Over the last several months, I met with many self-proclaimed DIY investors who were seeking a second opinion about their investment strategies. Interestingly, nearly all of them have faced similar challenges.
In an effort to help DIY investors make informed decisions and optimize their investment strategies, I have outlined the six most common mistakes I witness and have shared some insights regarding how to manage them.
Diversification Dilemma: A well-diversified portfolio can be a pivotal cornerstone of a successful investment strategy. Unfortunately, many DIY investors find it challenging to strike the proper balance. To avert this mistake, take the time to understand what types of investments you own and how they are positioned. It is important to remember that diversification and asset allocation are methods to help manage investment risks. However, they do not guarantee protection against investment loss.
Emotional Roller Coaster: Emotions can be a DIY investor's worst enemy. To keep your emotions in check, establish a clear investment strategy and adhere to it. Focus on your goals, time horizon, and risk tolerance rather than on short-term market fluctuations.
Overconfidence Trap: To avoid succumbing to the overconfidence trap, approach investing with humility and recognize that the financial markets are rife with surprises. Conduct thorough research, assess potential risks, and make informed decisions based on data rather than intuition.
Fees & Taxes Oversight: Consult with a financial professional if you have questions about fees and taxes. A financial professional may need to consult with a tax professional before your investment strategy can be modified for tax reasons.
Inconsistent Portfolio Reviews: To avoid this mistake, determine a specific time for a portfolio review. Ask yourself questions such as the following: "What is the role of this investment in my portfolio?" and "Have any investments reached my target price?" or "Have any investments slipped below an established floor in the price?"
Hesitating to Seek Advice: A licensed financial professional may have access to resources that can offer crucial insights, and they are trained to consider a wide array of factors before determining whether an investment aligns with your goals.
Many self-directed investors ultimately opt to collaborate with a financial professional. This allows them to benefit from professional training and experience while still retaining control over the portion of their investments they choose to keep DIY.
Knowledge is power, and continuous learning is essential to long-term success in the ever-evolving investing world. If you have any questions or would like to discuss your investment strategy further, please do not hesitate to reach out.