Strategies and Potential Pitfalls for the DIY Investor

Welcome, everyone, to this week’s Finlit by EWA Podcast. Today I have Chris Pavzik with us from our wealth advisor team. And today, Chris and I are going to talk about DIY or do it yourself investors, and we’re going to talk about what a DIY investor is. And then there are some common pitfalls and mistakes that DIY investors make. So this is designed to kind of inform our audience as to what those pitfalls can be and also some ways to possibly overcome that and how an advisor can assist. So, Chris, start us off and tell us, what is a DIY investor like in your mind? Like, what’s the definition of a DIY investor? Yeah.

 

So I guess just simply do it yourself. People just don’t want to delegate this aspect of life and planning to somebody else, which is totally fine. We see a lot of people are actually quite successful at this oftentimes, but that can lead to some problems that we’ll get into in a little bit here. But I’d say mostly on the portfolio side. These are people that just maybe they’re interested in it. They like trading and watching the market, and again, can be a really good thing and something that we see a lot of people have success and not so good success at the same time.

 

Yeah, absolutely. I mean, I think we see a lot of people that with the information that’s out there and technology and social media and so forth, all this information about the markets and companies and trends and the economy in general is at your fingertips. So I think sometimes, like, that influx of information makes people feel really informed about the markets and the decisions that they’re making. And again, some people make great ones, some people don’t. But let’s dig, like, right into, like, some of the things that we see come out of, you know, when people kind of wrap their arms around their own investment portfolio. Let’s talk about diversification. So I’m going to tee you up with this one. So, obviously, we talk a little bit about diversification in many podcasts.

 

And basically, this means creating a portfolio that doesn’t put all of your eggs in one basket, making sure that you’re invested in the right sectors, in the right percentages so that you’re not overweight over here, underweight over here, and you’re spreading out the risk and taking advantage of the full market. So what happens, Chris, sometimes when people invest their own portfolios or DIY with.

 

Diversification in mind, oftentimes we see there’s over concentration in one asset class, mostly in large cap. We see in us large cap. What I’ve seen personally with people that are managing their own portfolios is there’s usually a handful of individual stocks and then a couple of mutual funds or ETF’s. Usually the ETF’s are like an S and P fund or a large cap growth fund or another large cap value fund. Or maybe it doesn’t say that in the title, but if you look into the prospectus and you see go on morningstar y charts, whatever it is, you’ll see that there’s a lot of overlap. So whenever you look at your statement, you might feel like we’re covering, we have all these different funds holding hundreds of different companies, but those all have similar investment objectives. Interested to get your take on this, too.

 

But whenever it comes to the individual stocks, I’ve personally seen there’s a few funds maybe, and then a few stocks that are usually the big name hot stocks like Tesla or recently Nvidia, Apple, Microsoft, all of the, again, large cap companies. And very rarely we see other players internationally, whether developed markets, emerging markets, usually it’s focused just in one class.

 

But yeah, I mean, I would agree with you completely is that, you know, in the news as were talking about information, is that we talk a lot about the large cap, us stocks, a lot about technology or whatever the, you know, the hot sector is at the time. So I think this kind of like blends talking about diversification and then something else that were going to get into, which is, you know, getting overweight in a sector or creating like concentrated positions. So, you know, the tendency is to purchase the things that you know the most about. So those are the items that are in the news, the things that you can find a lot of press on, and they’ll say, okay, an investor might say, hey, you know what, tech is really hot right now.

 

So I’m going to buy Amazon, Apple, Nvidia, Microsoft, I’m going to buy all of those. And that because I have five stocks or whatnot, that’s diversification. But it’s really not. I mean, we’re in very highly correlated positions that are going to move like in the same fashion. So typically tech stocks will be up or tech stocks will be down, they typically move together. So that basically contributes to the lack of diversification. Although we have multiple holdings, so I think theory around, like, hey, I have multiple holdings, so therefore I’m diversified, is exactly where things can go wrong. So I think being cognizant of the fact that we’re not going to invest in ten stocks in tech or ten stocks in a consumer cyclical space, those things are things we have to be aware of and help our clients through.

 

Yeah. An analogy that I’ll steal from Matt, who’s not on here, is if you just think of one pencil, you could pick it up and snap it in half really easily, but get hundreds of them, and with a rubber band around it’s almost impossible. So I just like that. I think it’s neat.

 

Yeah. It’s a good visual for diversification and having, you know, not concentrating, you know, in any couple position, so. For sure. All right, well, let’s talk a little bit about some more, like, kind of softer side or intangibles, about investing on your own. So we talked about, actually, the stocks and the holdings in the portfolio. Let’s talk about, like, how this affects our clients and individuals, like, emotionally speaking. So, yeah, you know, investing, you watch things go up, you watch things go down. When you are in there investing your own portfolio, buying and selling, doing your own research, that can be a little bit of like an emotional roller coaster that can kind of take a toll on you in your personal life. So what are your thoughts on that? Have you had this happen with clients that we’ve onboarded at EWA?

 

Not recently, but over the years, there’s been a couple of those cases where I think back to COVID, in 2020, the market dropped, I think, like, 30%, actually.

 

Like this week. I think four years ago, as we’re filming this, right around this time four years ago. So it’s crazy.

 

And I just remember, like, our biggest job at that time was just to keep people in the market, talk them off the ledge. Yeah. Because if you sell at that, you know, and lock in that lot, it’s gonna be very difficult to recover from.

 

Absolutely.

 

Obviously, very scary times. But certainly emotions directly play into investing and planning in general.

 

Right.

 

I think that’s amplified by the presence of social media, too, today. Cause going back to. Not to keep going back to COVID, but I think that was a time where there was a big rise in day trading and having your own people.

 

Were home on their computers all day, all night, basically nothing else to really do.

 

Yeah. And there were threads on social media, like, just, what are the hot stuff? People got really into it. And again, success stories where people crushed it by finding the diamond in the rough, but also people getting crushed. Too delicate.

 

Yeah. I mean, I think if you’re watching the market trends, like every day, there is a tendency or a, you know, a likelihood that you would react emotionally to, like a major, like you said, in 2020, a major market downturn. I mean, it was very, very sharp, but just as quickly as it went down, it went back up. So if you were a DIY investor, you’re at home and you’re like, oh, my gosh, the market’s crashing. I’m going to go ahead and sell out of everything. By the time you sold out, it was time to get back in, and you likely missed that window. So before you had a chance to get back in, you sold low and you’re buying back in high.

 

So that’s really, like a danger of being reactive to short term market conditions and not understanding or not realizing, like, how short lived those can be and really, like, looking at things for the long term of your portfolio. So, I mean, keeping emotions in check, making sure that you actually have, like, a well planned out investment strategy and a roadmap, those are the things that are going to guide you in what you’re investing in. And that’s kind of difficult to do on your own a lot of times. You know, that’s what advisors are. That’s the value of an advisor. Is that to help you through that strategy, not necessarily stock picking, right?

 

Yeah, yeah, absolutely. Couldn’t agree.

 

Well, let’s move on to talking about, like, fees and taxes and costs, because I think this is probably the most overlooked item for those who are doing it themselves because I don’t think that, you know, when you buy in a mutual fund, let’s just say, you know, John Smith, he’s, you know, he’s an engineer. He’s going to buy a couple of mutual funds. It’s highly unlikely, in my opinion, you can chime in on this, that any individual is going to be looking into, like, the internal expenses on mutual funds. You know, really thinking ahead in terms of if I’m buying and selling, what does that mean for me, tax wise, trade costs, all those things. So what are your thoughts on that, Chris? Because I think this is huge.

 

Yeah, I don’t know. I think maybe, you know, the industry. Do you know what the industry average for soft costs?

 

Yes. So on a diversified portfolio, typically, that’s kind of a blend of, you know, active funds and possibly some ETF’s or passive. I mean, we’re looking at like 65 basis points or so. 65 to 70. So, you know, close to three quarters of a percentage point.

 

Yeah, there’s definitely higher and lower end. So I think one thing that’s neglected, I think especially in, I feel like in brokerage accounts, a lot of people try to do it yourselfers to stock pick trade stocks.

 

Of course.

 

Yeah. But in 401 ks or 403 bs even, there’s like, you can’t do that really. And you have to use mutual funds or ETF’s.

 

Right.

 

So that’s where I’ve seen a lot of times. Maybe there’s some funds that are on the higher end expense wise or. Yeah, and that’s just kind of an oversight. Cause I think whenever people think fees in our industry, it’s usually around, like, the cost to work with a team like ours, professional fee, but not necessarily the soft costs in the portfolio. That’s usually something when we’re sitting down with somebody for the first time. We can do an x ray of like, here’s your portfolio, now, here’s what you’re paying. And most people aren’t really aware of those costs.

 

Right. And those things don’t appear on your statement either. So, like, let’s be very clear about that. Like, so you may see your advisory fee quarterly charged by your advisor, but these soft costs are like, embedded in the funds themselves and they’re not a line item on the statement. So it’s kind of like out of sight, out of mind, however, that can really erode returns if the fund is up one and a half percent. But 75 basis points of that is going to the internal fee. You’re actually only netting out 75 basis points of return. And the same thing happens with inefficient tax management. Some individuals with a lot of day trading, you know, even just holding things short term, you know, 31 plus days for wash sale and so forth.

 

But if you’re buying and selling short term under a year timeframe, you know, those, any gains that you realize are going to be taxed at your income tax rate. So those can be really high for, you know, high net worth investors that can really erode returns and diminish the value of what you’re trying to do.

 

Right. I think I’ve mostly been talking about, I guess, kind of hinting to more like active, like, hands on, do it yourself investors. But there’s also the other end where I think people can, like, they get, you don’t have to be like trading every single day to have success with returns, even if you’re like a passive just buy and hold DIY investor. If you’re not careful about the funds that you’re holding, like if you’re holding, for example, a mutual fund, I’m thinking back to a recent example, very concentrated position that whenever those funds make changes, they could sell, like Apple stock, whatever it is, and that capital gain is going to pass through to you as the investor. So if you’re planning on something like a Roth conversion or big distribute, obviously different based on your context, but that could be a big difference.

 

Like, if you’re not planning, like, you can forecast your w two income, your IRA, distribute, whatever it is, but sometimes these unexpected capital gains distributions can lead to big problems, which we’ve seen.

 

Absolutely. I mean, I think actually at the end of, I’m thinking back the end of 2021, after the market had rebounded significantly, in 2020, continued to grow, there were significant pass through capital gains distributions on active large cap mutual funds. I mean, to, I recall some clients, and, like, legacy portfolios having, you know, the equivalent of 18% to 20% distributed to them based upon what they’re holding. So that can make a huge difference. And that usually happens, like, in December, sometime between, like, Thanksgiving time and the end of the year, those distributions come out. So if you’re not kind of keeping tabs on what the distribution percentages are when they’re coming, you know, if they’re short or long term, all of those things that can really change your tax situation, and you might not even be aware that’s happening at all.

 

Yeah.

 

So surprise in April.

 

Yeah.

 

So just to clarify for anybody listening to this, it may not be 100% knowing what we’re talking about. This is like, you don’t have to sell the fund to realize this gain. Like that’s a traditional capital gain, is whenever you sell something, you owe a tax. But this is, even if you didn’t sell it, maybe you weren’t even looking at your portfolio because, you know, I’m just going to buy this fund and check on it in ten years.

 

Sure.

 

That’s great. That’s long term investing. But there could be tax implications that you’re not even aware of important to, you know, have. I think we’re going to get into a consistent portfolio reviews, know what you’re holding, and just understand that so that you can plan accordingly.

 

Yeah. So we’ve talked about a lot of, I think, some technical aspects of investing. Like you said, that, you know, if you’re kind of a novice investor, and you’re listening to this, you’re probably like, wow, these are things that I’m not even aware of. So let’s, like, take that full circle and say, like, if you really wanted to understand everything that we are talking about, like, in detail, you could spend a lot of time learning, implementing, you know, trading, monitoring your portfolio. So there is a trap, I think, of spending way too much time doing that or either way, too little time. And so most people that we’re talking about are, you know, not financial professionals. They have other careers. They’re physicians, they’re engineers, they’re teachers, they’re lawyers, whatnot. And so they have, you know, a nine to five, a Monday through Friday job.

 

So they’re kind of doing this, like, either, you know, in addition to that or in the weekends, whatever they’re doing, but spending a lot of time potentially learning. So that can, I think, erode either quality of life, you know, the time that you’re spending with your family, time that you have to do other hobbies. So I think that can. That’s kind of a sneaky way that your time gets taken up potentially outside of your career, if you would.

 

Yeah. And even if it’s not, like, while you’re hands on, like in the e trade website, whatever it is that you’re using, like, maybe like, you’re at, I don’t know, like a kid’s baseball doing something, and you’re thinking about, like, do I need to make this move or what? But I think this is more relevant to people that have had success with their own planning, because there’s definitely a tipping point where the time that you’re spending doing this, like, if you’re successful with this means that you probably have built up your assets and net worth. So you gotta really evaluate what’s the value of your time. And is there a point where you should be delegating some of this or all of it to people that specialize in it?

 

All right, so, Chris, in addition to spending possibly too much time or too little time in your portfolio, we talk a lot about paradoxes with our clients when it comes to financial planning and investing. So let’s talk a little bit about those things that can happen. If you’re a DIY investor, what are things that you feel can come out of that situation?

 

Yeah, I think decision fatigue is probably the biggest one, whether it’s hesitating on making a technical move in the portfolio or hesitating on taking a distribution, like not knowing if you’re truly, like, okay to do something, whether it’s vacation by a big house, whatever it is. I think decision fatigue is very real whenever you don’t have, like, assurance from, you know, a third party, an impartial.

 

Person that’s taking a look at this whole situation. Right.

 

I think that’s probably the biggest one that I could think of.

 

Yeah. And I think we’ve had a lot of conversations with clients who, like, they can spend more and they have the latitude to, like you said, go vacation or whatever it is, make a major purchase, and they have a tough time, even with our guidance, you know, allowing themselves permission to spend what they’ve accumulated, which I think plays into another paradox, which is accumulation. I mean, obviously, we need to accumulate assets to be financially independent, have the latitude for spending, but there’s a tipping point there where you can accumulate just to accumulate. And we have people that over accumulate for the sake of, they like to watch that balance go up. But when it really comes down to it, what is it? What is the purpose for that money? You know, what are they looking to do with it?

 

How is that enhancing their lifestyle? Is it, you know, something that they’re going to be able to enjoy? Is this for legacy purposes? So I think it comes full circle back to having a holistic financial plan that looks at all of those things, the soft side, the number side, and kind of finds a balance in between all of those things. And, like, I think that’s where you and the team and all of our advisors are, you know, so critical, and that’s where the value really is and what you do every day. So I know we have lots of clients that, you know, done a great job throughout their careers, and now it’s time to have that, you know, ability to spend, and we really have to coach them through that.

 

Yeah, I think going back to the people that have success in the diy space, like you just said, like, maybe they’re crushing it in their portfolio and it’s growing, but, like, what’s the intention behind that? Like, why are we, why do we care?

 

Right?

 

Obviously, you want more money than less money, but at a point, like, why are we doing this? So I think a big part of our job is to help people identify and prioritize, really, their goals and their, I guess you can’t say prioritize your priorities. But, I mean, I think that’s true.

 

I mean, you could have a bunch of priorities, but there’s always a number one and, like, a number two out of that. I think that’s very valid.

 

So I think that portfolio and your money, like, ultimately the end goal is to make it a support system for you and your family, your life and lifestyle. So if you’re just, you know, doing this just to grow your wealth, I think that’s great. But, like, why are we doing it? Is super important.

 

Yeah, absolutely. I think, like, one of the biggest things that we see, too, is, like, if we have a couple. So we have a couple situation and one of them is really into, you know, doing it themselves, is really into the financials. You know, they’re watching their accounts, they’re watching the markets. So a couple things can happen there. A, we usually have one that’s that way and then one that’s like, I don’t want to look at it. I just want, are we okay?

 

So if that person who is very much, like, into the monitoring of the accounts, the investing, that can detract, like, from the relationship and then the enjoyment of what they’ve accumulated, because you have kind of, like, partner a spending a lot of time over here and, like, partner B who, you know, wants to travel or, you know, leave those things out of sight, out of mind. So that can cause, like, a little bit of strain. But then relationships, like, with spouses and whatnot, if they can’t come to, like, a middle ground where, you know, they’re either allowing someone to manage things for them or they’re finding a balance point where, like, I’m going to monitor this, but, you know, we’re still okay to go travel and do our, you know, do what we like to do in our retirement or whatnot.

 

So those are always, like, those relationship pieces, I think are also, like, really critical and how you guys coach often coach spouses who are trying to find a middle ground on things.

 

Yeah. Yeah, I think I agree. Yeah.

 

All right, so let’s talk about our very last point, which is, you know, whether or not you’re having a lot of success as a DIY or potentially things aren’t going so well, I think there’s a little bit of hesitation probably on both sides of those coins to feel or to kind of determine when and how to engage with an advisor. If you feel like maybe I’m in over my head, maybe I don’t know what to do now, maybe things aren’t going so well. You know, I think there’s hesitation there, and maybe it’s a little bit ego related. Maybe it’s just like, not even knowing how to approach the situation but, like, seeking advice when you really need it.

 

Right, right. Honestly, I think the biggest hesitation that I see is usually around the cost to working with a team like ours. But I think if you’re working with the right team, like, the benefits that you’re getting out of things like the technical planning with direct indexing, minimizing taxes, and optimizing efficiencies, there is a point where you can look at, yeah, there’s a cost, but ideally, like, the whole reason why we’re doing this is to exceed that cost and provide more value, for sure. So I think it’s all about the team that you’re looking to partner with. Like, are you truly going to be getting what you pay for and then some or not? So.

 

No, no, for sure. And I think, you know, let’s. If we talk about, like, a typical client for us, you know, these are high earners to people, you know, with a high hourly rate, let’s call it, if we truly broke it down. So if that person was going to spend 10 hours a month looking at their investments, like, what does that actually. Like, what does that break down to in terms of numbers? How do you quantify the value of 10 hours for, you know, an oncologist or, you know, a high level physician, an attorney, things of that nature. So to really kind of put a price tag on your time, I think, is a difficult thing for people to do. But again, that’s something that, you know, we work through with people.

 

But I think, like, also perhaps there’s, like, an element of, like, okay, I’ve been doing this for so long, and I’m sure I’ve made a lot of mistakes along the way. I don’t want someone to judge me for all of these decisions I’ve made, good or bad. And I think, like, that’s something where that doesn’t happen. Like, this is a judgment free zone. This is like, something where, you know, if you’re taking on a new client, you’re looking at a portfolio. There’s always gonna be something that could be tweaked or changed. That’s, like, almost 100% of the time. So that’s not what an advisor’s there to do. They’re not there to judge your past decisions. They’re not there, you know, to say, oh, you should have picked this dog versus this sock.

 

It’s really to help you kind of get your arms around everything and see the big picture and create that holistic plan and a roadmap to get you from, you know, where you are now to really where you want to be later in life.

 

So, yeah, I think the judgment, I mean, with financial planning, I think it’s. It’s so not black and white that it’s mostly. I feel like it’s hard. Yeah, I feel like it’s hard to judge because you can’t, like, who knows? You know, we can make a very informed, educated decision, but there’s a lot of routes that you can take. So I think, yeah, I’m sure that is something that holds a lot of people back, is fear of judgment.

 

Absolutely. But, yeah, I mean, I think of it, like, you know, our job is to get our clients, like, back on track and to living the life that they want to live. So I would say that, you know, the vast majority of people that come here, the value and what we do for them is not in the returns. It’s in the advice that they get and the ability to go and kind of live their life the way they want to, you know, raise their kids, go to work every day, and kind of have that peace of mind that someone else is, like, on their side in the background.

 

So. For sure.

 

Anything else, Chris, that comment on. On DIY?

 

No, I don’t think so. I think we covered most of it here.

 

All right, I’ll say let’s, you know, in conclusion, or to wrap everything up, like, the importance of, you know, being educated, being aware of what’s going on in your portfolio. DIY is not bad. It’s not. It’s not good or bad. You know, there can be, like you said, a lot of gray areas in finance. So I would say, like, I’d encourage anyone listening to this that, you know, if they have questions about what they’re currently doing, if they’re concerned about whether or not they’re on track, like, the best thing they can do is reach out to an advisor, kind of just get that second opinion, if nothing else, like, lift the hood on what they’re doing and make sure everything’s in line.

 

Yeah.

 

Well, thanks for listening, and we’ll see you next week.

 

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