On the surface, some Wall Street insiders view do-it-yourself investors with emotions ranging from pity to downright scorn.
Sure, a good chunk of that outlook is all about self-preservation. After all, if Main Street investors earn superior portfolio returns on their own, who needs a financial advisor skimming 1.5 percent of cream off the top?
Doubtful? Don’t be. The emergence of robo advisors and low-fee exchange-traded funds have attracted millions of investors over the past decade, drawn to both investment models by solid returns and low costs.
Even so, that’s not stopping the financial services industry from throwing some serious shade at do-it-yourself investors.
Take Dalbar’s ongoing Quantitative Analysis of Investor Behavior study, a regular report that the investment data firm has been rolling out since 1994. The 2017 version, just like the previous 22 studies, once again found that the average investor “did not realize returns that were on par with general market indices.”
[See: 9 Things to Know About Robo Advisors.]
“For the 12 months ended Dec. 30, 2016, the [Standard & Poor’s 500 index] produced an impressive annual return of 11.96 percent, while the average equity mutual fund investor earned only 7.26 percent, a gap of 4.7 percentage points,” the authors state in the report. That’s pretty much been the theme of all the Dalbar QAIB studies — investors who go it alone can count on investment underperformance.
But is that really the case? There are plenty of DIY investors and finance industry professionals who believe that, with good investment habits and a disciplined investment model, DIY investors can outperform the market and can do as well — or better — than investors who pay high fees for professional investment advice.
“I’m an actual do-it-yourself investor,” says Markus Horner, an investor based in Sachse, Texas. “I can’t speak on how people like Warren Buffett, Charles Munger and Peter Lynch run their investing operations, although I know they have top-notch advisors that help them. I am a one-man band operation that has to do it all on my own behalf.
“But I must be doing something right, because I am still going after many years,” he says.
What are investors like Horner doing right that other lone wolves are not? Start with these six good money management habits, and go from there.
They place a priority on common sense. Common sense is absolutely mandatory because of the need read all of the different indicators, both technical and fundamental, Horner says. “You have to be able to learn what they are trying to tell you,” he says. Technical indicators are more important for short-term investors, he says, while fundamental indicators are more critical for long-term, buy-and-hold) investors. “Common sense is absolutely necessary to be able to determine if a stock is a rolling stock or a trending stock. Each is different and each requires different types of indicators,” Horner says.
[See: 9 ETFs That Go Up When the Market Goes Down.]
They have stated principles, and live by them. The best Main Street investors have common core principles, says Adam Ritt, director of communications at the National Association of Investors Corporation’s Better Investing, a non-profit that teaches investors and groups how to become better investors. “At Better Investing, we believe in investing in quality growth stocks, reinvest earnings and dividends, investing regularly no matter what the market is doing, and diversify your investments,” he says. “The most successful investors also use a consistent process for evaluating stocks and stick to that process through both up and down markets, and always invest for the long term. I can’t recall seeing a day trader on the list of the world’s wealthiest people.”
They have mentors. Unless you came out the womb with a copy of the “Intelligent Investor” in your hand, you probably need someone to teach you the ropes, says Ryan Miyamoto, managing director at Derive Wealth, a fee-only financial planning firm in Pasadena, California. “Find someone who can help you research as much as you can about investing, find a style that resonates with you, and help you commit to it,” Miyamoto says.
They hold cash. Do-it-yourself investors usually always have a buffer of cash, Miyamoto says. “That’s not only for downside protection, but also for opportunities that arise,” he says. “Financial advisors don’t advise holding cash and they make money when you invest. But good do-it-yourself investors know they’ll only see a few good opportunities arise each year and stay prepared to capitalize.”
They play “small ball.” Good Main Street investors accumulate assets over the long-term with small, incremental buys, says Karl Kaufman, founder and chief executive officer of American Dream Investing, in Boca Raton, Florida. “To use a baseball analogy, instead of swinging for home runs, we do-it-yourself investors consistently keep hitting singles,” he says. “Since the stock market is so unpredictable, we buy and sell a little at a time and look for long-term opportunities. This way, we have a better chance of getting a good price for our trade.”
They don’t take it personally. “You’ve got to keep emotion out of it, never fall in love with a stock and reserve the right to adapt your position based on changing market conditions,” Kaufman says. “The reasons you once had to invest in a stock may erode over time, or breaking news about a competitor breaching a company’s moat need to be taken into account. You have to be able to react to macro and micro conditions and change your strategy at a moment’s notice.”
[See: 13 Ways to Take the Emotions Out of Investing.]
All of the above characteristics, and a good dose of what Kaufman calls independent thinking, can turn an average, or even failing, do-it-yourself investor into a successful one — no matter what a scornful Wall Street insider says.
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6 Good Habits of Successful ‘Do-It-Yourself’ Investors originally appeared on usnews.com
