There is a close relationship between do-it-yourself and blew-it-yourself investing.
Vancouver financial adviser Ian Collings figures that between one-third and half of his new clients have been doing at least some investing on their own. In looking at their portfolios, he’s found several recurring mistakes that hurt their results.
“I see a lot of bad portfolios,” said Mr. Collings, a certified financial planner (CFP) who catalogued the blunders of do-it-yourselfers in a recent blog post. Advisers have since been distributing the list on Twitter for obvious reasons. If you’re hurting yourself as an investor, an adviser is one answer.
Another is to study common blunders so you can become a stronger self-directed investor. So let’s dig into some of the points highlighted by Mr. Collings:
1. Not realizing you lack the time, knowledge or self-confidence to invest for yourself.
“This to me is a big one,” he said. “I know of a number of people who opened an [online brokerage] account and left the money in cash because they don’t know what to do. Or, they do invest the portfolio and, as more cash creeps in, don’t didn’t know what to do with that additional amount. This is often a big catalyst for people calling me. They say, what do I do with this extra money?”
Money sitting in cash in a brokerage account typically earns zero interest these days, or a token amount at best. At volatile times like these for the stock markets, simply not losing money may look like a victory. But this view ignores the returns forgone because you didn’t use your money more productively. At very worst, you can earn in the area of 1.2 per cent by parking money in a virtually bullet-proof high rate savings account that you buy and sell like a mutual fund.
To be a successful do-it-yourself investor, you need time as well as knowledge and the confidence to apply it. Mr. Collings estimates it takes a few hours per month to tend a portfolio. People who ignore their portfolios forgo the opportunity to rebalance their holdings, which means making adjustments that get you back to your target mix of stocks and bonds. Portfolios that become overweighted in stocks because of a lack of rebalancing can be too risky, particularly for investors approaching retirement.
2. Half-hearted diversification, or worse
Let’s start with bonds. “I think do-it-yourself investors neglect bonds entirely in many cases,” Mr. Collings said.
Another problem is too much concentration in a few stocks, some of which are chosen using some fairly superficial criteria. “I’ve seen a number of people with large Apple holdings. People say, it’s a great company, Steve Jobs is brilliant, the whole bit.”
What Mr. Collings doesn’t see as much as he thinks he should are DIY investor portfolios with the diversification provided by exchange-traded funds or other types of fund products. A traditional style ETF tracks stock and bond indexes and thereby provides exposure to a wide variety of stocks or bonds.
Perhaps Mr. Collings’ Vancouver location is to blame for the preoccupation his new clients seem to have with real estate. “It’s hilarious,” he said. “They have their principal residence, they’ll have a rental property and then when it comes time to sit down and talk about their investments, what do they want? They want real estate-style investments in their RRSP.”
3. Focusing too much on stock trading commissions and not enough on other costs
