The Benefits And Limitations Of DIY Investing

Every investor has a choice. Either go it alone, or hire outside help.

Both of these paths have merit but there are pros and cons to consider. If you’re on the wrong path, it could be costing you a bundle.

The Self-Directed (DIY) Path

There are many kinds of DIY investors operating in the market today. By definition they are retail, or amateur investors. They have day jobs and invest in their spare time. Professional investors do it full-time as their primary source of income.

There are volumes of books, academic studies, and white papers that correctly point out that most professional investors underperform the market. I’ll leave that discussion for another day. There is also a mountain of evidence that most DIY investors perform even worse than the professionals. And that’s what I want to address today.

If you are a DIY investor, ask yourself this – do you have an edge? And if you do, what is it? Are you smarter than other investors? Do you have better research or more sophisticated technology? Better instincts? If you don’t have a good answer, you’re probably leaving money on the table. In fact, you might just be the sucker at the table.

The Skilled DIY Investor

I’ve come across some very skilled amateur investors over the years, and you might be one of them. They tend to share some common characteristics, like open-mindedness, intense curiosity, keen self-awareness, highly developed organizational skills, and a willingness to seek out opposing views regarding their investment ideas. These characteristics can be inherited, but most often they’re learned by impartial observation and hard work.

The Unskilled DIY Investor

I’ve come across considerably more unskilled amateur investors. They tend to fall into two different camps – those who are unskilled and know they are unskilled, and those who are unskilled but think they’re skilled. You can probably guess which of these camps outperforms the other.

Unskilled investors tend to share characteristics like hubris, stubbornness, and impatience which prevent them from acknowledging their mistakes. As a result, they tend to repeat the same mistakes again and again rather than learning from them.

The Outside Help Path

There are some things I prefer to do for myself. I don’t cut my own hair or clean my own teeth, for example. I know my limitations. These are tasks that I leave to professionals.

When it comes to investing, I recognize that I can’t be an expert in every aspect of the market, so I focus on what I know well and hire advisors for the rest. Skilled advisors will pay for themselves many times over. I have a defined process for vetting outside advisors, and when I find a good one I don’t hesitate to pay for their valuable counsel.

The Skilled Advisor

A skilled advisor must have a few things before I am willing to hire them. Experience is one. I look for those who have managed money professionally for at least 10 years.

A demonstrated track record is another requirement. I look for those who have published their work so I can audit their track record myself. Alternatively, there are websites that track performance, like TipRanks and Seeking Alpha for example.

The Unskilled Advisor

Advisors who lack front-line experience and only get attention by clever marketing and superior writing skill don’t interest me. I don’t care how clever you are – I only care if you walk your talk.

The Benefits of Using Outside Help

The most obvious benefit of using outside advisors is saving precious time. I don’t like reinventing wheels when I can simply pay someone to use the one they have already created. But they have to be able to demonstrate how their wheel works, and how well it has performed in real time as opposed to backtesting.

The other key benefit is return-on-investment. When I pay someone for advice, I want to earn a return on my investment in their expertise. As a rule of thumb, if I can’t earn back my cash investment after the first year, I’m not interested. The best advice is the kind where I can earn multiples of my investment each year, year after year. These folks are out there if you know where to look.

The Limitations of Using Outside Help

I don’t hire outside advisors for everything. I’m very selective about which areas of investing, and which advisors who serve these areas will give me the best return on the fees I pay.

One of the biggest limitations of hiring an outside advisor is the possibility that their approach or investment process may go out of favor just as I am getting on board. This can happen to even the best advisors with stellar records. It’s Why every sales pitch comes with the disclaimer “past performance is no guarantee of future results.”

The best way to minimize this risk is to fully vet the advisor to find out what they have done in the past when their process stops working. If a prospective advisor tells you that this has never happened, politely thank them for their time and move on to the next candidate.

How to Decide What’s Best for You

The primary indicator of whether or not you should hire outside help is your time budget. Some investors enjoy the game so much that they are willing to spend nights, weekends, and vacations reading annual reports and studying stock charts. But most investors don’t want to spend more than what’s absolutely necessary when it comes to their free time.

The most savvy investors will surround themselves with experts they know, like, and trust. They know what they know, and they farm out the rest. They don’t waste time doing research that others have already done and can deliver to them in a nice, neat format.

When something stops working, they talk it over with the advisor and make a determination as to whether or not to continue the relationship. A good advisor will not make excuses, but instead talk about what they are doing to tweak their process and get back on track.

In the final analysis, it all comes down to your willingness to outsource the things you’re not good at, and focus on managing the experts you hire to do these tasks.

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Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.