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The Disaster of DIY Investing

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The Disaster of DIY Investing

Some people resist advice, guidance, or coaching and instead opt to make financial decisions on their own. This type of rugged individualism separates Americans from most others. The financial services and insurance firms that litter the landscape attest to the allure of this approach.

Outside of the financial realm, the DIY big box hardware stores and home supply stores demonstrate just how far the reach is with Americans who rely upon their own abilities to fix things and do routine projects. Your financial life, however, is anything but routine.

Why DIY Investing Doesn’t Work
 

Here’s the issue; it’s impossible to look at your own financial situation objectively. It’s like looking in the mirror. You see yourself differently from the way others see you and there is no way to avoid that bias.

Looming equally as large is the problem of financial and investing knowledge. Without a specific foundational background in personal finance, most individuals obtain their “knowledge” from the financial media, which is filled with misinformation and sensationalism.

Perhaps even more problematic, investors make costly financial errors by aiming for the wrong goal. Trying to “maximize returns” isn’t the primary objective. The real goal is to accumulate enough money to maintain your lifestyle in retirement.

Avoiding Bad Outcomes
 

Our “why” is to help clients achieve good outcomes and avoid the bad. Accomplishing desired financial outcomes mostly amounts to avoiding big financial mistakes. A financial miscue at age 40 is one thing, but at age 60 or older, a big mistake can be lifestyle threatening.

Most DIY investors are transaction oriented. That is, they make ad-hoc decisions one or two at a time. Rarely do a string of these decisions end up constituting anything resembling a coherent strategy. The result ends up with some pieces of the portfolio “pushing,” while other parts are “pulling.”

Related: The Three Rules for Financial Success

The Power of the Market
 

Author James Surowiecki in his book Wisdom of Crowds says “None of us knows more than all of us.” This is an excellent retort to the whole idea of DIY investing. Generally, DIY investors think that they are smart enough to exploit some type of market mispricing, only to find that the market ultimately knows the score better than they do.

Let’s put an even sharper point on the main issue. A limited foundational understanding of personal finance and the investment markets combined with behavioral reactivity isn’t a winning formula.

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