The pitfalls of DIY investing

By Jerry Wagner

DIY investing has become easier than ever. With a few taps, investors can open an account, place a trade, and build a portfolio on their own. But easier access does not always lead to better outcomes.

Investors would be wise to remember that there are costs to trying to do it yourself.

Since 1984, analysts at independent investment research firm DALBAR Inc. have published their annual “Quantitative Analysis of Investor Behavior” report (QAIB). Over time, the report has shown that investors managing their own accounts consistently underperform the mutual funds in which they invest.

While Flexible Plan Investments (FPI) was one of the first to create a turnkey asset management platform that allows the adviser to be the portfolio manager (DIY investing for your financial adviser), we’ve also learned that there are four common pitfalls to attempting to do it yourself.

1. Investors may not fully understand what they own

Whether you are investing in assets or strategies, you have to spend the time to learn about the investment. This sounds pretty basic, but many investors buy before they fully understand what they own. Losses by inexperienced investors in options, bitcoins, volatility vehicles, and leveraged and inverse funds show how costly that can be.

This knowledge is important for more than avoiding mistakes. The more you understand the characteristics of an asset class or strategy, the more likely you are to trust it to do what it is intended to do within an investment portfolio. This trust can make it easier to stick with a plan and invest for the long run.

2. Investing takes time many people do not have

Most investors cannot devote all of their time to their investments. Yet today’s 24-hour investment and news cycle can make it feel like investing requires constant attention. The demands of everyday life only make that harder. Most people simply cannot do everything all the time.

3. Emotion can get in the way

Markets can be noisy, uncertain, and uncomfortable. For many investors, that can lead to frustration, anxiety, and rushed decisions.

Fintech entrepreneur George Mitra made this point in an article about DIY investing:

“The two emotions that always compete in investment decisions are Greed and Fear. In reality, it is only one—Fear. It’s either FOMO (Fear of Missing Out) or the fear of losing something. One leads to making a decision when times are good and gives investors more confidence in their ability, their risk tolerance, and knowledge about their needs. Whereas, the other freezes us, or makes us take decisions in haste looking at short term rather than longer horizons.”

The interplay of these and other investment biases has spawned a whole new field of study: behavioral finance. We now know that the internal mechanisms of the human brain can work against successful investing. Successful professional investors establish procedures and conduct the quantitative research needed to help overcome these emotional roadblocks.

4. Discipline is hard to maintain

Lack of discipline can undermine the best-laid plans and overcome years of research. When I was doing weekly seminars for investors, I used to tell attendees that I had researched thousands of investment systems. Many of these systems had long-term records of success. But based on my experience with investors, I knew that I could explain a profitable system’s rules and history and, in most cases, investors still would not go home and follow it.

It’s similar to subscribing to an investment newsletter. The writer tells investors when to buy and sell. But investors often respond in a predictable way: They wait to see if a recommended trade works in real time. After enough successful trades, they finally start investing. Then, after one or two losing trades, they stop following the signals and let the subscription expire. DIY investors tend to be easily discouraged.

Over time, investors often learn that the best buy and sell signals can come when they are hardest to follow. The market falls and falls, and then the buy signal arrives. At that point, losses may have mounted for weeks, and investors may be down 20%, 30%, or 40%. Now they are being told to invest. It can be very hard to do. The same challenge can happen on the other side. If a sell signal comes when gains are multiplying and it feels like the best of times, will investors sell?

If not DIY investing, then what?

For FPI, the answer is turnkey investment management. With turnkey separately managed accounts, we choose the investments, allocate and reallocate them, and provide the dynamic risk management we are known for.

Since FPI’s founding in 1981, we have provided turnkey separately managed accounts. In the past, those accounts mostly consisted of a single strategy, often involving a single asset class.

As we developed hundreds of these strategies over the years, advisers and investors began asking whether we could also choose the strategies and decide when to invest in them. The result was our turnkey multi-strategy offerings: QFC Multi-Strategy Core, QFC Multi-Strategy Explore, and QFC Multi-Strategy Portfolios.

How turnkey multi-strategy investing addresses the four DIY pitfalls

Turnkey multi-strategy investing changes the investor’s role. Instead of selecting, monitoring, and adjusting strategies on their own, investors and advisers can rely on a defined investment process built to handle those decisions over time.

1. Choosing investments becomes less complicated

Investors don’t have to learn the ins and outs of FPI’s full strategy lineup to decide what may be appropriate in the current market environment. They also do not have to review the statistics on each strategy to gain enough confidence to stay with it for the long run.

This is also an advantage for financial advisers. It gives them a limited number of strategies to become familiar with and a consistent concept to explain to clients: the advantages of multi-strategy investing.

Instead of deciding which strategies to buy, when to buy them, and how much to invest in each one, investors and advisers can rely on FPI’s turnkey process. FPI monitors individual strategy performance, evaluates whether strategies remain effective, and adjusts the lineup as market conditions change.

2. Time constraints become less of a burden

FPI has a team of financial service professionals helping monitor client accounts when investors have pressing personal or business concerns. Investors can even take a vacation, knowing that FPI is there to help oversee the process.

3. Investor emotion has less influence

Our quantitative strategies are drawn from years of research, backtesting, and experience. The rules for buying, holding, and selling are laid out in advance and monitored for improvement. Because the process is defined ahead of time, investors are not left trying to decide what to do in the moment.

4. Trading discipline is built into the process

Our quantitative systems are designed to reduce indecision. Signals are generated by our computers and sent to a trading staff that is separate from the strategy development. The trading team is focused on executing the signals accurately and promptly once the computers generate a buy or sell signal. The trading staff is judged not by the profitability of a trade, but by precision and timing in each trade’s execution.

DIY investing remains susceptible to all of these pitfalls. Turnkey multi-strategy investing is designed to help address them.

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Fintech entrepreneur George Mitra concluded the following:

“DIY investors tend to perceive risk management as avoiding losses. In reality, risk management is about taking chances while mitigating potential negative fallout with safer bets: it’s about maintaining an acceptable level of risk to enable higher returns. Part of this process is also reviewing investments. To not be swayed by personal bias, hindsight bias, or being too attached to them. This helps in identifying losers and pruning them, to make way for the new potential winners.”

Robert R. Johnson, president and CEO of the American College of Financial Services, in Bryn Mawr, Pennsylvania, sums it up like this:

“Basically, when people get sick, they go to a doctor. When people get in a legal tangle, they seek the advice of a lawyer. Yet, somehow, people believe they should be able to navigate the complex financial waters on their own.”

Generally, people can’t. But today, people don’t have to.

Turnkey multi-strategy investing gives investors and advisers a way to put a defined, risk-managed process to work without having to do everything themselves.