Wednesday, March 11, 2009

What Does DIY Investing Mean?

Do-it-yourself (DIY) investing means different things to different people. When experts list potential pitfalls of the DIY approach, the message can be misleading depending on what DIY investing means to the reader.

An investor who investigates companies and chooses individual stocks to buy is clearly a DIYer. Larry MacDonald’s article on the pitfalls of DIY investing offers good advice for someone who is considering this route to investing.

At the other extreme we have someone who hands control of his portfolio to an investment advisor who gets paid a substantial portion of the portfolio each year. This type of investor is clearly not a DIYer.

A gray area is the index investor (for example, someone who invests along with the Canadian Capitalist in a Sleepy Portfolio). In one sense, index investors are DIYers because they aren’t paying for investment advice. On the other hand, they don’t choose their own individual stocks and bonds, which makes them seem less like DIYers.

For the index investor who doesn’t engage in market timing, the standard list of DIY investing pitfalls doesn’t apply. Beyond an initial decision of which indexes to buy and in what proportions, index investing takes very little time, there is no need for immersion in financial minutia, and there is no reason to stay on top of the latest business news.

The main pitfall of index investing is getting off track. Investors can be scared off track by large drops in stock prices or frightening financial media reports predicting doom. They can also get off track by becoming overly confident in their abilities and choosing to take some chances based on hunches.

1 comment:

  1. Thanks for the link Michael. A further pitfall for active DIY investors is that all that effort in investigating companies and individual securities may not pay off in the end. So, they should at least ensure that their results are no worse that can be had by being passive.

    ReplyDelete