The Pitfalls of DIY Investing
Have you experienced a bit of the rush of investing through these new apps and companies providing easy access to investing?
Maybe you are curious about how investing works or maybe had pandemic boredom creep in. You also may have a lot more time to research and stock pick?
While investing can be a thrill much like gambling creates, a DIY investment strategy comes with its own risks. For those new to investing especially, it’s all too easy to open a brokerage account, revel in the low-cost nature and plonk your money into a few random companies you’ve heard of. However, this may lead to losses, without access to the data and analytics that larger companies can use to help you make informed investment decisions.
Here are four of the most common pitfalls for beginners to avoid when DIY investing:
Emotion-driven decision-making
Mis-information
Lack of long-term planning
Failure to regularly review your portfolio
Emotional decision-making
Emotional decision-making is one of the easiest traps to fall into as a beginner DIY investor. Across a 20 or 40-year investment period, this may accumulate into thousands of dollars in losses per investor. Emotional decision-making could refer to investing immediately after experiencing a change in the market or a specific event, for example.
Now, there are two sides to this coin: fear-based decisions which lead to missed opportunities or greed-led decisions that lead to rushed investing. Arguably, both of these are equally as bad for your portfolio.
So how do you avoid emotional investing?
Simply put, ignore the reactive nature of investing based on news cycles and create an automated investment strategy that will continue regardless of whether the markets are up or down.
Misinformed Decisions
Misinformation refers to the deliberate spreading of false news in order to deceive. Unfortunately, while the (often-ridiculous) tidbits of information are made up, the impact of these words are very real. In fact, false information costs investors approximately $39 billion annually.
Even when beginner investors perform their due diligence and research the markets and their stock picks, it’s easy to fall into the trap of misinformed decision making. There are a few precautions you can take in order to avoid this.
Do not solely base your investment decisions on what you are hearing on TV
Wait for your initial reactions to die down before you decide how to move
Avoid short-term trading unless you understand the risks
Do your research - this is the hardest and most time-consuming part
Lack of planning
A lack of a long-term investment strategy is a no-no for beginner investors. Not only is planning useful for managing your current finances and potentially reducing volatility in your portfolio, but it also helps when reacting to short-term market fluctuations too.
In order to create your long term investment plan, it’s important to consider your goals. Think about why you are investing and when you would like to withdraw the money, for example. Next, your risk tolerance should be assessed in order to determine how much you can invest every month and how certain you should be about your investments. Finally, it’s important to spread your assets across different types of companies or investments in order to diversify.
Not reviewing your portfolio
Another mistake a newbie investor can make is failing to consistently review their portfolio every so often. When you leave this stagnant, you could miss out on significant gains or incur losses. Even those that have done the DIY route for years can become complacent and fail to review their portfolios.
When you review your portfolio, what should you be looking out for?
Have your goals changed since you first started the portfolio?
Are you keeping up with the ins and outs of each company or investment?
Have the economic conditions or market indicators changed?
Finally, it’s important to update your choices as the market moves. While we’ve been clear about the risks of rushing during this article, investors can also lose out by delaying their actions and trying to time the market.
Would you like a review of your DIY investments so far? Schedule a call with me so that we can discuss your exact requirements and plan a personalized, long-term investment strategy.