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Why DIY Investing Is Risky

U.S. News & World Report - Money logo U.S. News & World Report - Money 10/17/2017 Lou Carlozo
A man thinking hard about a question.: "If anything, investors will be challenged not by a shortage of investing tools and opinions, but by too many." © (Getty Images) "If anything, investors will be challenged not by a shortage of investing tools and opinions, but by too many."

Ever since the first proto-human took a proto-wrench to a proto-pipe and grunted that he could fix the proto-plumbing by himself, a strain of DIY stubbornness has dogged our species, spawning a tribe of misguided folk who try things that they really shouldn't or can't do.

"Most people don't attempt to repair their own car or to diagnose a health ailment, but may have built up a false sense of confidence with their ability to manage their own investments," says Jon Ulin, managing principal of Ulin & Co. Wealth Management, a branch office of LPL Financial in Boca Raton, Florida.

Now it makes sense that if a wealth manager like Ulin spends years studying the art and science of investing, and a career honing the practice of it, anyone with a portfolio could benefit, right?

[See: Avoid These 8 Rookie Investing Mistakes.]

But wait a minute. That smacks of applying common sense to an investment world former Federal Reserve Chairman Alan Greenspan once characterized with the words "irrational exuberance." Or a 1999 dot.com crash that could only be described with a kiddie word: "bubble." Experts talk, yet those who can benefit most from their wisdom refuse to listen. What gives?

Often, that's tough to say – though in many cases, pride goeth before a share price fall.

"People tend to view their investment decisions through their own unique lens, relying on gut feelings and mental shortcuts," says Paul Bennett, managing director of United Capital's office in Great Falls, Virginia, and author of "The Money Navigator." "Many of us don't realize how our money and emotions are bound together. When you put it all together, you get a high tendency to fall into decision traps and miss out on possible gains."

"Self-advisors rarely know when to sell an investment," adds Oliver Lee, owner of The Strategic Planning Group in Lake Orion, Michigan. "Advisors like myself know the rules and use fact-based modules to determine when a stock should be sold. Self-advisors don't have rules or are unable to stick to them."

Actually they often do have a rule, though it's the most pointless of all: market timing. Just about every serious investment expert has dismissed the theory that an investor can profitably buy and sell by predicting future stock movements.

"Don't fool yourself into thinking you can correctly call a market top or bottom, as most of the so-called 'experts' cannot do so themselves," Ulin says. "Market timing involves making two distinct decisions – when to sell and when to buy. Many of us cannot correctly make one of those decisions otherwise both."

Still that doesn't stop many in the DIY crowd from trying, even if billionaires Warren Buffett and Charles Brandes made their respective fortunes by going in the exact opposite direction with a "buy-and-hold" strategy.

To be sure, some people have done it their way and made money. Witness anyone who bought bitcoin in 2013. Back then the cryptocurrency was worth about $100. Today it's at an all-time high of $5,700. Even since this past January – when one bitcoin fetched $1,000 – the price jump has been astronomical.

Then again, DIY investors once had the same enthusiasm for famous flameouts such as Enron and Bear Stearns. Or: buying stocks on margin in 1929. It's a story as old as the Dutch Tulip Mania of 1637, when crazed speculation over the bulbs meant lights out for green and greedy investors.

But that's definitely not to say that DIYers can't feed an independent streak in a responsible way.

"Investors can avail themselves of the most popular publications that served shareholders before the internet age," says Alex Calderone, managing director of the Birmingham, Michigan-based Calderone Advisory Group.

The digital age has also meant an avalanche of great information (and lousy stuff, too, oft pitched via spam or infomercial).

"If anything, investors will be challenged not by a shortage of investing tools and opinions, but by too many," Calderone says. "As a result, every investor soon learns that they'll need to narrow their focus down to those tools and opinions that are compatible with their specific investment interests."

Old school or new, you might want to make a beeline for a timeless classic: "The Intelligent Investor," a 1949 book by Benjamin Graham. They may call Buffett the Oracle of Omaha but for him, Graham is the guru; after reading the book, Buffett studied under the British-born economist at Columbia Business School. Buffett has since praised the writing as "by far the best book about investing ever written" – and Graham as the second most influential person in his life, after his father.

[See: 7 Investment Fees You Might Not Realize You're Paying.]

Right now you can buy used copies of "The Intelligent Investor" for as little as seven bucks. Considering it's made some people piles and piles and piles of money in the 10 digits, that's an even better investment than early bitcoin.

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