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Most do-it-yourself investors will be familiar with stories of people who got rich from a tip they heard on the street. But as Joseph P. Kennedy learned, it's not what you hear, it's how you use the information.
As the story goes, the wealthy father of a U.S. president and two senators survived the Great Depression by getting rid of his investments before the October of 1929 stock market crash. "When my shoeshine boy tells me what stock to buy, I sell out," Mr. Kennedy apparently said.
The lesson for do-it-yourselfers is to manage advice, which is everywhere nowadays – on the Internet, on TV, even on the screen in the elevator. The trick is to know how to sift through the noise.
"Many situations do not necessarily require advanced advice, but more sophisticated problems may require professional advice," says Darren Coleman, senior vice-president and portfolio manager at Raymond James in Toronto.
"I can change a light bulb myself, but renovating a kitchen is another story."
One of the challenges for DIY investors today is to separate useful advice from noise. Part of the problem is that while there is an abundance of useful advice available from a variety of sources, it's not always relevant to every investor's needs.
"There are excellent resources investors can access on their own, such as savings calculators, retirement income planning software and asset allocation software. They can also access a wide range of research and information about investments online," Mr. Coleman says.
"But information does not equal wisdom."
This is evident in the findings of the 2014 Quantitative Analysis of Investor Behaviour (QAIB) report from U.S. financial research firm Dalbar Inc. It suggests that the wisdom of herds is not that wise when it comes to sophisticated financial advice.
Each year the QAIB report looks at the gap between leading indicators of investment performance and what mutual fund investors actually earn, and this year's report finds a gap. Over 20 years the S&P 500 has retuned 20 per cent, while the average U.S. investor's return is 5.02 per cent.
"We need a fundamental change that transforms investment thinking into meaningful decisions and choices for retail investors," said Louis S. Harvey, Dalbar's president, when the 2014 report was released last spring.
Too often, investors react on "mindless warnings" that "past performance does not guarantee future results" without really understanding their own expectations and the actual risk they are exposing themselves to with their investments, he suggested.
"The single greatest determinant of investor return is not the investment – it's what the investor does with the investment," Mr. Coleman says. Here is where DIYers can run into trouble – by holding unprofitable investments for too long, trading too much or at the wrong times or buying and selling products that they don't really understand.
The QAIB report echoes this, saying that the major reason that retail investors' profits lag the market indexes "has been withdrawing from investments at low points and buying at market highs."
This sounds like emotional investor behaviour, Mr. Coleman says: "In investing, we often see massive inflows into equities and redemptions back to cash at precisely the wrong times." One way to avoid this is to check in with an adviser; some will help DIY investors for an hourly fee.
There are also lots of good online resources, he adds – planning software, sophisticated online calculators, market and product research and in some cases, call centres where DIYers can seek advice for a low fee. Mr. Coleman says that each investor must decide whether he or she is comfortable with this kind of generic service – it can be good if an investor is looking for specific information, but some people might prefer to talk to an expert in person.
He and other advisers also note the advent of online advice that goes a step further – robo-advisers. These are companies that use computer algorithms to take clients through a series of questions to suggest and sometimes even manage portfolios of exchange traded funds (ETFs) and mutual funds. They have become big in the United States, with companies such as Wealthfront and Betterment already boasting several hundreds of millions of dollars under management.
Robo-advisers invest clients' money in portfolios for low fees – typically 0.15 per cent to 0.35 per cent of annual assets. This compares with fees of up to 2 per cent for portfolios handled by human advisers.
The portfolios that robo-advisers design are based on how the investor answers a few questions about finances, goals and risk tolerance. In Canada, ShareOwner launched the country's first robo-adviser service in May and there are others, such as Nest Wealth and WealthSimple.
These services seem to aim toward younger investors who are comfortable with technology. Yet just like tips from the street, it's important to know how to use the information.