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The 5 Most Common DIY Investing Mistakes…And How To Avoid Them

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I used to work in derivative sales, serving investment and brokerage firms across the country. Since I worked in the industry, it seemed only obvious that I would invest my money myself. I felt I was equipped to do better than the average person –  I even had my own Bloomberg terminal!  After 5 years “in the know”, 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 Sunday afternoon to figure out how to invest my savings and put an asset allocation plan into action, but work got busier and constant traveling derailed all my DIY intentions.

Since joining Personal Capital, I’ve learned that many of our users fall into the same trap. Our users on average hold three times more cash than they need in their investment portfolio. Our average user keeps 14% of their portfolios in cash (when the recommended amount is closer to 5%). Nearly 10% of our users, have over 50% of their brokerage accounts in cash.

DIY investing can appear to make sense for a lot of people – but even those “in the know” can run into mistakes. The Head of Advisory Services at Personal Capital recently sat down and shared the most common DIY investor pitfalls that he’s encountered over the years (watch the recorded webcast here).  Before trying your hand at investing yourself, avoid these five most common mistakes.

DIY1

Managing your personal finances, especially long-term planning for retirement, is on 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.

You shouldn’t treat your financial future like this. 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.

DIY2

If you’re like most investors, you have multiple retirement accounts, savings accounts, and brokerage accounts, all in different places. Plus you might 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, DIY investing is not always saving you money. Consider talking to someone who can help with tax and fee efficiency. In some cases, you can save more in taxes than the advisor fee you may be paying.

DIY3

Is your retirement on track? Do you have enough in your 401k and other retirement accounts Do you know how much is enough?

You need to build a long-term investment plan based on your personal goals.  Make sure your portfolio is properly maintained and efficiently allocated for retirement. Don’t think of it as a one-time shot, but an ongoing process as circumstances change. Talking to a professional can be extremely valuable in figuring out how to create income when you do retire.

DIY4

People can be their own worst enemy, especially when it comes to investing. We all know we should exercise regularly and eat right, and every January, a lot of us make resolutions to work out and get healthy. It’s no wonder gym memberships spike every January. But very few people have the plan in place or discipline to stay on track. That’s what happens to most DIY investors with a haphazard investment strategy. They don’t have a clear idea of what their portfolio asset allocation looks like. They can’t say why they made the allocations they did in their 401k. Their portfolio is a just collection of random holdings and they aren’t sure how they fit together.They are relying on luck and hope, not strategic thinking.

Any of this sound familiar? Make a plan and stick to it. If you can’t, hire an advisor to put a plan into action and force you to stay disciplined and accountable.

DIY5

We all want to invest based on the latest information. It’s tempting to invest based on what you see on CNBC. As fast as electronic media is, this rarely works since the market has already priced in all available public information.

Understand that sometimes you don’t have all the expertise you need. Talking to someone who does is a sign of strength, not weakness.

Photo Credit: DIY burnt cookies, creative commons.

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Theresa Chin

Theresa Chin

Theresa graduated from Northwestern University in 2008 with a degree in Economics. Prior to earning her bachelor's degree, she grew up in Hong Kong, where her parents and sister still live. After Northwestern, she moved to San Francisco, where she worked for Wells Fargo for five years. At Wells Fargo, she played a key role in product origination and sales of structured investments, serving institutional investment firms across the country. She is now an MBA student at the Stanford Graduate School of Business and is part of the marketing team at Personal Capital.

7 comments

  1. 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
  2. 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
  3. 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
  4. 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
  5. Rachel Barney

    Interesting

    Reply
  6. 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

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