DIYing has grown in popularity over the years. And, why not? There’s a high level of satisfaction to building, fixing, and installing projects on your own (and subsequently showing off the completed project on social media, of course). Not only does it save money, it creates pride and accomplishment.
However, when it comes to managing your financial life, the road to satisfaction and success might be more dangerous. When you handle your personal finances, there is no universal instruction manual from the manufacturer, and the journey to your desired outcome has far higher risks. The downside of botching the creation of a piece of furniture or shelf is significantly less than finding that you missed something important or worse yet, something critical—like collecting Social Security, properly accounting for health care costs, or proper estate planning and elder care planning.
Let’s begin with some basic assumptions. DIYer’s are bound by the same biases as non-DIYer’s—and those biases can easily lead you down the wrong path of decision-making. DIYer’s rely on their intellect and experience to make decisions. DIYer’s are confident that their capabilities are up to the task; these attributes are not necessarily bad, but they can be potentially devastating when it comes to personal finance.
Over the years, I have seen many DIYer’s decide to do one of two things: 1) Test their abilities with an objective review or, 2) As they near retirement or other big transitions, decide that their swagger has lost some of its, well, swagger, and want to divest themselves of the pressure of making the right decisions.
Here are some of the most common mistakes made by DIYer’s:
- Overweighting equity positions in U.S. Stocks. U.S. stocks are where the performance has been of late and they are where the comfort zone currently exists. That being said, U.S. stocks represent approximately one-third of equity opportunities globally. If you’re sitting predominantly in U.S. holdings, your portfolio is most likely going to take a big hit when corrections happen.
- Looking for yield in long bonds. It’s no secret that rates of longer-term bonds are better than short-term instruments (of the equivalent quality). But on a risk-adjusted basis, long bonds are volatile and offer nothing but inevitable heartache as interest rates rise and bond values drop like rocks.
- Ignoring risk. Our feelings about risk is a moving target; when markets are soaring, we are impervious, when markets tank, any further shaking produces the desire to stuff our mattresses with dollar bills as a ‘safe’ haven. Unfortunately, we rarely look at risk for what is it when we are not in the throes of change.
- Relying on Newsletters, Magazines or other subscription services for making investment decisions. While the information gleaned sounds right and resonates down to the marrow of our souls, you must know that the creators of these publications and services make money from your subscription. The information is not always in your best interest.
- Mutual fund star followers. Yes, I know, it makes you feel good to see 4 Stars next to your mutual funds. But remember, just because it’s 4 Stars today, doesn’t mean it can’t be 1 Star tomorrow.
- Overlap disaster. If you stack up the holdings of all your funds, you might be surprised to find out that you own Microsoft, Apple, Exxon, etc., 10 times. While mutual funds are created to offer diversification, it doesn’t work out as intended when each fund owns the same companies. You are now the proud owner of an inefficient, expensive, tax disaster with more risk than you bargained for.
In order to avoid or fix some of these common mistakes, it helps to acknowledge that your biases, comfort zone, and acumen might not be your best allies in your quest for DIY financial nirvana. While you might be able to read a diagram designed to help you fix, build, or create something wonderful, there are no blueprints for objectively navigating your way through the financial jungle without help. You might love it, you might even be good at it, but at the end of the day, you cannot be objective. Therein, lies the greatest challenge and one not easily mitigated.
The reality is, your greatest asset, your intellect, may just be your biggest enemy in reaching your intended objective. Go build a swing set, repair a toilet, or tune up your motorcycle. You won’t have to bump up against your hard-wired biases.