9 Costly Mistakes DIY Investors Make

By Tim Lemke on 5 October 2016 0 comments

With the right approach and education, it's possible for people to handle their own investments. But it's also easy to make mistakes that could cost you large sums of money in the long run.

If you're a do-it-yourselfer, ask yourself whether you're making any of these mistakes below. If so, it may be worth seeking professional advice from a certified financial planner.

1. Trading Without Considering Fees and Taxes

For many investors, it's fun to trade stocks. The actual buying and selling can be a bit of a rush, especially when things are going well. But all of that activity can come with a cost, in the form of transaction fees and capital gains taxes. If you are finding that the returns on your portfolio seem a bit lackluster, it may be because you're investing without taking these costs into account. More experienced investors and financial advisers understand how to avoid extra fees and maximize returns as a result.

2. Getting Emotional

Investing your own money can sometimes be hard on the psyche. You may go through stretches where you see your portfolio shrink. Stocks that you personally selected may not always perform the way you predicted. Markets can be volatile, and not everyone can stomach it. If you find yourself getting stressed out by the investing process or buying and selling based on emotion, you may want to consider having a financial adviser take over the reigns.

3. Not Investing Enough

When you invest on your own, you may only be guessing as to how much you need to save. And it's common for investors to feel a little skittish and invest too little if the market is down. A financial adviser may be more tuned into the appropriate level of risk an investor can take on, and will usually advise a more aggressive approach for someone far out from retirement.

4. Not Diversifying Enough

Most do-it-yourselfers understand the basics of diversification, and will invest in index funds that track the S&P 500 or broader stock markets. And that's perfectly fine. But often, these funds are heavily weighted toward larger companies or certain industries. If you are investing only in basic index funds, you may not have good exposure to international markets or smaller companies, for example. There may be entire industries that will be underrepresented in your portfolio.

To achieve true diversification, you can have an S&P Index fund as a base, but should also look for funds and stocks that fill in the gaps.

5. Failing to Rebalance

You may think you're creating a diverse portfolio based on the investments you've selected. But have you checked the balances recently? Over time, portfolios can get out of whack if certain investments are performing better than others. For example, you may think you're investing in 50% large cap, 25% small cap, and 25% mid cap stocks. Until one day, you check your account and realize that small cap stocks make up 40% of the portfolio. Financial advisers will recommend when to rebalance, and offer advice on how to avoid taxes in the process.

6. Trying to Beat the Market

Some investors insist on doing things themselves, because they believe they are expert stock pickers and can beat the performance of the overall stock market. In most cases, they are wrong. Numerous studies have shown that even professional investment managers can't beat the market on a regular basis, and that most investors would be best off with a portfolio of index funds.

7. Falling in Love With Shiny New Things

Do-it-yourselfers can become enamored with whatever the hot stock is at the moment. They go for name brands and flash rather than looking closely at a balance sheet. They also tend to go with what's familiar, rather than doing some research and finding investments that are less well known but of sound quality.

8. Having No Backup Plan

If you are an older DIY investor, do you have a plan for what happens to your investments if you are incapacitated? Are you sharing your investment accounts with your spouse or other loved ones? Many DIY investors are too stubborn to seek help from anyone, and thus run into problems when they are no longer in a position to manage things themselves. It's fine to handle your own investments if you're confident enough to do so, but it's wise to have a plan for how things will be dealt with if you're no longer in charge.

9. Becoming Too Consumed

Realistically, the average person can handle their own investments while checking in only periodically each week. A properly balanced portfolio does not need a lot of maintenance. But investing can be like an addiction to some people, and it's possible to spend hours a day buying and selling and becoming obsessed with the movement of the markets. If you're finding that your investing is having a negative impact on your relationships and other aspects of your life, it may be best to back off and let someone else handle things.

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