to understand their differences.

What is Direct Investing?

Direct investing is also known as self-directed investing or DIY investing. It involves researching, buying, and managing your own investments, using your own funds. This gives you full control over your investments, giving you the ability to make decisions about where and when to invest your money.

Direct investing can be done in a variety of ways, depending on the investor's needs and preferences. For example, an investor can purchase individual stocks or bonds, invest in mutual funds, or purchase exchange-traded funds (ETFs). It can also involve real estate purchases, investing in commodities, or developing a portfolio of diverse investments. Each of these investing options carries its own risks and potential rewards.

What is Indirect Investing?

Indirect investing, also known as managed investing or passive investing, involves hiring a professional to manage your investments on your behalf. The portfolio manager will research, build, and manage your investment portfolio - finding investments that suit your needs and continually monitoring and adjusting your portfolio as the market changes.

Investors who choose to go with indirect investing generally pay a fee to their portfolio manager or financial advisor to manage the investments on their behalf. This fee can be a flat fee or a percentage of the assets under management. The amount of the fee can depend on the size of the portfolio as well as the type of investments chosen.

The Differences Between Direct and Indirect Investing

The main difference between direct and indirect investing is control. When you opt for direct investing, you are in full control of your investments and can make decisions about where and when to invest your money. With indirect investing, you give up control to the portfolio manager.

This difference also translates to cost. Direct investing typically involves lower costs than indirect investing. Since you are managing the investments yourself, you eliminate the cost of a portfolio manager or financial advisor. However, it is important to remember that there can be additional costs associated with direct investing, such as administrative fees, taxes, and trading commissions.

Another difference between direct and indirect investing is expertise. Direct investing requires time and effort to research investments and make decisions. If you don't have the time or expertise to research and select investments, you may consider indirect investing, which comes with the expertise of a portfolio manager.

Finally, direct investing is more risky than indirect investing. When you make your own investment decisions, it is up to you to manage the risk associated with each investment. With indirect investing, you are trusting the portfolio manager to make informed decisions on your behalf and understand the risks associated with each investment.

Conclusion

Both direct and indirect investing offer potential rewards and carries their own risks. It is important for investors to understand the differences between these two types of investing in order to make an informed decision about which type is right for them. Those who are willing and able to spend the time and effort researching and managing investments may benefit from the control and reduced costs associated with direct investing. Others who have less time or expertise may find indirect investing a better option, allowing them to benefit from the expertise of a portfolio manager.