When a do-it-yourself investor, 72, came in with his wife to ask Kurt Rosentreter whether they were on the right track, Mr. Rosentreter had a simple analysis: No.
"They engaged me to do some retirement cash-flow forecasts," says Mr. Rosentreter, a financial adviser at Manulife Securities. He provides a service for do-it-yourselfers who can hire him by the hour to review their decisions.
"I made some conservative assumptions. I had them running out of money at 85."
Do-it-yourself mistakes and pitfalls are all too common Mr. Rosentreter says. He has a list of general tips for avoiding them:
1. Find a sounding board
Talk to someone about your portfolio and your plans, whether it's a professional who you pay or simply a friend who can offer a thoughtful second opinion, Mr. Rosentreter says. "Whether you're a beginner, or even if you're really good at this, there should be someone you can turn to. It's a big mistake if you don't have someone. When the markets get tough, or when you need someone just to talk about the basics on economics, to think you can do all this without coaching is really naive."
2. Be rational
"Everybody likes to talk about their winners, but you never hear about their losers." You should self-assess, to make sure your investment program is doing what you want it to do. "A rational reality check on yourself is good whether you use a full-service adviser or do all your investing in your basement in your pyjamas."
3. Balance your life
"I have clients who divorced because they became addicted to investing," Mr. Rosentreter says. "You need to reflect on your spouse, on your own health. If you're spending more than 10 hours a week, I think you need to reflect."
4. Understand risk
Knowing that investments can rise and fall is not the same as understanding this, Mr. Rosentreter says: "Your risk level can be excessive when there's no one who can assess it." He has seen do-it-yourselfers who put everything into volatile small cap stocks. Memories are short. "It's easy to be greedy and then to forget how ugly 2008 [the last big recession] was."
"Even as a do-it-yourself investor you should have a written plan," Mr. Rosentreter says. A good plan defines who you are in terms of your stage of life and expectations, itemizes your net worth, assesses your risk tolerance and outlines your tax situation. It should be two to six pages long. Investors who work with advisers always have plans – if you're your own adviser, you should have one too.
A common pitfall among do-it-yourselfers is to neglect revisiting your portfolio. You should rebalance it from time to time, taking profit, selling the underperforming or loser stocks and funds, looking at where you should invest next. People who don't do this "are the people who didn't sell Nortel when it was at $120," Mr. Rosentreter says. Three ways to rebalance are to do it strategically, based on your stage in life, dynamically, based on allocation of your investments in stocks, bonds, funds and cash, or tactically, based on newspaper headlines. "The third way is the hardest," and easiest way to make mistakes, he says.
7. Understand research
There is lots of information for do-it-yourself investors, but you need to know how to sift through the good and the bad. "People need to reflect on research for what it is – it's someone's educated guess about the future of a stock or a security," Mr. Rosentreter says. Look at more than one source and try to find a consensus on which investments are most promising. Otherwise you might find you're looking at someone's glorified opinion.
8. Don't stick to one investment style
"Value stocks aren't always up, growth stocks don't always grow and technical analysis doesn't always work. You should put them all into perspective," Mr. Rosentreter says. "We all have good days in the sun and we'll all have some bad days, too."
9. Understand your own emotions
Just because you want to do it yourself doesn't mean you have the personality for it, Mr. Rosentreter says. If you want to go it alone, that's fine, but it shouldn't be just about saving fees or disliking a particular adviser – you should only go it alone if you have enough knowledge and also know how you will handle the work it takes to invest, as well as the risk.
10. Keep your partner in the loop
In many relationships one person does the do-it-yourself investing "and the other person doesn't have a clue what's going on," Mr. Rosentreter says. This is a mistake. What if the investor dumps the partner, or dies – or loses all the money. Couples should work together, or at least communicate."