Should I DIY My Finances?
Do-It-Yourself. DIY. I love to DIY different things to save money; a haircut, an oil change, etc. Many of you probably have something or multiple things in your life that you have been DIYing for so long that you will never pay for that service again. Like anything, you can also DIY your finances. You can choose your own investments, file your own taxes and even develop your own estate plan! Is this the best option? What does the data say specifically about people that DIY their investments? Read an excerpt below from Freeman Linde’s book, 3D Retirement Income, to find out.
If the average equity investor had invested $100,000 thirty years ago, they would have ended up with $450,000. The S&P 500 would have turned that $100,000 into $2 million.
It was not the investments that performed poorly over those thirty years, it was the investors.
We make four mistakes as DIY investors costing us potentially millions of dollars over our lifetime.
They are:
Chasing Returns – Poor Diversification – Market Timing – Panic
The First Mistake – Chasing Returns
The Grass is Always Greener in Another Investment
Chasing returns occurs when you change your investments based on short-term investment track records or projections. Perhaps we’ve read an article, watched a video, or heard of an opportunity to catch the next wave. We move some of our investments into this new sector or fund in hopes of getting that higher return before it happens, only to see that fund plummet or languish right after we invest in it.
This doesn’t mean you should never change your investments. If you’re too heavy in sectors that have always been bad, then you should establish a plan. Making sure you are on the right road will lead to success but constantly changing lanes isn’t going to get you there any faster.
Chasing returns is probably the hardest to resist. Getting “average” returns just doesn’t seem right to us. Surely, we are above average. And shouldn’t our returns reflect our superior status?
We chase better ones. We are encouraged to chase returns all the time.
To be a successful investor, you must follow investment strategies for decades, not days.
The Second Mistake – Poor Diversification
All Your Eggs in One or Too Many Baskets
You have heard that you should diversify your investments. The threat comes when we have all or most of our eggs in one basket. What happens when the nest falls out of the tree?
Facebook (META) is currently down 73% YTD. The S&P 500 is only down 22%. Never own enough of something to make a killing on it and you will never own enough to be killed by it.
You can also be over-diversified. People will have eighteen different positions with no rhyme or reason for any of them. Perhaps out of their eighteen funds, they have most of their money in growth, large-cap, technology, and blue-chip funds. That sounds like good diversification, right? Except that under the hood, these funds contain 70% the same companies.
Over-diversified, DIY portfolios bring redundancy in holdings, increasing fees and bringing down overall returns on the same underlying companies.
The Third Mistake – Market Timing
Lose by Not Winning
Market timing believes that you can be invested in the equity market only when it goes up and get out before it goes down. You “win by not losing.”
It feels like it should be possible. You look back at the markets and see fantastic growth spurts followed by catastrophic crashes. Couldn’t it be possible to be in the market during the good years and then get out to preserve your gains? Even if you pulled out a little before the peak and didn’t get in right at the bottom of a dip, one should be able to sell high and buy low while DIYing, right?
The problem with market timing is that you must be right twice. When you get out of the market and when you get back in. If you’re wrong on either side, you’ll end up worse than if you have never tried.
The Fourth Mistake – Panic
The Big Mistake
The markets are going up and up and up—euphoria around investing sets in. The good times will never end! There is the excitement of being part of the “in” crowd. There is the joy of watching your money increase weekly, if not daily. It is alluring even for the most disciplined and principled investor.
Now imagine you have worked for thirty to forty years. You have built up a modest but sufficient nest egg. The market has been mainly good to you and has helped propel you to new heights. But now, as you approach or enter retirement, the market is beginning to fall.
You watch your life savings decrease. You’ve lost $100,000. $200,000. $300,000 gone. You are watching your life’s work evaporate before your eyes.
Panic sets in. You sell your investments and go to cash.
This move turns out to be devastating. You went to cash at the bottom. The market comes raging back, but you are still in cash!
The market recovers without you, turning a temporary decline into a permanent loss.
Other reasons contribute to poor investor returns, but these are responsible for many of our woes. The Four Horsemen signal the destruction of our potential, impact, and legacies. Knowing the information above, is it possible to DIY your investments? Yes! Does it require a lot of your time, knowledge, and emotional capacity? Absolutely! A financial planner will help you avoid these mistakes and build a financial plan that achieves your goals.
This article is educational only and is not intended to be investment, legal, or tax advice or recommendations, whether direct or incidental. Again, this is not investment advice. Consult your financial, tax, and legal professionals for specific advice related to your specific situation. Never take investment advice from someone who doesn’t know you and your specific situation. All opinions expressed in this article are those of the people expressing them. Any performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be directly invested in.
