5 Challenges DIY Investors Face

Many investors like the “do-it-yourself” approach for one or more of the following reasons:

  1. To save money on fees
  2. They think they can do a better job than their advisor
  3. They enjoy the process

Perhaps DIY investing was a lot of fun in the beginning.  It felt good to fire your advisor.  Maybe the prices on your investments started to soar.  You were proud of the great job you were doing.

Related: Why I Became A DIY Investor

But since then life has taken over.  It’s hard work to find the right investments and make good decisions consistent with your future goals and at a comfortable risk level.  It’s tough to remain disciplined with your own finances.

Procrastination can quickly become the simplest and most likely course of action.

DIY investors often lack financial literacy

Some investors do a good job, but just because you regularly watch BNN and subscribe to Money Magazine doesn’t make you an expert.

DIY investors follow trends and fashions

First mutual funds were popular.  The Globe and Mail had a regular monthly insert that tracked the return of every mutual fund.  Dozens of books were and magazine articles were published detailing how to purchase the best funds.

Then people realized that they were paying a lot in fees – front load, back load, trailing fees and high MERs.  It became popular to build a portfolio of individual stocks.  Just look at the top 10 holdings of your mutual fund and buy the same individual stocks, we were told.

Different styles of investing became popular depending on what the stock market was doing – value, growth, buy-and-hold dividend investing.

It takes a big time commitment to research individual stocks – and we’re told it’s impossible to beat the market – so make it easier and buy ETFs.

Often when following the latest trend, people tend to invest aimlessly.  The result is a mish-mash of investments that are not consistent with a well thought out strategy.  Which strategy fits you best?

DIY investors become too emotional

We know the exuberant high we get with the thrill of victory when a hot stock tip pans out (at least initially), and the despair when we experience the agony of defeat as our investment plummets.

Related: Why Is It So Hard To Sell Those Investment Dogs?

We are also emotionally attached to our purchases.  We have a hard time selling losers, but what about our attachment to stocks purchased 5 – or even 25 – years ago?  It makes us feel good to see that they have doubled or tripled in price, and look at the dividends we’re raking in.  What a great job you’ve done!

Would it work for your strategy to set a price target – a range in which you would consider selling all, or a portion, of your stock to lock in gains?  Would you be able to take advantage if a better opportunity came along?

DIY investors often make mistakes

When the stock you picked with high hopes tanks within a few months we consider that a big mistake.

Related: The Beginner’s Guide On How NOT To Start Investing

But what about when you’re making your discount brokerage purchase and end up buying RY when you meant to buy RYL, or indicating T instead of N for the stock exchange, or a preferred share instead of common?  Then again, sometimes it might pan out in your favour.

DIY investors often fail to address changing situations

Our long-term strategy needs to change when our life circumstances change.

We also need to address any changes in a company that we have invested in.  How will it affect us?

I currently hold stocks in Empire (EMP), which has recently purchased Safeway.  My market value has increased quickly by almost 40%.  Do I sell?

Related: How Do You Know When To Sell A Stock?

I also own Shoppers Drug Mart (SC), which has been purchased by Loblaws.  I have now been given a choice.  I can accept $61.54 per share (which would give me a profit of just over 50%) or exchange them for approximately 1.3 shares of Loblaws’ stock, which would increase my quarterly dividend payment by about $3.

I’ve always liked Shoppers Drug Mart but I’m leaning toward taking “the cash please, Gaelen.”

Portfolio challenge

If you are a DIY investor I challenge you to take a couple of hours to do a complete review of your portfolio.

Do you have a hodgepodge of products that sounded good (and maybe were) at the time, but don’t make overall sense now?

Do you need to do some rebalancing?  According to Gail Bebee, author of, No Hype – The Straight Goods on Investing Your Money, an individual stock should represent no more than 5% of a portfolio.

Do you lack diversity?  Check out the holdings of your mutual funds and ETFs.  If they have similar names – High Dividend Payers, Canadian Blue Chip Equity – they probably hold the same underlying companies.

Related: Is It Time To Say Goodbye To Dividend Investing?

For example, if you hold individual shares in several Canadian banks AND iShares Dow Jones Canada Select Dividend Index Fund (XDV), know that financials (all the major Canadian banks) make up almost 54% of this ETF.

Re-assess your original plan and long-term strategy.  Be sure to also factor in any company pension plan or group RRSP you may have.

Does it still serve you?


23 Responses to 5 Challenges DIY Investors Face

  1. I would absolutely agree that doing DIY investing requires lots of knowledge, due diligence, and great control of one’s emotions.

    I know all of those things are easier said than done. Not many people possess the drive and focus to research, learn, educate, read the fine lines, and control emotions.

    However, even if it takes countless hours (maybe months or years) to educate yourself on investing and truly learn your own temperament and tolerance for risk, all that time spent learning and then deploying your own DIY investment portfolio will still save much more money if executed correctly compared to leaving it with a high fee actively managed mutual fund.

    Currently, I hold 4 TD E-Series index mutual funds. That is all I plan on buying and holding for a long time. It’s a simple, straight forward strategy that doesn’t take much effort and captures the market average. Personally, that is good enough for me for the amount of time I am willing to commit to investing.

    • @Steve: Often people don’t realize that a good plan doesn’t have to be complicated or overly time consuming to be effective, as you have demonstrated.

  2. I’d contend that controlling ones emotions forms a large basis of the failure of most DIY investors. If they can learn to control that, learning isn’t too hard or doing research and in any case there are products or strategies out there that do not require much knowledge or expertise (index investing) but they do require discipline and consistency.
    At the end of the day it does pay to educate oneself thoroughly as a DIY investor.

    • @Simon: As Steve above has shown, an investment plan need not be complicated. You need to do some research to see what will best work for you and then stay consistent with that approach.

  3. I have been slowly, through DRIPs and OCPs, building a portfolio of a mixture of stocks. I try to send each company an optional cash payment at least once a year, since I have 8 companies that accept them at the moment. Several others I am DRIPing only. I hope to build up to 20 companies eventually. I have not ventured into the U.S. yet, though that is eventually a goal. I am also building up a precious metals portfolio in case all our fiat currencies go to zero. Its all going slowly, but I feel like I am on the right track. I did make a few mistakes in the beginning, but I sold them off quickly when it became obvious. It is hard some months to write out a check for OCPs when there are so many demands on your money, but I always try. In the future I hope to have rental properties as well, but I am not there yet, so I stick to REITs for now. To do all this, I have read and still read anything on the world of finance. There are a lot of opinions and strategies out there, but I have opted for buy and hold. It seems to be the most rewarding in the long run. All this takes a lot of discipline and I constantly have to remind myself to keep emotion out of it. I do this by training myself to be excited when the price of stocks go down, because then the good ones are on sale. Not easy, but there you go!

    • @Maria: It sounds like you have come up with an investment strategy that works for you and you have the determination to see it through. This consistency will make you successful. Good luck.

  4. I’d love to be a DIY investor and although I’d also like the challenge it has to be the right time. I think if people take on too much in their life and try and do it all something will suffer and investing is certainly not an area you want to tank in. Great post. Cheers

    • @canadianbudgetbinder: Not everyone has the time or even the desire to be their own investor. That’s were having a good advisor comes into play – as long as you make sure you understand what investments are being chosen for you – and why. There’s no excuse for just aimlessly handing over your hard earned money to someone and then complaining when your objectives are not met.

  5. I agree with all of your sentiments on DIY investors and as a former financial advisor I have to say that financial advisors and even portfolio managers have the same issues. Actually, I think the number one challenge for any investor is emotions. The most important way to combat emotions is make sure you are not investing emergency funds. If you have a sound and diverse strategy, then over time, you will perform well, but if you look at it daily and stress as much, then you will not.

    • @Shannon: I agree with you that emotions, and especially obsessing over daily fluctuations, can lead to making poor decisions. Procrastination can also lead to missed opportunities.

  6. Hi, Great article. I think there are many people who should not be DIY investors but soldier on all the same. Part of the reason is they do not know how poorly they are doing.

    That is why performance measurement capability was one of my main criterion for picking a discount broker in a recent article I wrote.

    http://www.theglobeandmail.com/globe-investor/personal-finance/financial-road-map/for-the-diy-investor-which-discount-broker-is-best/article12313627/#dashboard/follows/

    Only 4 brokers have any decent performance monitoring tools. Anything you can do to push more direct brokers to offer performance measurement tools would be a great service to DIY investors. Once someone realizes that she/he is not getting reasonable returns on her/his own, hopefully she/he will hire a financial advisor or take steps to improve their investing skills.

    Thanks for the mention of my book in your article.

    Regards,
    Gail

    • @Gail Bebee: Thanks for stopping by Gail and thanks for your comments.

      Access to research tools and the ability to track your personal performance – whether with your brokerage account or your own spreadsheet – are a large part of successful DIY investing.

  7. I learned way back that the mutual fund managers are worse than I am in making emotional decisions an inadequate research. If they have 150 stocks in the fund do you really think one guy is on top of them all? Also, you do not have the added emotion of tweaking things artificially at quarter or year end just to look better.

    At one point I owned a classic buy-and-hold fund (so they claimed) from AIC. They would run like scared chickens when a stock tanked and dump it low (and I would watch it rise over the next several years after the dump).

    I realize it is theoretically possible to make money in mutuals, but unless you luck out when yours is about to go on a lucky streak, expect them to under-perform stock investing.

    • @Robert: I’ve found that often mutual fund managers will choose investments that are doing well at the time instead of staying with their mandate. That’s why you will see growth stocks in value funds and vice versa, and many of the same companies being held in different types of funds. Good quarterly and year end performance is important to maximize sales and minimize redemptions because that’s what the average investor looks for.

  8. I can totally identify with this. I’ve made a lot of the mistakes listed in this article myself as I made my foray into DIY investing. It’s tough and if your investing knowledge is limited and you don’t have a lot of time to invest in it then following a very simple emotionless strategy seems to be the best approach.

    It’s easier said than done though for sure!

    • @Stephen: You can learn from your mistakes and you can pick a simple “couch potato” type approach to keep your strategy focused and consistent.

      Many DIY investors don’t like simple styles. They are afraid they will miss out on the big score if they don’t hop onto the latest trend that’s being hyped. That’s when they lose focus and get into trouble.

  9. This is a really good article and I definitely agree. I think a lot of investors aren’t educated enough. We learned a lot about a “rational investor” in finance class but again and again we see that it really isn’t the case. It’s hard to tune out the “noise” in the market but that’s why company analysis and financial health is so important and I think a lot of people over look doing this analysis. While I think it’s okay to make investing mistake, advisors do it too you have to learn when to cut your losses. I know people think they can beat the market but in reality there are only a select few that have actually done it to a worthwhile extent.

    Anyways could go on an on about the psychology of investing but I think my comments already long enough!

  10. This is a great article.

    I have helped many DIY investors establish and manage their own portfolios in my career and have learned that emotions are a big factor in their success. Also, transitioning to your own portfolio from advisor managed is also another critical point where I believe individual investors need the most help.

    I am creating a new model at Portfolio Audit that I believe will help individual DIY investors. We perform comprehensive reviews on investment portfolios for an hourly fee. We do not sell any investments of any kind. The Portfolio Audit allows the investor to have an investment professional sitting on their side of the table when dealing with their advisor. If they then wish to go it alone, we will assist the client in setting up their own portfolio, and once in place, we will then be able to provide audits and assistance as needed for a fee. Unbiased, no conflict of interest, just someone to help when you need it. I believe our business model fits perfectly the needs of the DIY investor in your article. Thank you for posting. Stay tuned, I am ready to launch Portfolio Audit in the next few weeks.

    Regards,

    Neil Murphy
    Founder,
    Portfolio Audit

  11. Interesting blog! At Eureka we have found that the biggest challenge for those wanting to go DIY is getting off the starting blocks.

    There are numerous challenges starting out:
    - old advisors influencing you or convincing you not to leave
    - input from family members
    - fund companies taking forever to move funds into a online brokerage
    - misfiled forms or confusion over what transfer forms to complete
    - understanding confusing jargon
    - organizing funds for transfer and making sure they arrive, they often arrive at different times
    - deciding what to do once you have the funds in place
    - and many more!!

    We have found that large fund companies are atrocious at moving funds to discount brokerages. They misinform, mislead and confuse clients in attempts to keep the funds in house–of course they’d never admit this. If clients call the discount brokerage call-centers for help…well I am sure you can guess how that goes…The client then disappears into a labyrinth of call centres and press 1 press 2 to be ignored or passed off to someone else.

    I am sure I have seen some large banks sit on part of accounts so that the client has to keep in touch and they then make subtle undermining comments to scare them. Top that off with emotional black mail, abrupt phone calls or emails from fired advisors acting like petulant 5 years olds…its amazing any one gets out of there to the freedom of DIY. One “financial advisor” recently made a special visit to pat his female client on the arm and tell her “how concerned he was about her managing her own money” and departed in a huff when she told him to get the transfer done. We have even had cases where legal threats have had to be made before fund companies get their crap together and move clients funds.

    Since 2011 we (Eureka Investor Guidance) have assisted over 100 clients in moving to discount brokerages or going DIY. We give clients the education and tools to get them started on their DIY journey. Then we tag along for the ride to help out with surprises. We believe the biggest challenge for investors is leaving the fly-trap of the fund advisory world and switching to DIY investing.

    Just my 2 cents.

  12. You’re absolutely right about the challenges that we as DIY investors have to face at times, but it’s about creating a right balance depending on one’s risk taking ability. As for myself, I prefer moderate risks and returns, though it takes a fair bit of my time.

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