Many people dream of becoming an investment guru like Warren Buffett or Peter Lynch. They aspire to win the praise of their family, friends and the investment community by getting in on the ground floor of the next Apple or Google. But treasure hunting for the Holy Grail of investments can cause do-it-yourself investors to miss out on more than they realize.
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Today, plenty of websites, newsletters and online brokerage companies cater to individual DIY investors. "The playing field is level when it comes to the tools and information once reserved for financial professionals," says Drummond Osborn, president of Osborn Wealth Management. But it turns out DIY investors run into many of the same problems as those who decide to remodel a kitchen or bathroom. While the tools and information are available, developing the skill and expertise to use them can be more painful and costly than running back and forth to the hardware store several times.
"Investing doesn't come with step-by-step instructions or an extra hand to hold along the way," says Jonathan Citrin, CEO of CitrinGroup. He advocates against DIY investing for this very reason. "DIY investing can be great when times are good, but if the ship starts sinking, you want someone who has and can make the tough decisions," he says.
Fear and Greed Factors
Investment guru Warren Buffett, who has steered his flagship company Berkshire Hathaway through rough waters many times, has said, " Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ." He is alluding to the role emotions, not just academics, can play when investing.
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Citrin says, "We're all prone to our own emotions, and if you can't objectively step back and make decisions from an arm's length away, greed and fear end up affecting your portfolio decisions."
"DIY investors can't quantify their relationship with their investments ... emotions show up in the way they describe their holdings as either ' good ideas' or 'bad ideas' instead of through the numbers or business cycle," says Osborn.
Time and Money
Another downside to DIY investing: It can completely consume and overwhelm some people, sucking both the life and money right out of them as they are held hostage by their computer screen and whims of the markets. Henry K. "Bud" Hebeler, retired president of Boeing Aerospace Company and founder of AnalyzeNow.com, says, "There's more to life than standing in front of the computer all day, especially since you can't predict what's going to happen on any given day in the market."
"Spending all day, every day, reading Investor's Business Daily and combing through Morningstar.com reports can be stressful and taxing," says Citrin. "Investors can miss out on a lot of life if they don't know how and when to detach themselves from it."
In addition, many DIY investors tend to overlook costs beyond annual expenses and trading fees that can siphon money out of their pockets.
Bid/ask spreads, or the difference between the highest price a buyer is willing to pay for an investment and the lowest price a seller is willing to sell it, on some ETFs can completely wipe out the savings they're supposed to provide, Osborn says. In addition, "Investors who opt for generic market orders instead of specific buy and sell limit orders surrender both execution and cost control."
At the other end of the spectrum are investors who can't devote the proper time to DIY investing because they simply don't have it. Writing an investment policy statement or rebalancing your portfolio on a regular basis can add helpful dimensions to a DIY portfolio, but these important chores can be problematic for those who are still working, have family obligations or haven't established good buying and selling habits. As a result, "Investment discipline can fall by the wayside, especially if you're constantly juggling 10 different things ... and that can prove costly," says Osborn.
"I've had people write me who have amassed huge portfolios because they bought every stock that the experts in Kiplinger and Money magazine suggested ... and none of them are doing particularly well," says Hebeler.
Citrin, a professor and market theorist, says most DIY investors are too narrowly focused. "They often have a very myopic view of the markets," he says, "with the capacity to follow only one or two gurus." This lack of capacity can create more portfolio risk than bottom-line returns.
That brings us to the last point about investment risk. Whether you're a new or experienced investor, everyone knows that investing comes with significant risks. However, many DIY investors perceive risk as the potential to lose money instead of as a tool to fine-tune and manage their portfolios.
Citrin uses modern portfolio theory, or MPT, to construct and monitor client accounts. MPT involves constructing an optimal portfolio by analyzing the relationship between risk and return. "DIY investors miss out on half the equation of investment success if they aren't managing risk through the likes of standard deviations and correlation coefficients," he says.
DIY investing can be complex, stressful and less rewarding than some investors expect it to be. In the process of paying less in fees, creating the perfect portfolio or discovering the next best thing, DIY investors may miss out on more than they gain.
Copyright 2013, Bankrate Inc.