Pitfalls of DIY investing
DIY investing is one of the hottest trends out there. You’ve probably heard about apps focused on micro-investing, robo-investing, and DIY investing such as Robinhood, M1 Finance, Stash, Betterment and Acorns.
Now, if you’re not hip to the lingo, DIY stands for “do it yourself”. You no longer need a middleman to jump into the stock market. You don’t even need a computer. Heck, you don’t even need a bunch of money. All you need is a smartphone and a lot of risk tolerance.
In 2021, anyone and their mom can get in on the stock market for as little as $1 and make trades for free. And with that low barrier to entry comes a whole slew of people wanting to ride the gravy train to wealthy town.
Sounds great, doesn’t it? Well, I’m going to go against Smash Mouth and say all that glitters may not, in fact, be gold.
DIY means Do It Yourself
You see, when you’re doing it yourself, that means just that – you’re doing it all by yourself. All the responsibility is on your shoulders. And the offerings you’re limited to on these apps are usually single stocks, options and cryptocurrency – which are all super volatile, high-risk investments.
I don’t recommend you invest in anything you don’t fully understand – and most DIY investors don’t understand the ins and outs of options trading or the unregulated, virtual Wild West of crypto. And with all the confusion and hype can come some poor investing decisions.
Watch Out for the Pitfalls
Let’s be real. People flock to these investing apps because they seem like a fast track to get rich. They want to become millionaires, and they fall into the trap of believing this is a shortcut to make their financial dreams come true. It’s easy to see why they think this works. However, one of the biggest myths about millionaires is that they take big risks with their money to build their wealth.
In fact, Ramsey Solutions talked to more than 10,000 millionaires, and we found out that exactly zero said that single stocks were one of the top three factors that contributed to their wealth. That’s right. Zero.
Now, more than ever, we have access to so much information. But just because you have access to the information doesn’t necessarily mean you know what to do with it, does it? Here are a handful of pitfalls with DIY investing:
• Not understanding risk and reward
• Not recognising your level of risk tolerance
• Improperly planning for future financial objectives
• Unnecessary trading (too much or too little)
• Having little portfolio diversification
• Panic selling that can derail your long-term plans
• Dealing with market uncertainty
Don’t do it alone
We hire doctors, lawyers and tax professionals to help us with things we know we can’t do ourselves, or things we don’t completely understand. Sure, I can learn pretty much anything on YouTube – but that doesn’t mean I feel comfortable changing the brakes on my wife’s car. I’ve learnt to trust professionals.
Investing can be confusing and intimidating, which is why it’s always good to consult with a financial adviser. One who’s committed to educating and empowering you to make decisions about your financial future and providing you with the investing information you need.
Working with an investment professional can help you grow your portfolio effectively and with your goals in mind. They can help minimise your risk and protect your wealth from wild swings in the market. And that’s a win in my financial book!
• George Kamel is a personal finance expert with a countercultural approach to money. He’s the host of The Fine Print podcast and The EntreLeadership Podcast on the Ramsey Network. Since 2013, George has served at Ramsey Solutions, where his goal is to help people spend less, save more, and avoid consumer traps so they can make the most of their money. Follow George on Twitter, Instagram and Facebook or find out more about him online at ramseysolutions.com/personalities.