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The Dangers of Doing It Yourself
Founder and President, Armstrong Advisory Group
Many investors have made it a point to manage their own investment portfolios. In the financial services industry, we call these people do-it-yourself (DIY) investors. It is true that there are DIY investors who are mostly successful in their efforts to self-manage their money. I can sympathize with people who like the idea of not having to pay management fees or deal with a financial advisor. However, there are many downsides to self-managing your accounts. If you consider yourself a DIY investor or are thinking of becoming one, it is smart to take a look at a few of the dangers of doing it yourself.
A Lack of In-Depth Knowledge and Resources
The first danger that comes to mind is the reality that financial laymen do not have direct access to the information that investment professionals have in their toolkit. Many advisory firms have in-house financial analysts who possess the expertise necessary to guide their organizations as they pick and choose stocks to place into their clients’ portfolios. Although a DIY investor is able to watch the news and keep track of the markets, they are less likely to have the resources required to make the most educated decisions possible. Think of it this way: if you have strep throat, you can visit a website like WebMD.com and teach yourself about your symptoms. However, the only way you are going to actually treat your ailment is by visiting a doctor and obtaining a prescription for an antibiotic. The same principle applies to investing.
Another danger that befalls many DIY investors is their potential insensitivity to the tax component of their investment strategy. Net unrealized appreciation and short- and long-term capital gains are good examples of often overlooked factors missed by DIY investors who invest their money without considering the consequences from a tax perspective. Additionally, many DIY investors may be unaware about the potential tax benefits of transactions such as Roth conversions. If you self-manage your money or hope to become a DIY investor someday, I highly recommend that you sit down with a professional investment advisor who understands the importance of tax-sensitive investing and discuss these potential pitfalls and missed opportunities. A simple consultation may save you a lot of money in the future.
Unproductive Emotional Attachment
The third danger to consider is the impact of emotional attachment between a DIY investor and their portfolio. If someone is managing their own money and changes in the market take place, they may overreact and make investment decisions without a thorough understanding of the market trends at play. However, if someone has hired an investment professional to manage their accounts, the financial advisor has a mandate to remain emotionally detached and make suitable recommendations. Remember that advisory firms typically have access to the expertise of financial analysts who guide the decision-making process.
Inadequate Succession Planning
The failure to develop an adequate succession plan is the clearest and most present danger for any DIY investor. If you are a DIY investor and neglect to establish a plan with your spouse before you pass away, your husband or wife may struggle with the overwhelming responsibilities associated with a self-managed portfolio, especially if they do not possess your same level of financial understanding. I urge you and your spouse to sit down together with an investment advisor to develop a plan and allow your loved one to develop a sense of trust with the advisor while you are still around. Taking the time to chart a course with a financial professional may save your spouse from unnecessary stress once you are unable to maintain control of the helm.
Over the course of more than 30 years in the financial services industry, I have interacted with many DIY investors who have simply grown tired of having to keep constant track of their portfolios and would like to sit back and let an investment professional take control of the wheel. Although there are some people who dislike the thought of paying a fee for an advisor to manage their accounts, consider the fact that peace of mind is truly priceless. If you self-manage your money and have questions about your current strategy or would find value in obtaining a second opinion, call (800) 393-4001 and ask to meet with a member of my advisory team. What do you have to lose?
Barry Armstrong has over 30 years of experience in the financial industry. He founded the Armstrong Advisory Group in 2004 and has been sharing his financial knowledge with New Englanders on a daily basis during his Boston-based radio broadcast for nearly 20 years. Learn more about Barry and the Armstrong Advisory Group at www.armstrongadvisory.com. Securities offered through Securities America, Inc. Member FINRA/SIPC and Advisory Services offered through Securities America Advisors. Barry Armstrong, Representative. Representatives of Securities America do not offer tax advice. Always seek the assistance of a tax professional familiar with the laws in your state. Armstrong Advisory Group and Securities America are unaffiliated. February 2017