May 22, 2024

The Challenges and Opportunities of DIY (Do It Yourself) Investing

The rise of DIY (Do It Yourself) investing has been driven by increased access to the stock markets and data, empowering individuals to take charge of their financial destinies. This approach, however, is not without its complexities and potential missteps. This blog explores what it means to be a DIY investor, the common pitfalls, and how leveraging the expertise of a financial advisor could enhance positive experiences and results through your investment journey.


Lack of Diversification 

One of the most frequent issues we observe among DIY investors is a lack of true diversification. Many portfolios often exhibit over-concentration in popular large-cap stocks. While these stocks are attractive and often make headlines, their dominance within a portfolio can expose investors to heightened risk, particularly if the particular sector, where many of the stocks reside, faces downturns.

Diversification isn’t just about owning multiple assets; it’s about ensuring these assets are not highly correlated, meaning they don’t move in tandem during market fluctuations. DIY portfolios often appear diversified with holdings across various funds, but a closer inspection usually reveals overlapping investment objectives concentrated in similar asset classes.


Emotional Investment and the Attempt to Time the Market

The emotional aspect of investing can significantly impact decision-making. The rapid information flow from social media and financial news outlets can make investors feel well-informed and prompt them to make frequent, sometimes impulsive, trading decisions. These actions often result in buying high and selling low, precisely the opposite of investment best practices. Investors often act when they see markets falling quickly assuming they can lock in gains, avoid loss and then “get back in” at the bottom. It is near impossible to time the top of the market, let alone the top and bottom in a cycle. Staying the course through economic cycles, downturns and upswings is advisable vs attempting to time the market.


Costs and Tax Implications

Many DIY investors overlook the ‘invisible’ costs embedded within mutual funds and ETFs, known as expense ratios. The costs are not shown as line items on statements, so they often go unnoticed. Additionally, inefficient trading can lead to significant tax liabilities, particularly if investments are sold within a short period. Understanding the tax implications and internal expenses of investments is crucial in maximizing returns long-term. All of these can erode the total return of a portfolio.


Time Commitment and Opportunity Cost

Managing a portfolio properly requires significant time and effort, which can detract from personal life and other responsibilities. There’s a tipping point where the time spent managing your investments might outweigh the benefits, particularly when professional advisors could manage them more efficiently. One of the greatest paradoxes that exist in financial planning is the trade off between money and time. Clients with busy lives and careers often have diminished time to spend on things they enjoy and with their loved ones. Spending time actively managing one’s portfolio could be time spent in these other meaningful aspects of life.


The Role of A Financial Advisor

Engaging with a financial advisor can provide several benefits, including strategic planning, risk assessment and asset allocation and holistic financial planning. Advisors can help develop a comprehensive investment strategy that aligns with your long-term financial goals and offer an external perspective that can mitigate emotional decision-making. From tax planning to estate strategies, advisors may also provide a range of services that complement pure investment management.

While DIY investing offers a sense of control and direct involvement in one’s finances, it also comes with its own set of challenges. For many, partnering with a financial advisor not only helps in navigating these complexities but also enhances the potential for achieving financial goals with a balanced, informed approach. Whether you choose to continue on the DIY path or seek advisory services, the key is to remain informed, proactive, and mindful of the broader financial planning picture.



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Important Disclosures:

Securities and advisory services offered through EWA LLC dba Equilibrium Wealth Advisors (a SEC Registered Investment Advisor).
* Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.  However, the value of fund shares is not guaranteed and will fluctuate.
* Corporate bonds are considered higher risk than government bonds but normally offer a higher yield and are subject to market, interest rate and credit risk as well as additional risks based on the quality of issuer coupon rate, price, yield, maturity, and redemption features.
* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. You cannot invest directly in this index.
* All indexes referenced are unmanaged. The volatility of indexes could be materially different from that of a client’s portfolio. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. You cannot invest directly in an index.
* The Dow Jones Global ex-U.S. Index covers approximately 95% of the market capitalization of the 45 developed and emerging countries included in the Index.
* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
* Gold represents the afternoon gold price as reported by the London Bullion Market Association. The gold price is set twice daily by the London Gold Fixing Company at 10:30 and 15:00 and is expressed in U.S. dollars per fine troy ounce.
* The Bloomberg Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.
* The DJ Equity All REIT Total Return Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.
* The Dow Jones Industrial Average (DJIA), commonly known as “The Dow,” is an index representing 30 stock of companies maintained and reviewed by the editors of The Wall Street Journal.
* The NASDAQ Composite is an unmanaged index of securities traded on the NASDAQ system.
* International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.
* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.
* The risk of loss in trading commodities and futures can be substantial. You should therefore carefully consider whether such trading is suitable for you in light of your financial condition. The high degree of leverage is often obtainable in commodity trading and can work against you as well as for you.  The use of leverage can lead to large losses as well as gains.
* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
* Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
* Past performance does not guarantee future results. Investing involves risk, including loss of principal.
* The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee it is accurate or complete.
* There is no guarantee a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
* Asset allocation does not ensure a profit or protect against a loss.
* Consult your financial professional before making any investment decision.

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