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Beware of do-it-yourself investing

How an advisor's support can help you avoid these 10 common pitfalls.

Do-it-yourself (DIY) investing has become more popular in Canada recently, with Canadians opening 2.3 million self-directed accounts in 2020 – nearly tripling the 846,000 accounts opened in 2019. Overlapping that growth, however, was a 270 per cent rise in complaints from DIY investors to the Investment Industry Regulatory Organization of Canada (IIROC) Complaints & Inquiries team.[1]

The challenge is that successful investing requires both time and expertise – and working with an advisor can help to ensure that your investment strategy is designed to meet specific goals. Studies have shown that investors who receive professional advice accumulate almost four times more assets after 15 years than investors without advisors.[2]

There are good reasons for the performance boost advisors can provide. By clearly explaining investing concepts and products and providing concrete examples that reflect an investor’s personal situation, advisors can help clients make well-informed decisions. By connecting investments directly to goals and developing plans to meet short-term and long-term needs, advisors can help investors stay focused on what matters most to them. 

Perhaps most importantly, by sharing their professional perspective and guidance, advisors can help their clients avoid investing pitfalls. Here are 10 of the most common.

1. Too little time for investing

Investing wisely takes time. It’s critical to carefully research potential investments, select the ones that best align with goals and monitor performance to evaluate whether to sell. Investors who don’t have the time or interest to devote to this work may underperform.

2. Lack of knowledge about investing

Investors who don’t fully understand the fundamentals of investing – concepts such as diversifying assets, minimizing fees and managing taxes – may make expensive mistakes. For example, they may fail to rebalance when one asset class performs well, allowing a portfolio to become too concentrated. 

3. Misunderstanding an investment

A dizzying array of investments exists, each with different benefits, risks and features. It’s easy for investors who don’t have a good grasp of all the ins and outs of a specific solution to choose products that don’t meet their needs. 

4. Not accurately assessing their own situation 

Many aspects of an investor’s personal situation should factor into investment decisions. One of the biggest is risk tolerance – something people often find is lower than they thought when markets become volatile. Without an outside perspective, investors may also miss complexities in their finances that need to be addressed.

5. Borrowing to invest without fully understanding the consequences

While there may be situations where it is appropriate to take on debt to invest, it’s important to proceed with great caution. DIY investors who are tempted by what seems like a great opportunity may overextend themselves and increase their losses if the investment drops in value.

6. Failing to read the fine print

Details matter in investing – from currency conversion rules associated with foreign-denominated securities to legal terms and conditions that may, for example, allow a brokerage to sell investments to repay an investor’s debt to the firm. Missing a key detail can be costly.

7. Feeling too confident in market predictions

It can help to be humble when investing. Overconfidence in their knowledge, skills and ability to predict or even control market outcomes can cause investors to ignore risks and trade more frequently – both of which can erode the value of an account. 

8. Assuming current conditions won’t change

It’s easy to assume that whatever is happening in the markets right now will continue for the foreseeable future – but market conditions can change quickly. Failing to plan for different market scenarios can leave a portfolio vulnerable to sudden downturns.

9. Avoiding loss at all costs

We all feel losses more keenly than we feel gains – that’s a key finding from behavioural economics. As a result, DIY investors may avoid investments that can result in loss, resulting in a portfolio that generates returns too low to meet their long-term goals.

10. Expecting the brokerage to look out for them

The brokerages that facilitate DIY investing are known as “order execution only” firms, and that means the firm generally can’t help if investors run into trouble because they make a mistake. Going it alone means no personalized recommendations and no reviews for investment suitability.

Everyone can benefit from an expert second opinion

Working with an advisor gives investors access to professional guidance tailored to their specific circumstances. Beyond technical expertise, an advisor can alert investors to biases that may be negatively affecting their decisions, help investors evaluate the possible positive and negative repercussions of every action, and remind investors that the choices they make today will affect their ability to meet goals down the road. 

Do-it-yourself can work well when you’re taking care of minor home repairs – but working with an advisor can be a much better way to approach investing for your future.

Want to learn more about sound investment decision making? Check out this article on cognitive biases. 

[1] IIROC compared the number of complaints between March 2020 and January 2021 to the number of complaints between March 1999 and January 2020. www.iiroc.ca/news-and-publications/notices-and-guidance/canadians-opening-do-it-yourself-diy-accounts 

[2] http://aeconf.com/Articles/May2019/aef200115.pdf 

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