Should I DIY it?

There are many people who are unsure if they should try to manage their own investments or hire a professional. My aim is to help empower those people who want to do it yourself, while being realistic about what it takes to do it well.

Managing your own portfolio well requires a few important ingredients in order to achieve a better outcome than paying someone to do it for you. If you don’t possess these ingredients, then the value you will likely receive from a professional who understands your situation will likely far exceed the cost over your lifetime. So what does it take to manage your portfolio well? And do you have what it takes?

Gym Memberships

Investing today is often compared with joining a gym. Gyms memberships don’t cost a lot and there are plenty of free workout programs that you can research to help you accomplish what it is that you are trying to achieve. Then you have to implement the program on your own. However if you don’t want to implement on your own, or if you want to make sure things are done correctly, or if you want accountability to achieve your goals, you are likely going to hire a personal trainer.

Today investors have other options – robo advisors. Robo advisors are a digital advisor that manage your investments for a lower fee than a human advisor. Not wanting to stretch the analogy too far, Robo advisors are like attending a fitness class. You still have to turn up to the class yourself, just as it's the DIY investors responsibility to save and invest their cash. Once your at class you get some guidance – although its mostly impersonal.

With a robo advisor you won’t have a program that’s personalized to your needs or the accountability to do what is required outside of class, but for a self motivated person it can be a great option. Robo Advising is still a largely self guided approach so I consider the ingredients needed for people using Robo Advisors to be similar to DIY investors.

What’s needed to Self Manage your Investments?

In order to gauge whether you “have what it takes” to invest on your own there are three ingredients that you will need: Interest, Discipline and Time. If you don’t have all three you have a slim chance of doing better than a professional.

 Time

You have to dedicate the time to develop a strategy and maintain it. If you aren’t willing to dedicate the time to read a few books to understand investing ( like The Four Pillars of Investing, The Intelligent Investor, The Investment Answer) then you don’t have the time to self manage. This is your life-savings we are talking about here. The stakes are high, and if you can’t make room in your schedule to understand investing of how to develop an investment strategy that is personalized to your situation and goals, then you may well not be suited to self management. All investment strategies go through a period of underperformance. So even if you use a robo advisor, you’ll still need to understand and be convinced of the strategy because it will be up to you to avoid the fatal mistake of abandoning it during the rough patches.

You also need to consider the opportunity cost to your own time. Could you be spending the time in another way more enriching and fulfilling to your life? Spending time with family or working on things that will help promote your career or help increase your monthly income? 

Interest

If you don’t have an interest in the subject it is unlikely that you will dedicate the time needed to reading and learning about it. You need to make smart decisions and those smart decisions will be a result of curiosity and interest in the subject matter that will guide you to the right answers.

Many DIYers are happy to sacrifice their time to save money, but if you don’t have an interesting in investing then it is unlikely that you will develop the skills and the knowledge base required to produce a better outcome for yourself than hiring a professional.

Discipline

This is where the rubber meets the road and requires you to be completely honest. Investing is not always smooth sailing. It can be a wild ride and your portfolio is going to swing up and down. You will constantly be inundated with scary headlines designed to elicit an emotional response from you. Do you have the discipline to fight off your cognitive biases to make the smart choices?

Investing requires you to make decisions that are contrary to your emotional impluses, and usually in exact opposite way. When the financial world seemed to be ending in 2008-2009 and you felt like throwing up, were you a buyer, a seller or neither? If you weren’t a buyer you may not have the discipline required to make the cold calculated decisions in the face of uncertainty needed to achieve the best outcome. Undisciplined DIY investors who didn’t rebalance into stocks during that period could have paid a very high investment management fee over the last 10 years and still been better off today.

Investor behavior has an enormous impact on returns – more than fes/expenses and more than fund/security selection. So when the market is “expensive” will you be still on cash or continue to invest it prudently? When the markets are volatile will you still rebalance against the advice of the scary headlines? Can you carry out the discipline through think and thin? Research has shown time and time again that investors make terrible timing decisions. 

A famous study by Dalbar demonstrated that due to poor timing decisions, the average investor underperforms their own investments by on average 3%. Whether it is sitting on cash too long, or selling out of stocks to cash when things get scary, it’s easy to make a reactive investment decision that severely impacts your returns in a negative way. Investing your own money requires a heavy dose of discipline. If you don’t have it you are better off with an advisor who acts as an objective guide for you through turbulent markets to ensure you make the right decisions and avoid damaging investment mistakes.

DIY Investment Risks

As with doing DIY around the home there are certain risks to doing something on your own. You may conclude that the risks are worth taking, but its important that you and your spouse understand the risks and are both on board. There are many things in life that are fairly easy and relatively low risk to DIY. Putting up new shelves is fairly easy and unlikely to be expensive to fix if something goes wrong. However, with investing there is an enormously high cost of making a mistake regardless of your portfolio size. A mistake that costs you $10,000 at age 40 ends up being a $785,000 mistake by age 85 if that grew at 10% per year for 45 years. That could be the difference between having a financial legacy to pass onto your children and having to financially depend on your children to take care of you.

DIY investing is more like DIY roof replacement than sink replacement. Even if you do have the time, interest and discipline to tackle the project, you are still putting yourself on top of the roof with the possibility that you could fall off and severely injure yourself.

How many people have what it takes?

William Bernstein, a former brain surgeon turned author of several investment books left the medical field in order to educate investors. He has dedicated his life to empowering people to manage their own investments. However, Bernstein ultimately realized that while he possessed all of the ingredients to self manage, most people do not.

 “I really did believe that the average investor could do it himself. I was wrong. I’ve come to the sad conclusion that only a small minority, at most 1%, are capable of pulling it off.” W. J. Bernstein.

Advocating for people to self manage their investments is like advocating for people to do all of their own car repairs and maintenance – there are a certain percentage of people who can and will, but a majority of people will achieve a better outcome by hiring a skilled mechanic who does it all day and has the necessary tools to do so.

When it comes to self managing your investments the key is to be honest with yourself. If you have what it takes, you have the opportunity to save a lot of money over time by doing it yourself (assuming you do as well as a professional). In the same way, you could save a lot of money doing your own car repairs, but it's all for nothing if you make a mistake that causes you to lose control of the car while your kids are in the back seat. The stakes are high.

If you have any doubts about whether you possess the ingredients to success, the value you receive from a skilled financial advisor will far outweigh the cost of hiring one. Since the cost of making financial mistakes is so high, my hope is that this post has helped you determine for yourself whether or not you should pay a professional to avoid them.