Over the last year, investors experienced significant volatility. What seemed to be a strong start in January of 2020, turned into a bear market by mid-February when the Coronavirus pandemic swept the nation, and continued to an outstanding recovery in the second half of the year. Then at the start of 2021 we saw the impact of social media, with the GameStop frenzy banning together a large group of retail investors.
A lot of investors who see immediate success with something like GameStop are inclined to continue to invest on their own. Although DIY investing can be tempting, especially for those who triumph in the short-term, you’ll want to make sure you don’t fall into these pitfalls that working with a trusted professional would normally avoid.
Emotional Investing
How does market movement make you feel? Are you nervous if the market drops and your investments drop with it? Do you think you know the next big stock and want to go all in? Emotional investing is one of the leading causes of underperformance. DIY investors tend to buy at the height of the market, thinking it will continue to rally and sell at the bottom, out of fear of losing more.
Herd Mentality
Herd mentality occurs when investors follow what they believe everyone else to be doing with their own money but lack the fundamental analysis to support their decisions. As we’ve recently seen, social media can have a large influence in this. The problem with herd mentality when it comes to investing is that each investor has a different set of life circumstances and the stock market is not a one-size-fits-all approach. This often leads to excessive risk taking, with a small portion of the herd reaping the benefits while a larger portion experiences bad outcomes.
Hindsight Bias
Have you ever thought you could have predicted the outcome of an event after it happened? Hindsight bias is prevalent with DIY investors. For example, lots of people may say they could have predicted the rise of Tesla, though they never actually invested in the stock. Hindsight bias can manifest into frustration and regret, leading to underperformance with inexperienced investors.
Lack of Investment Research
Part of a wealth advisors’ job is to extensively research the holdings their clients are invested in. They often work with Portfolio Managers of the fund companies to understand the individual security holdings, sectors, outlooks, and day-to-day management.
Advisors track the performance of their models and adjust throughout. They bear in mind things such as capital gains distributions, diversification, and tax consequences. If you’re managing your own portfolio, these are just some of the things to keep in mind, especially if you’re not holding the securities long-term.
Inconsistent Review and Adjustments
When you start working with a wealth advisor, you’ll agree upon how often you want to formally sit down and review your portfolio together. In addition, you’ll see monthly statements, and your advisor is only a phone call away if anything needs to be discussed.
When you’re investing DIY style, it’s easy to overlook the importance of frequent reviews and adjustments. Life gets busy and procrastination is human nature. Working with an advisor can give you comfort that you have a team of professionals watching the markets and responding accordingly.
DIY investing can be enticing, but unless you have a robust understanding of financial management, strong emotional intelligence with your own money, and can steer away from many behavioral biases, it can be beneficial to work with a professional to pursue your financial goals.
In the wise words of Warren Buffett, “There is nothing wrong with a 'know nothing' investor who realizes it. The problem is when you are a 'know nothing' investor but you think you know something."
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.