3 Reasons Why DIY Investors Fail

The message is everywhere. You don’t need the input of an investment professional to manage your portfolio. You can easily do it yourself and it takes no time at all.

There are many reasons for investors to pursue DIY investing. Perhaps you are tired of paying the high fees for so-so performance with your advisor, you may be just starting out and not yet have the numbers required by professionals, or maybe all your friends are bragging about how well they are doing – so why not you too?

The biggest challenge, however, is controlling your emotions and behaviour.

Three reasons why DIY investors fail

Three reasons why DIY investors fail

1. It’s difficult to overcome inertia

A mistake due to an action is more psychologically painful than a mistake produced by failure to act. Losses hurt more than gains. So, investors start procrastinating. Overwhelmed, they postpone taking action while they gather more and more information. They attempt to time the market. Their procrastination leaves their funds in a savings or money market account until circumstances seem more favourable.

Failure is scary. Even if the plan is a sound one, it’s hard to pursue because we are afraid we might screw it up.

After a lot of research into different U.S. ETFs, Amelia purchased iShares Core S&P US Total Market (XUU) for her RRSP portfolio. Later, after reading a new post on her favourite financial blog, she saw that the author owned Vanguard US Total Market ETF (VUN).

What? Did I make a mistake? Why did she choose that ETF? What does she know that I don’t?” And, now Amelia starts second guessing herself.

2. Overconfidence

At the opposite extreme are people who are overconfident about their investment choosing abilities. They are not average – they are exceptional.

We all want to be good investors, to show everyone how talented we are. Everyone wants to be a hero. But this isn’t little league soccer where you get a trophy just for playing. There’s financial advice everywhere and it’s hard to avoid reacting emotionally to financial headlines, especially if you’re chasing performance and looking for a big score – the next Apple or Facebook. You can’t just be focused on making a ton of money – that’s just short-term thinking.

DIY investing seems easy when markets are up and your portfolio has increased by 28% a year. But, these are often the same people that will overreact and sell everything in a bad year.

3. Tinkering with the model

Numerous articles have shown that a core index portfolio with two to four funds can outperform experts. But, now we decide to buy every fund the experts suggest. We think we should add REITS, emerging markets, health services – and maybe precious metals would be a good addition. Now instead of a simple, easy to manage portfolio, we have tiny percentages of multiple different funds.

Alternatively, we can be too narrowly focused, holding only Canadian banks for the dividends, for example.

Ben has reduced his management fees to less than 0.5%. Now he sees in an ad for Vanguard that they have reduced the fees on some of their funds to 0.35% so he switches his funds, offsetting the minuscule difference with trading fees.

Final thoughts

The ancient Greek motto, “Know thyself,” applies especially well to investors. Know what you are capable of doing and be aware of your own limitations. DIY investing can be more complex and time consuming than some investors expect it to be.

DIY investors enjoy reading about financial markets. They are willing to invest the effort in educating themselves and they spend time analyzing potential investments for suitability and managing their portfolios – and enjoy the process. They have clearly identified long-term goals and have developed a plan to achieve them.

They are disciplined and committed to a plan that meets their goals. That’s what makes a successful DIY investor.

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  1. Darren on August 2, 2017 at 5:08 am

    Good article

  2. Cheryl on August 2, 2017 at 10:07 am

    Nice article. And then you get someone like me who sees themselves in all 3 of those categories all at the same time!

  3. Wes on August 2, 2017 at 11:02 am

    Thanks for the write-up Marie. We’re only human and we make mistake(s) in our lifetime, heck even Warren Buffett makes mistakes too.
    Our best defense is to educate ourselves in anything and learn to tune-out the noises out there. Personally, I only listen to investing people who use their own money to invest in their own portfolio(s) usually on ‘blue chip’ companies with proven track records. Their published data on the companies they invest in become my starting points for my due diligence on the companies that I want to invest in.

  4. DIANE MONETTE on August 2, 2017 at 2:46 pm

    My cousin is 65 years old and is now a millionaire doing it on his own time. He knows when to NOT panic and keeps his cool WHEN hes sees the market go down.. As a young man, he comes from a single parent environment, went back to school , and then went after his dream of becoming rich. And he has. He still lives moderately, owning a small house, travels with his wife, does the groceries, and cooks the meals. His fun is to have good food, good travels, a nice car, and knows that he is comfortable for life without sweating it anymore. I AM SO PROUD of my cousin; especially knowing where he is from ….a hard childhood. And he still is careful with money, despite being a millionaire.

  5. EngPhys on August 2, 2017 at 6:04 pm

    The biggest danger would be to sell if the markets drop. That could ruin everything.

  6. Diane on August 5, 2017 at 7:46 am

    My husband and I were DIY investors many years ago, but being green/ignorant we failed miserably. In 2001 we went to the financial planning section of our bank and almost begged for help. We lucked out and got an advisor who was excellent at his job; he took the time to get to know us and what was really under our skins. I learned so much from him over the years; the main lessons were fear and greed; I was fearful, more conservative and my husband was greedy and focused on the unreality of getting something for nothing. Under his guidance, we came to understand ourselves, what makes up an appropriate portfolio, and patience.

    Unfortunately, our advisor retired a few years ago, and the selling atmosphere has changed. The advisor we have is very nice, but doesn’t seem to have the same people skills and follows the party line. So we have decided- we will leave the current structure as is at the bank, as we are still happy with it’s management. (Our RIFs are in the withdrawal stage, so I don’t want to mess around with those.) For any new money, we have branched out on our own into some very stable stocks for the non-registered account and some e-series for our TFSAs. Since this portion makes up a small percentage of the overall portfolio, we can’t mess things up too much; we are in our late 70’s, so free money is dwindling. We still get a lot of information on trends and current thinking from our advisor.

    I write this to emphasize that you MUST “Know thyself” very thoroughly, and if necessary, use someone to help you do so.

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