At Premier, our wealth advisors often field questions from clients who wonder about taking a DIY - a "Do It Yourself" - approach to investing.
We certainly understand this impulse. After all, self-sufficiency and that "can-do" attitude are certainly ingrained into the American character, but there are some activities that simply aren't as DIY-friendly... and strategic wealth management is one of them.
Think of it this way: Say your favorite chair has a wobbly leg. Now, you're not a carpenter by trade, and you've never fixed a chair before. But there's no reason you can't go online, find a how-to video, grab your screwdriver and some strong wood glue, and fix that chair yourself.
Now let's say that you've chipped a tooth. Are you going to try and DIY your pearly whites, or go see a professional and get the job done right? While investing isn't likely to be as physically painful as botched dental work, botched investment planning can certainly affect your financial future. Here are two common mistakes often associated with DIY wealth management.
Stock Picking, Market Timing and Investment Planning
For many investors, especially those who pay attention to the financial media, investing means picking the right stock at the right time in order to "beat the market." The problem with this approach? Marketing timing simply isn't effective.
For one thing, the additional costs and fees associated with jumping in and out of the market decrease your return. And, even more significantly, picking that "hot stock" just doesn't work. In fact, multiple studies illustrate that attempts to pick stocks that outperform the market by chasing those elusive short-term profits are just that -- elusive.
Speaking of terms, investing for the long term is a more effective approach. Maintaining a consistent approach to wealth management, including a properly diversified portfolio, and not reacting emotionally to market volatility ensures that you can stay in it for the long term.
It's all too easy to react to market ups and downs, rushing to sell off that stock that dipped yesterday or sinking more money into that stock that's riding high today. With investing, the past does not predict the future. If anyone tells you otherwise, ask to see the supporting evidence. It probably doesn't exist.
Professional Investment Guidance: Worth the Cost?
For many DIY investors, saving on the cost of working with an investment professional may seem well worth it. However, when tax day rolls around and they're hit with a higher tax burden, those professional fees may seem like a real bargain. If you aren't up to date on the latest incarnation of the tax code, how can your financial planning process keep up?
Similarly, the fees and expenses associated with high portfolio turnover add up quickly -- and significantly decrease your overall returns.
The solution? Leave the DIY to minor repairs, and turn to your trusted wealth management consultant for investment guidance.