D-I-Why? Pitfalls of Do-it-Yourself Investing
Canadian investors pay the highest management fees in the world for mutual funds. According to a study published by Morningstar, the average management expense ratios (MER) of equity funds sold in Canada is 2.42%; whereas in the U.S. investors pay on average 0.82% for a similar fund.
DIY-investors think they can just pick a few diverse index exchange-traded funds (ETFs), and stick with them through thick and thin. They know that money managers are generally not any better at beating the market than passive ETFs. Unfortunately, many investors who take the DIY route are merely treating the symptoms of high fees. They are not treating the actual problem: a lack of value provided by the advisor they know from their bank, who typically isn’t a fiduciary (In contrast, WealthBar financial advisors do have a fiduciary duty to their clients).
Good advisors can offer valuable guidance, such as for retirement income planning, tax planning, coaching and much more. Sadly, most advisors using bank advisors are not getting that kind of value.
With that in mind, here are four common pitfalls when DIY investing:
Pitfall #1. Scattered short-term focus
By managing your own money you introduce new biases that work against you. A good advisor helps you focus on identifying long-term goals and developing a clear plan to achieve them. Ad-hoc investment decisions generally don’t work.
Financial planning must be a process that leads to good decision making about your money, and must not be dependent on short-term market movement. Investing is often a longer-term game.
Pitfall #2. It’s hard to tune out the noise
There is financial advice everywhere: online, newspapers, and through family and friends. It can be hard as a DIY investor to tune it out, especially when people are offering stock tips or there’s a popular trend. In the 1990’s it was gold, in the 2000’s it was oil.
It’s dangerous to follow a trend or take unsolicited advice, as many of the people offering advice have a vested interest in where you put your money.
Humans are emotional creatures. Even the most experienced money managers have to refrain from reacting emotionally to financial headlines. Having a conversation with your financial advisor helps mitigate those emotional, gut reactions.
Pitfall #3. Panic leads to big problems
DIY investing seems easy when the markets are up. But when things go south… look out.
We all look to professionals in crisis. If there’s a fire we call firefighters. If markets are in turmoil, we look to financial professionals.
It can be scary to be left to your own devices when the stock market is plummeting. This is something to consider when deciding to DIY or not. Remember, you created a long-term plan, and you should be sticking to it. The worst thing you can do is panic and sell everything – this is how most inexperienced investors lose the most.
Pitfall #4. Rebalancing is time-consuming and difficult
DIY-ers can’t simply set it and forget it when it comes to investments. They have to review macroeconomic factors every few weeks, monitoring global trends. They have to check asset allocation and rebalance regularly, at least quarterly. And on top of that, they have to review their plan every few years, when major life events happen (and they will happen). Getting married, having kids, purchasing a home — and of these events can change your financial picture dramatically. The tax implications alone can be very significant.
And that’s why DIY-ing doesn’t work for most investors
For most people though, managing your own money is like learning how to fix your own car. If you don’t find pleasure in it, it’s not worth doing. It can be easier to pay someone else to do it. That way, you make sure that your investments and advice are low-cost, and that you’re getting the value out of them that you deserve.
Wondering where you can find a good advisor or how to start investing? That’s exactly why we created WealthBar. We offer low-cost advice and investments easily accessible anywhere with an internet connection. Not only is it one of the most affordable ways to invest, but our financial advisors will have your back every step of the way, including helping you create a plan and sticking to it. Signup for WealthBar and you can open your account in 20 minutes or less!