Are You Cut Out To Be A DIY Investor?
Many investors – not happy with their advisers for whatever reason – feel they can do a lot better themselves, especially when the market is booming and their friends and co-workers are bragging about their winning investment performance.
DIY investing can appear to make sense for a lot of people.
However, studies have shown that a large population of DIY investors are earning painfully low returns and underperforming indexes.
Related: How the behaviour gap affects investor returns
From the person who put his entire LIRA monies into Nortel stock to the one who keeps 80% of her money sitting in cash waiting for the perfect opportunity, investors are leaving massive returns on the table.
DIY investing takes time, knowledge and confidence to be successful.
It’s About Time
Managing your finances is on your to-do list. You mean to set aside a Sunday afternoon to put a financial plan into action. Then work and family life gets busier, you have errands to run, and your intention gets put on the back burner. It can be easy to let it slide.
This is especially true if you are trying to manage multiple accounts – RRSP, LIRA, TFSA, RESP and non-registered accounts – for both yourself and your family.
It takes time to develop a total investment strategy, research to find appropriate investments, and periodically assess your holdings.
You want to save money
There’s a lot of buzz in the media about how investment fees, expense ratios, and trading commissions are eating up your long-term returns. But, DIY investing is not always saving you money.
Related: 5 challenges DIY investors face
Are you saving money when you:
- Stay in non-performing funds because you don’t want to pay the back-end load to cash out?
- Don’t want to pay taxes on capital gains, and then lose the gains?
- Hang on to losers in hopes that they will rebound?
“A good decision is based on knowledge.” (Plato)
There’s lots of information for DIY investors but you need to know how to sift through it.
Many DIY investors have a haphazard investment strategy. They don’t have a clear idea of why they are choosing their asset allocation, where to hold investments for tax efficiency, and the impact of foreign withholding taxes and currency spreads. Their portfolio is a random collection of holdings and they don’t know how it fits together. They rely on luck and hope, not strategic thinking.
Lacking confidence in their own capabilities and trying to take the easy way out, they want someone to make specific investment recommendations that they can implement on their own, or directly copy sample portfolios from magazines and blogs.
Related: Where do you get your financial information?
They react emotionally to financial headlines and invest based on what they see on the news, thinking they are basing their decision on the latest information. Often this information is just someone’s “educated” opinion (or guess) about what looks promising in the future.
Poor decision-making
Some people are just plain bad at making buy-and-sell decisions. They are unable to get the right investment mix, lack diversification, and put all their money into a single “can’t lose” stock.
They have unrealistic expectations for high returns and underestimate their risk tolerance. Knowing that investments can rise and fall is not the same as understanding how you will react to risks.
Memories are short when the stock market is booming, but the number one reason for underperformance is getting scared and ditching investments when the market retreats.
Final Thoughts
Fear, lack of time, and lack of knowledge don’t have to keep you from growing a comfortable nest egg. You shouldn’t try DIY investing just because you want to save fees or you don’t like your adviser.
Related: How my behavioural biases prevented me from becoming an indexer
If you don’t have the time or interest to manage your portfolio yourself, take your investments to someone who does.
In the end, paying for professional money management may be your greatest investment. Financial advisers charge 1-2% of assets and on-line portfolio management services can be less than 1%.
Paying 1% a year, or less, is certainly better than paying 0% and underperforming by 4% or more.
I so agree. Years ago I realized that not only do I not have the personality to do my own investing, I don’t really have the interest to do the research. I found a good company (an unusual mutual fund company) who now charge me 1% (since I have a certain amount of investments) to manage my portfolio in real time and give me all the financial advice I need in general (insurance, wills, estate planning, etc.). I trust them (though I do watch my investments and ask questions when needed). It gives me such peace of mind knowing someone I trust is doing my investing, not me. I’ve been with them for almost 30 years and they’ve done an excellent job.
@Tracy H: I like to hear about investors having a good relationship with their financial advisers – it’s, unfortunately, not all that common.
Congratulations. It sounds like you have a great partnership.
I knew a long time ago I would always need a boss if I wanted to have a job. I’m just not cut out to be an entrepreneur. I don’t have the drive. It’s the same for my investing. I need brainless, long term solutions with a good track record. I also need someone to point me in the direction of what that looks like. I just don’t care enough. I want to retire comfortably but I don’t EVER want to lose sleep over it. Somewhere in a high school year book interview I said of my future, “I want to do as little as possible and make as much as possible”. I think I’ve found the perfect balance in my career and my investments.
@Kurt: There’s no shame in knowing where your strengths lie, and letting someone with more experience take care of the rest.
I hope you have someone like Tracy, above, to help you succeed financially.
Before I became a DIY investor the whole idea of it seemed very intimidating. But after doing my own research and just educating myself I realized how incredibly simple it was. Going DIY was one of the best decisions I ever made.
For me, the idea of being part-owner in a company makes sense, perhaps because I ran my own company. I don’t see how an adviser can tell me which companies I believe in, although they might add some research I suppose.
Mutuals and ETF’s are less attractive to me because they want to bet on several competitors all at once. So I largely avoid pooled funds.
I am not overly creative. I just spread my money around to various industries and try to avoid holding shares in direct competitors.
I think my main weakness is for round numbers. I hate owning 830 shares – I want to top it up to 1000 even if it lies outside my overall plans.
@Barry:
@Robert:
I am also a DIY investor with mostly dividend paying stocks. I like to read about finances and do research on companies that interest me. Could someone have done better with my portfolio? Maybe. But, overall, I’m quite satisfied with my results.
Robert, I’m with you about round numbers. Is that being obsessive?
Yes. We need a therapy group.
I’m with you, and since I DRIP shares, it’s particularly challenging. I’m trying to get to a sense of tranquility when I see odd lots of stocks in my portfolio.
this is so very true. being able to do your own investements is a very time consuing task and if one is not fully committed to the over goal of try to have a schedlued working time on your portfolios one will probably not be able to get the best of the investments and will undoubtably loose overal.
@kirsten burnett: DIY is not for everyone. Like most things that are important, you need to make a commitment to do well.
@Boomer I do have someone to help me succeed… I believe you know him quite well. I have no shame about knowing where my strengths and weakmake es are although it’s pretty much a requirement in my job to never admit your wrong and never admit you don’t know something… I can make an exception when it comes to my finances.
My ears are burning…
@Kurt: Now I know you’re in good hands.
Guess who taught him everything he knows 🙂 ?