Low fees and free reports are just two of the siren songs Do-it-Yourself (DIY) investing sites use to lure investors. Unless you are a financial expert or use DIY investing as a hobby, don’t be too quick in firing your investment advisor.
Many studies show that DIY investors underperformed compared to investors using professionals. One study, performed by DALBAR, shows that for the first decade of the 21st century the S&P 500 rose an average of 7.81% while the average performance of a DIY investor for the same time period was 3.49%.
So, what’s the difference? There is an insurmountable difference between the two – when considering compounding interest earned the DIY investor would have $198,600 compared to a total of $450,000.
People who decide to try online DIY investing think they can do as well as or better than an investment advisor. Often, these folks are mistaken. When they invest, they often do so in a kind of vacuum. That is, they don’t understand or pay attention to how an investment impacts their financial health – for the present and the future.
When done right, financial planning considers the following factors:
• Your budget
• Your taxes
• Your risk management through insurance
• Your investments
• Your retirement planning
• Your estate planning
Your wealth manager takes all the above into consideration when making and updating your financial plan. He or she also treats each aspect of your financial plan as an integral plan part – removing investments so that you deal with them online defeats your wealth manager’s total plan implementation and diminishes the likelihood of your financial plan succeeding.
Protect Yourself from Your Emotions
One investment mistake that many DIY investors make is letting their emotions dictate their investment strategy. When they hear the markets are rising they buy near the top price and when that stocks are falling, they sell – many times at a loss. It is the emotions of greed and of fear that make them do exactly the opposite of what smart investors to which is to buy at the bottom and sell at the top. Your wealth manager isn’t affected by these emotions when dealing with your investment portfolio.
In order to become a certified financial planner, a person must complete a rigorous education at a college or university and then take an exam that lasts for two days. The passing rate for this exam is less than 60%.
This intensive education prepares these individuals to quickly identify problems with your investment portfolio and offer solutions. To keep their certification, they must attend several continuing education sessions each year. These keep financial planners up-to-date on changing market conditions and tax laws.
Ask yourself, do I have the time to do all the leg work and reading needed to manage my finances or do I really need an expert?
Asset Allocation
One vital aspect of successful investing is asset allocation — an investment strategy that meets your investing objectives while considering your risk tolerance. Your risk profile dictates what the mix of your investments looks like and considers:
• Bonds
• Stocks
• Property
• Cash
Other factors in asset allocation include how your investments cover different industries, different countries, as well as the spread of investments among small, medium, and large companies. Studies show that most DIY investors don’t understand or invest using asset allocation strategies. Several academic research studies also show asset allocation strategies is a key driver in the difference between the performance of portfolios – more so than the funds or shares held in a portfolio.
Some online stock sellers only get you access to limited fund ranges or the research they make available to consumers only covers funds that pay commissions. Investment trusts are sometimes better than open-ended funds and you should not ignore them. Yet, online brokerages often ignore investment trusts – your advisor has access to these funds and to research about them.
Certified financial planners know about investment trusts and can add them to your portfolio is they are right for you.
Regards,
Ethan Warrick
Editor
Wealth Authority
