DIY Investing Comes with Its Own Costs

Have a leaky roof? Watch this video. Hate the dentist? Start cleaning your own teeth. Want to build your own space-faring rocket? Follow these blueprints. There is an endless amount of information out there that can teach you how to do just about anything yourself. The question is, is that always a good thing?

Consider DIY investing, or do-it-yourself investing, which can include robo-investing. Download an app, plug in some personal information and you can start trading stocks in minutes on your smartphone. And, there are thousands of investing “experts” online who claim they can show you how to become a gazillionaire.

DIY investing is increasingly popular among younger investors, not only for the tech appeal but also the very low cost. After all, DIY investors are paying for less services. Low cost investing is generally a good thing; except, what do you lose in the process?

While they may not appear on a statement, there are DIY investing risks that can turn into very real and very high costs. Therefore, if you are thinking of going it alone or know someone who has aspirations to become a DIY investor, first understand what’s exactly at stake.

Overview of DIY Investing and Robo-Advisors

Basically, DIY investing entails opening an investment account, selecting investments and managing that account -- all on your own. This can be done through a traditional brokerage or various trading apps, like Robinhood, where you can even purchase just fraction of shares.

A step toward a more traditional wealth manager is robo-investing or working with a robo-advisor. With a robo-advisor, you create an account online or through an app, and then your money is invested with an algorithm based on personal factors, such as your financial goals, risk tolerance and timeline. You may have more or less discretion over how your money is invested, depending on the platform and your preferences. Some robo-advisors also offer limited access to additional financial planning services and a human financial planner.

Ultimately, both modes of investing put a greater share – if not all – of the responsibility on your shoulders. Trusting your hard-earned money to yourself or a computer – no matter how cheap – can be risky if you don’t fully understand what you’re getting into.

Potential Costs of DIY investing and Robo-Advisors

There is nothing inherently wrong with managing your own investments. You could argue that people DIY things as major as their homes all the time, so why not their portfolios, too.

But there is a big difference. Your home isn’t constantly changing like the market. Additionally, there is a lot of conflicting and often dangerous investment information out there. What if you were convinced your house was going to collapse so you rushed to move out, when in reality it wasn’t? That’s how many individual investors feel when the market drops and misinformed pundits on TV scream to sell.

Just because you can manage your own portfolio doesn’t necessarily mean you should, at least not without learning the potential risks and costs involved. So, here are some of the potential costs of DIY investing:

Lack of accountability: Investing can be simple, but not easy. It takes the will, time and energy to carry out an investment strategy. Who will make sure you save enough, or stay disciplined, or avoid making mistakes?

Inappropriate asset allocation: DIY investing means building your investment portfolio from scratch, which leaves a lot of room for error. Without a full understanding of risk and reward, investors could buy investments, such as individual stocks, that are highly unsuitable for their long-term goals.

Unnecessary trading: Investors who are attracted to the idea of beating the market tend to trade more frequently, which generates trading costs and often lower returns over time.

Gamification: Many trading apps use bright colors and digital graphics to replicate the experience of a slot machine and encourage people to make more trades so they can earn more money.

Your emotions: Unfortunately, investors often make investment decisions based on their emotions, which affects their performance. Market research from JP Morgan found the average investor’s annual return over 20 years (2001-2020) was 2.9% compared to the broader stock market’s gain of 7.5%.

Getting in over your head: No one is going to tell you no. While that can be liberating, it comes with serious risk. With trading apps, in particular, relatively inexperienced traders can use options to chase bigger returns and take on more risk than they could achieve by simply buying a stock. Tragically, a young man in 2020 committed suicide after losing $750,000 on a day trading app.

Being misled: The SEC recently released a risk alert on observed robo-advisor deficiencies, including misleading or prohibited statements on their websites, wrongly implying that client accounts would be protected from market declines and failing to disclose conflicts of interest.

Bad information: Without a financial adviser, DIY investors often rely on the wisdom of the crowd online, which anyone who has been online knows, has a high probability of giving bad advice.

Missed opportunities: There is much more to investing than just returns. On your own, it can be hard to keep track of all the additional opportunities, from lowering your taxes to choosing the right account, that would let you keep more of your earnings.

The Value of Hiring a Financial Adviser

What DIY investing or robo-advisers can offer in a lower price often comes with a lack of personalization. More than that, it can produce feelings of anxiety and fear as an investor. Think of it this way, if you have a toothache, you could pull the tooth yourself rather than visit a dentist. But how confident would be that nothing goes wrong?

Perhaps, it’s not surprising then that a study found that top-earning Americans who had sought out a financial adviser were nearly three times happier than those who managed their own finances—and those who went solo became statistically unhappier as they made more money, which could highlight how difficult it can be to manage large sums of money on your own.

Both younger and older investors, therefore, could benefit from far more personal management, especially as their wealth accumulates and their needs grow beyond simply saving and investing. This may include building a diversified portfolio, creating a tax-efficient income stream, making charitable contributions, estate planning and more.

Sure, hiring a financial adviser means paying an additional expense, but what you get in return can be greater than the costs of going solo. And, over time, you may increasingly value having a dedicated adviser to personally guide and hold you accountable to your financial goals.