The Hidden Cost of “Do-it-Yourself” Investing
Tom Batterman, JD, CTFA
The magazine headline blares, “TOP 10 MUTUAL FUNDS.” The television ad shouts about the new cell phone application or computer program you can use to manage your investments and trading. The common theme here is “You can do this yourself. We can help.”
But aren’t magazine articles really written for the purpose of getting you to buy the magazine rather than to provide you sound investment advice? Is this good information on which you can rely as a basis for making financial decisions? Cool cell phone apps and computer technologies can help you decipher information more quickly. But in addition to having to learn how to work the program, don’t you need to know what information is really important in making good decisions?
Poor decisions equal poor returns
The subject of how and why people make the investment decisions they do is a fascinating area described in our profession as behavioral finance. Since 1992, the DALBAR research organization has been publishing an annual report entitled, “Quantitative Analysis of Investor Behavior.” The report looks at how non-professional investors make investment decisions and what kinds of results they obtain.
Some of the subtitles in the 2011 report hint at its conclusions: “Investor Irrationality on Display”; “Irrational Decisions Lead to Inferior Results”; “Guess Right Ratio.”
The report states: “The gross underperformance of the average investor in 2011 clearly displays what has been the case for over 25 years—irrational decisions lead to inferior returns. This is not just the case on a year-by-year basis, but for intermediate and long-term results as well.” The report goes on to note that over a 20-year period, the average individual investor in stocks underperformed the stock market by over 4% per year!
We have seen many investors balk at paying a reasonable fee to obtain professional, client-centered assistance with their investment decisions. Instead, they opt for the do-it-yourself approach—relying on information that is designed only to get them to read an article, or computer programs and cell phone applications they don’t fully understand—to make their investment decisions. The DALBAR report strongly suggests that investors who try to save the money of hiring a professional incur a much more substantial, but not as readily apparent cost: the significant cost of a portfolio that doesn’t perform as well as it should because investors overestimate their ability or simply make ill-advised decisions based on incorrect, incomplete or inaccurate information.
Learn more about the hidden cost of “do-it-yourself” investing
If you would like to receive a complimentary copy of the full Advisor Edition of the DALBAR report, please contact us. We cannot put it on our website for you, but we would be happy to send it to you upon request. It is a worthwhile read if you are open to re-assessing the hidden cost of do-it-yourself investing, if you do not have the experience or expertise to make proper investment decisions and/or if you do not have the time to pay close enough attention to your investments.