DIY Investors: Tips for Investing and Mistakes to Avoid

Do-It-Yourself investors should consider these investing tips and avoid making common DIY investing mistakes to achieve the greatest success.

If you’re a Do-It-Yourself (DIY) investor, you may be self-sabotaging your portfolio without even realizing it. Don’t get me wrong, I am a fan of DIY investing, and I’m a DIY investor myself.

However, a Morningstar report makes it clear that our constant need to tinker with our portfolios is costing us big-time money.

Morningstar looked at the average return of investment funds over the past ten years and compared that to the actual return that investors in those funds received. They found that the average investor trailed the return of the funds they were invested in by nearly 1% per year during that time.

• The average fund in the study returned 7.05% per year
• Meanwhile, the average investor returned 6.1% per year
• That is a 0.95% (95 basis points) annual difference

A difference of 95 basis points is significant. Let’s say you invested $100,000 when you were 25, never invested another dime, and pulled the money out at age 65.

• The portfolio returning 7.05% per year would end with $1.525 million
• The portfolio returning 6.1% per year would end with $1.07 million
• That is a difference of $457,000 

The DIY investor in this example would cost themselves nearly half a million worth of wealth over their lifetime. The larger the lifetime investment, the more wealth they would be giving up.

Why DIY investors lag fund performance

All humans suffer from a number of cognitive biases that lead to irrational investment decisions. Three psychological traits, in particular, hurt DIY investors – fear, greed, and overconfidence.

Fear and greed are two halves of the same coin 

In their report, Morningstar found that in periods after funds performed exceptionally well, investors poured in a lot of additional money into that fund. Following periods of underperformance, investors began selling off their investments in that fund.

Translation – investors were buying high and selling low. You don’t need to be Warren Buffet to realize that isn’t a recipe for investing success.

DIY investors also suffer from another bias; overconfidence 

If you are a DIY investor, you believe that you will have a better outcome managing your own investments than paying a professional to do it for you.

This overconfidence can lead to market timing decisions that seem like good ideas at the time but most often lead to underperformance. These people say things like, “I don’t want to invest right now while we are at the top of the market.“

By holding their money out of the market, they are betting that the market is about to crash. In reality, market timing is nearly impossible to pull off successfully, and your most likely outcome is missing out on future gains.

“DIY investors oftentimes try to time markets despite the fact the way that their strategy works by neglecting market timing,” said Blaine Thiederman, Certified Financial Planner and founder of Progress Wealth Management. “They get scared of markets crashing and will try to get out of the way if they think markets will drop and, in doing so, will be out of the markets for months, or potentially even years.”

3 Tips to help DIY investors get out of their own way

1. Stop trying to outperform the stock market
2. Don’t check your account balances
3. Don’t take more risk than you need to

1. Stop trying to outperform the stock market

As I’ve written elsewhere, there is enough academic research to conclude the stock market is reasonably efficient. This means that trying to time the market or pick stocks or engage in any activity to try and “beat the market” will likely fail and cost you money.

Standards & Poor’s collects data on how actively managed funds perform against their benchmark index across the globe.

Over a five-year period, here is what they found: 

• 82% of active fund managers in the U.S. underperformed the S&P 500 index
• 90% of active fund managers in Canada underperformed the TSX index
• 80% of active fund managers in Europe underperformed the S&P Europe 350 index

There is no country in the world where a significant number of actively managed funds beat their respective indexes.

The managers of these investment funds are very intelligent people with more resources and more investing experience than you have. If they can’t beat the market, what makes you think you can?

Don’t bother trying. Invest in a passively managed fund that tracks the entire stock market. Then treat it like a passive fund by simply buying and holding.

2. Don’t check your account balances

Adopting a passive buy-and-hold strategy helps us deal with overconfidence bias. The only thing that can derail this strategy is fear (selling low) and greed (buying high).

To overcome fear and greed, simply do nothing.

• Do not read news about what is happening in the stock market on a day-to-day basis
• Do not follow blogs that advocate things like market timing or investing in gold
• Only check your account balances when it’s time to rebalance your portfolio

Fidelity did a study that found the best-performing investors all had one thing in common: they forgot they had an account with Fidelity. Which means they never checked their account balances.

“The biggest challenge facing a DIY investor who is just getting started on their investment journey is staying consistent and ignoring the noise,” said Brian Tegtmeyer, founder of Truly Prosper Financial Planning. “It also helps to read good books like The Simple Path to Wealth by JL Collins, or I Will Teach You To Be Rich by Ramit Sethi. These books teach the basics and help people stay the course.”

3. Don’t take more risk than you need to

One of the most effective ways to manage the fear of large market declines is not to overexpose yourself to the stock market. That means having a balanced portfolio of stocks and bonds.

A portfolio invested 100% in stocks is not appropriate for two groups of people.

1. Those approaching or already in retirement
2. Emotional investors

It just so happens that nearly everyone will fall into one of these categories. Most DIY investors probably think of themselves as the ultimate rational investor who won’t make emotional decisions with their money. This is another form of overconfidence.

The Morningstar data of investors underperforming their funds suggests that most people do, in fact, make emotional-based decisions. That includes selling when the market is down and locking in losses.

Watching your portfolio drop by 40%-50% in a single year is a scary and real possibility if you are invested totally in stocks. This causes fear, leading to an irrational decision to sell and lock in losses.

If you’re invested in a portfolio that has a healthy allocation to bonds, it’s much less likely to see such steep losses, and things seem a little less scary.

Investing in bonds may lower your “expected return” as stocks tend to outperform bonds in the long run. However, if you’re an emotional investor (which the data suggests you are), you should be happy to trade off some expected return to save yourself from yourself when things take a sharp turn for the worse.

“One of the biggest challenges DIYers face is understanding that DIY doesn’t mean going it alone; it’s OK to ask for help,” said Dwight Dettloff, CPA, CFP, and founder of Winding Trail Financial. 

“I recently worked with a family that has been managing their own portfolio and planned to continue doing so but had questions on their equity compensation, help on rental properties, planning for aging parents, and help considering their own eventual retirement,” Dettloff said.  

“We worked together over a handful of meetings to address their concerns, made some minor tweaks to their portfolio, and addressed some blind spots. While they’ll take the recommendations that were made during our conversations and implement them themselves, they also can reach back out and work together under an hourly relationship.”

What to Read Next:

• Get to Know Advice-Only Financial Advisors for DIY Investors
• Happily Retired: 15 Tips to Enjoy Life After Retirement

About the Author

Ben Le Fort

Ben Le Fort is a personal finance writer and creator of the online publication “Making of a Millionaire.” He has been passionate about personal finance ever since graduating University with $50,000+ in debt.

In the eight years following graduation, he paid off all of the debt and built a seven-figure net worth. Ben holds a Bachelor’s degree in economics from Acadia University and a Master’s degree in Economics & Finance from The University of Guelph.

Ben lives in Waterloo, Ontario, with his wife, son, and cat named Trixie.