Why more DIY investors should just stop it and get a robo-advisor
DIY day Investors/traders want to make money. However, they typically show lower rates of returns than professionals. That’s often because they make simple, emotional based mistakes that a financial advisor might avoid. Here are some of the pitfalls of DIY-investing, which helps explain why so many people are better off going with an advisor (or in our case, robo-advisor).
Trading too often. It’s an easy trap to fall into. You’re checking the markets in the morning; riding the thrill of how much money you made yesterday; catching up-to-the-minute financial reports on your smartphone. You want to experience the emotional high from betting on a winner. Or maybe, you just feel like you have to quickly earn back the losses you had last week. For these emotional reasons, you’re making a lot of quick trades that may be doing more harm than good for your return.
The truth is clear: people who trade more often have lower rates of return than those who hold for the long-term and ride out volatility in the market.
Refusing to sell. Amateur traders often have investments they are in love with. They’ve got faith in that one business they just know will be a big winner in the end (even if it’s glory days are in the past). They cling to a failing investment with the hope that it will recover, because they have a gut feeling. Sometimes they do it because they just can’t let go of their sunk costs.
Being blind to the opportunity costs will lower your rate of return over time. A good advisor bases decisions on systemic, objective research and helps you see losses for what they really are.
Buying what you know. It may seem easy to draw connections between the long lines at the Apple Store, or the never-ending sea of Starbucks locations and assume that these are signs of growth and a sound investment. It’s not uncommon for amateur investors to gravitate towards companies they are familiar with. Maybe you genuinely do love Apple products or Starbucks coffee. Unfortunately, big, famous companies aren’t always a good place to put your money.
Studies have shown that familiar investments underperform and most amateur investors would be better off buying index funds. An advisor will have more knowledge about which investments are right for you. Plus they will have done more research than what is available from a quick stroll around the mall.
Smart investors are in touch with their feelings and keep them a safe distance from their finances. Sign up for a free trial at WealthBar for access to a financial advisor to learn what emotion free investing can do for your money.