10 Potential Pitfalls to Avoid

Do-it-yourself investing is on the rise. Canadians opened 2.3 million self-directed accounts in 2020 – nearly tripling the 846,000 accounts opened in 2019.

Marching in lockstep with that news, complaints from do-it-yourself investors to the Investment Industry Regulatory Organization of Canada (IIROC) Complaints & Inquiries team nearly quadrupled between March 2020 and January 2021 compared to the same period in 2019.

Enthusiasm for a new way of doing things, resulting in disappointment when those things don’t work out as planned is a fact of everyday life.

In that respect, do-it-yourself investing is a lot like everyday life.

Research proves that investors who receive professional advice accumulate almost four times more assets after 15 years than investors without advisors. Successful do-it-yourself investing is harder than it appears. And, done even with average competency, it can be time-consuming and risky.

Most people reading this blog – whether young, old or somewhere in between – understand the following in principle. But in practice? Not nearly as much as makes sound financial sense.

10 Potential Pitfalls the Do-It-Yourself Investor Needs to Avoid

1. Not Devoting Enough Time to the Process

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 will likely underperform.

2. Not Knowing Enough About the Fundamentals

Investors who don’t fully understand the fundamentals of investing – such as the diversification of assets, the principles of portfolio rebalancing, understanding the tax implications of an investment decision, and minimizing (for example) mutual fund fees – are prone to making expensive mistakes.

3. Not Knowing Enough About How Individual Investments Work

A dizzying array of investments exists out there, each with different benefits, risks and features.

Navigating your way through those options and choices is the equivalent of traversing a minefield. 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 Knowing Enough About Themselves

All investing is personal. Risk tolerance is a crucial factor in investing, especially when markets are volatile – as they are now. Many aspects of an investor’s personal situation should factor into investment decisions – family obligations in particular. A holistic approach to investing works best, and for that you need an outside perspective.

5. Not Knowing When to Say No

One of the biggest pitfalls in investing involves borrowing to invest – especially if you don’t fully understand 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.

6. Not Knowing How to Read the Fine Print

Details matter in investing – ranging from currency conversion rules associated with foreign-denominated securities to legal terms and conditions. Mutual fund investing is riddled with complexity regarding fees, some of which are buried beneath legalese. That’s a trap a professional advisor can help you avoid.

7. Not Knowing How to Keep Your Confidence in Check

Overconfidence is bad enough in everyday life. But in investing, it can be fatal. Overconfidence in their knowledge, skills and ability to predict or even control market outcomes can cause the do-it-yourself investor to ignore risks and trade more frequently – both of which can erode the value of an account. Rapid trading is something many males fall prey to – it’s an expensive mistake.

8. Not Recognizing That What Happened Yesterday Might Not Happen Today

Past performance is no guarantee of future success. Variations of that expression are stated on every investment prospectus. However, you’d be surprised by how many do-it-yourself investors suffer from short memories. Failing to plan for different market scenarios can leave a portfolio vulnerable to sudden downturns.

9. Not Understanding That the Golden Rule of Investing Is to Avoid Losses

Warren Buffet’s two principles of investing are 1) don’t lose money, and 2) don’t forget principle #1. Smart.

10. Not Grasping How Unsympathetic Do-It-Yourself Brokerages Are

Brokerages that facilitate do-it-yourself investing are known as “order execution only” firms, and that means the company generally can’t or won’t help you should you run into trouble because you made a mistake. Going it alone means no personalized recommendations and no reviews for investment suitability.

Our Advice Is to Get Advice

Everyone can benefit from expert advice. You wouldn’t take up a sport for instance, with ambitions to play a technically correct game without soliciting the advice of a professional coach, would you?

Well the same goes for most people when it comes to investing. Working with an advisor gives you access to professional guidance tailored to your specific circumstances.

And the good news is that our credit union partners at Coastal Community Credit Union, Coastal Community Private Wealth Group and Interior Savings offer that technical expertise in abundance.

Do-it-yourself can work well when you’re taking care of minor home repairs – but working with a financial advisor can be a much better, saner way to approach a high-stakes process such as investing in your future.