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The 5 Most Common Self-Directed Investing Mistakes…And How To Avoid Them

For do-it-yourself investors, self-directed investing means managing your portfolio and making trades by yourself, without a financial professional advising or doing it for you. A lot of people think that this is the most cost-effective way to manage their portfolio, and others just like doing it themselves. But there are some common pitfalls of being a self-directed investor that aren’t always immediately apparent.

Before I started working at Personal Capital, I was among those who thought I could handle being a self-directed investor. But before long, I was ashamed to admit that more than 80% of my savings was sitting in cash doing nothing. I kept meaning to set aside a weekend afternoon to figure out how to invest my savings and put an asset allocation plan into action, but life always gets busy and it can be hard to actually come up with and execute this kind of plan. Eventually I had to accept that I didn’t have the time to be a self-directed investor.

I’ve also learned that many of the folks who use our Personal Capital dashboard fall into the same trap. Our 2 million dashboard users have over $41 billion in cash sitting in savings, checking, or money market accounts. That’s a lot of “lazy cash” that could be working a heck of a lot harder if it was invested.

Self-directed investing can appear to make sense for a lot of people – but even those “in the know” can run into mistakes. Before trying your hand at investing yourself, avoid these five most common mistakes.

1. Putting your personal finances on the back burner.

your to-do list. But it gets pushed down the list, after work, family, errands, travel – and completely left on the back burner.

When your refrigerator stops working, or your car needs a tune up, you take it into the shop. When your child is sick, you take her to the doctor. We rely on professionals all the time, but we always focus on the immediate. It’s easy to let something like retirement planning slide until tomorrow, or next month, or next year.

Treating your financial future as something that you can get to “another time” can be risky. Almost everyone’s investment strategy needs planning. If you don’t have the time or passion to manage it yourself, take your investments to someone who does have the time and is passionate about it.

2. Trying to manage all of your accounts yourself.

If you’re like most investors, you have multiple retirement accounts, savings accounts, and brokerage accounts, all in different places. You might also have your spouse’s accounts or children’s 529s to consider. A lot of people can’t even remember which investments are where. It happened to me and happens to a lot of people.

On top of knowing where your money is, do you actively try to minimize taxes and fund fees? Almost every investor, even those with many millions of dollars, are paying more in taxes within their investment accounts than they should be. Because of this, self-directed investing is not always saving you money. Consider talking to someone who can help you with tax and fee efficiency. In some cases, you can save more in taxes than the advisor fee you may be paying.

3. Having undefined financial goals.

Is your retirement on track? Do you know when you want to retire and when you want to take Social Security? Do you have enough in your 401k and other retirement accounts? Do you know how much is enough?

Everyone should have a long-term investment plan based on personal goals, retirement targets, and risk tolerance. Make sure your portfolio is properly maintained and efficiently allocated for retirement. Don’t think of setting goals as a one-time exercise, but as an ongoing process that will evolve as circumstances change. Talking to a professional can also be extremely valuable in figuring out how to create income when you do retire, which is something that self-directed investors often overlook. There’s so much focus on accumulating wealth during your working years, that how you withdraw and spend that money in retirement is sometimes forgotten.

Clients of Personal Capital have access to a tool called Smart Withdrawal, which helps you build a plan for how to most efficiently withdraw your assets in retirement.

4. Making emotional decisions.

If you are managing your own investments, it can be hard to be objective. If the market were to go into a major correction tomorrow, would you be able to stay the course and stick to your plan? Oftentimes, self-directed investors find it hard to keep emotions out of their investment decisions – after all, we are all human and it’s almost impossible to remain objective when it comes to our nest eggs. But it’s incredibly important for your long-term success to avoid falling into some common behavioral finance traps like recency bias (thinking that what performed well recently will always perform well), status quo bias (opting for what you’re familiar with), or simply making knee-jerk reactions when the market starts getting volatile.

Hiring an advisor can mitigate a lot of these risks when it comes to emotional decision-making. It’s hard to be objective when it comes to your money!

5. Not looking at the whole picture.

Your financial well-being is more than just your investments. There are countless other considerations that should be factored into your financial plan. We talked about tax management, but what about insurance needs? Estate planning and charitable giving? Saving for your children’s college education? It can be difficult to find the time to actually manage these things and educate yourself enough to be able to manage them effectively.

Personal Capital’s free financial dashboard is a great place to start looking at your finances holistically. You can link your bank, credit card, savings, investment, and retirement accounts to see everything in one place. Our advanced Retirement Planner tool will help you plan for various scenarios and project your chances of success towards reaching your long-term retirement spending goals.

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The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.
Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.

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7 Comments

  1. capital protection

    Hi, firstly thanks for sharing this informative article with us. I must say you have explained all the basic mistakes done by not only newbies but also by matured investors in very interesting way. If anyone considers these points I am sure will never face any problem of loss while doing investments.

    Reply
  2. Rachel Barney

    Interesting

    Reply
  3. Brendan

    The biggest difficulty I have in managing my own accounts is the cost of making changes. I’d like to consolidate some accounts, but is it worth paying the $95 per account fee to do that, considering that apps like Personal Capital show all holdings from all account in one place? Also, there are some funds I’d like to get out of, but I’m sitting on huge capital gains, and would have to pay back-end loads if I sold. Getting an advisor wouldn’t help – he/she would just move all the accounts and sell everything not caring about the cost to me.

    Reply
  4. Steven

    I spent 8 years before I became homeless try not to make money I guess because nobody would join me in the ventures I chose and I worked hard to get to know a lot of people so that I wouldn’t have to face this moment that I am in now homelessville at 7 8 months and my wife is pregnant now and we don’t have a place to go or be because real estate people ganged up with ultilization of county city state and famly services courts agents of every branch used to gang up on me and the property’s family living to even try to kill me, and put biased judges on my assets litterally, all this everyone needs know before we end up dead. We are good people with out a doubt trying to simply live as i am disabled, if any caring founders can see actionably without satan signing to begin my already ligit busisiness to help those whome come to know what i feel is vital to humanity. then we can help ourselves out of our own predicament. For life and our childrens future. we just found out about the baby 11 weeks is now 12 weeks and we still have no idea what we can do other than to build my dreams and try to make it come true. Carol I think I set up a damn good way to make money for everybody individually and I’ve seen a lot of people fail it all there’s many many startups that they try including just wasting life to spend money or make money and the things I chose are actual values that people will need to survive in their lives in every way gives me a way to share my uniqueness with other people as well so won’t you take and go to my site and be the first to found the foundation that builds a great company of the future?

    Reply
    • Anonymous

      perhaps your first plan should be to finish formal education.

      Reply
  5. Financial Samurai

    I like the mistake about NOT having a goal.

    Making money for money’s sake is pretty soulless. But once you have a goal, like saving money for your kid’s college fund, saving to buy our parents an anniversary gift, etc… money becomes much more meaningful.

    And once the goal is told to several folks, one can’t help but succeed out of fear of public failure.

    Reply
  6. EL

    I agree that work and family commitments get in the way of people spending time with investing strategies. The secret is to set aside a timeframe dedicated to that goal. The personal capital tool can save you time and money if you can’t do it yourself.

    Reply
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