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July 13, 2017

4 Avoidable DIY Investment Traps

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When investors do it all themselves, they tend to make these mistakes.

By Gregory S. Ostrowski, Managing Partner, CERTIFIED FINANCIAL PLANNER®, CRPC®,  Scarborough Capital Management  / Previously appeared on US News & World Report and has been updated for clarity

Repairing your investment plan and repairing a leaky faucet are not both DIY projects.

You have a leaky faucet. You’ve never repaired a leaky faucet before, so you go to YouTube and figure out how it’s done. Half an hour later, your faucet is back to normal. Easy.

But what do you do when you have a toothache? You go to the dentist. Why? Because working on your molar is much different than a repair to your sink. It’s more complex and there’s a much smaller margin of error (not to mention how painful it will be if you get it wrong). This is why we don’t see much of a market for do-it-yourself dentistry.

But where does managing your money fit in? Although mistakes made in DIY investing may not necessarily send you to the emergency room, they can have some very real and lasting negative effects.

Some typical DIY investing mistakes. Many young investors think that paying for a financial advisor or planner is a waste. They think, “How hard could this be?” Maybe they’ve even picked a stock or two that’s done well in the past and believe investing is as easy as that. In actuality, there’s more to it than what’s on the surface. Here are four traps some investors fall into if they try to go it alone.

  1. Chasing fads or the “hot stock.” The example of the dot-com bubble is a classic that comes to mind when talking about how seeking out short-term profits may not be the best way to go. According to a The Wall Street Journal article, “The Trouble With Hot Stocks,” not all hot stocks are created equal. Here’s how they define a hot stock: “Consider the 20 companies that have seen the greatest number of their shares change hands this year on an average day, as a percentage of their total shares outstanding—one way of measuring what’s ‘hot.’”

They went on to say that out of those 20, although a few have been very successful, 14 of them lost money this year. Even if you know ahead of time which stock is hot, it may not guarantee you’ll make money from it.

  1. Not looking at the long term. We know that a consistent approach is the best way to manage wealth over the long term, and even the best investors can sometimes make this mistake. Warren Buffett, perhaps the greatest investor of our time, once admitted to maybe his biggest mistake, which was not buying shares of Walmart, due to a slight increase in the price. Instead of looking at what the investment could grow to in the long term, he was stuck on the short-term goal of not buying it at a price that, he thought, was just a little too high.

That mistake, he estimated, cost him about $10 billion.

  1. Not understanding how taxes and fees can impact your investments. DIY investing can seem great because you’re saving from not having to pay a financial planner or tax professional, but do you know what tax changes are coming in 2018?

According the Tax Foundation, a self-described “non-partisan research think tank, based in Washington, DC,” comprehensive federal tax code reform has been offered by House Republicans and President Trump, just to name the leading proposals. If you’re not aware of all of these changes, chances are you won’t be able to modify your investment plan around them.

  1. Basing your decisions on fear and greed. It can be easy to run for cover when the market starts to dip, or start putting more into a stock that’s on its way up. But history says investing more or less based solely on if an investment is doing well or not isn’t the best way to go. Look no further than the housing market decline of five or so years ago. Those who went “all in” because it was a “can’t miss” investment paid the price. Their greed in trying to chase extra dollars cost them in the long run. And these are just some examples of what can go wrong.

What to do next. As you can see, there’s a lot to consider when you get serious about investing. Taking the time to have a conversation with a financial planner or advisor and setting up a long-term approach can sometimes be the difference between investing success and failure.

So although it certainly can be done, DIY projects should be limited to those kitchen repairs. Let the financial advisors and dentists give you a hand with the rest.

Securities offered through SII Investments, Inc. (SII), Member FINRA, SIPC. Advisory Services offered through Scarborough Capital Management (SCM), a Registered Investment Adviser. SII & SCM are separate companies. Please consult with your representative to confirm on which company’s behalf services are being provided.  Neither SII nor SCM provide tax or legal advice.

Opinions, estimates, forecasts and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. This material is for information purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Past performance does not guarantee future results.

Article updated as of April 2017.

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