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
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.
