The internet has expanded the field of investing and financial planning, giving everyone unprecedented access to financial tools, information and resources. While many found this change empowering, its pitfalls are also significant.
According to the Federal Reserve, increased direct ownership of stocks broke records between 2019 and 2022, from 15% of families to 21%. However, the median stock holdings also fell by more than half in this period, suggesting smaller portfolios for the newcomers.
Novices may be losing money due to inefficiencies and lack of knowledge. A survey revealed that 51% of new investors don’t understand how investment fees work and 41% have not considered the tax efficiency of their strategy. At Tencap, we review people’s portfolios all the time, we certainly have seen a pattern of examining “do it yourself” strategies; I can tell you I haven’t been impressed with any one.
Some also fixate solely on investments without paying attention to other aspects of healthy finances, like retirement, insurance, and estate planning. After all, less than a third of Gen Z have retirement accounts. Those that do, we can almost always find ways to optimize their planning! That is to say that yes, funding your retirement accounts is great. Funding the proper retirement accounts is even better!
This article from Tencap exposes the frequent mistakes in DIY financial planning to help you and others better handle your finances. As this article is geared toward self-taught money managers, here’s a handy list of financial planning terms you can reference!
The Common Pitfalls of DIY Financial Planning
While DIY financial planning might seem appealing and cost-effective, it can lead to significant long-term consequences if not appropriately managed. You can fall into numerous pitfalls when you attempt to do it alone.
1. Making inefficient investment decisions
In DIY financial planning, it’s easy to find general strategies from online sources that don’t consider your unique financial situation. For instance, high-net-worth individuals (HNWIs) might follow advice made for a one-size-fits-all audience, resulting in suboptimal investment decisions.
Using generic advice instead of tailored HNWI financial planning might misalign your investments with your risk tolerance or long-term goals.
2. Letting emotions play a role in decision-making
Emotional decision-making is a common issue. Market volatility can trigger fear and subsequent impulsive actions like selling off investments during a downturn or buying hype-driven stocks.
Often, losing emotional control results in buying high and selling low—a strategy that can hurt long-term growth. For example, you might sell a substantial portion of your portfolio out of fear during a market correction. As a result, you could miss out on potential rebounds and long-term gains.
3. Focusing too much on the short-term
Many DIY planners focus excessively on short-term gains while neglecting long-term planning. This tunnel vision can cause you to ignore crucial areas like retirement and estate planning. In the absence of a structured plan, you might prioritize high-yield investments without considering their sustainability or how they fit into your financial strategy.
For instance, while aggressively investing and reinvesting in high-risk stocks might seem lucrative now, it might not provide the stable returns needed for a comfortable retirement.
4. Not taking tax implications into account
The impact of taxes is one of the biggest drains on your wealth, but it doesn’t have to be. Many new investors fail to understand how investment taxes work, potentially leading to higher tax liabilities.
For example, selling assets without considering capital gains tax can lead to a significant loss on your investment returns, reducing overall profitability. Additionally, failing to effectively utilize tax-advantaged accounts, such as a health savings account, can leave you with a larger tax burden than necessary.
Furthermore, there are many additional decisions that may be prudent for your portfolio that people managing their own money often miss, like loss or gain harvesting, QCD’s or in-kind 501(c)(3) donations.
There are dozens of tax strategies that we deploy for our client on the offense side as well. This means that there are dozens of strategies that we can ethically lean on to reduce your tax liability!
5. Managing risks inadequately
Risk management is one of the most critical components of financial planning. Without professional guidance, you might not fully understand the risks associated with different asset classes or how to adequately mitigate them.
This knowledge gap can lead to overexposure to high-risk investments or insufficient protection against market downturns. For instance, failing to diversify your portfolio or establish an emergency fund can leave you vulnerable to shocks.
6. Ignoring portfolio diversification and rebalancing
A well-diversified portfolio spreads risk across multiple asset classes, industries, and geographical regions. By contrast, DIY investors may put all their eggs in one basket or expect their strategy to be a one-and-done solution, resulting in concentrated risk.
Then again, even a diverse portfolio can become overly weighted in certain areas without periodic rebalancing. This imbalance can cause misalignment with your risk tolerance and investment goals.
For example, a portfolio that heavily skews toward tech stocks without rebalancing faces a significant impact during a sector downturn.
7. Creating a DIY Will (Estate Plan)
Estate planning is one of the most complex and often overlooked areas of personal finance, but choosing the DIY route can lead to unintended consequences. A poorly constructed will could lead to family disputes or assets being distributed in ways you didn’t intend.
For instance, failing to update your will to reflect changes in your estate or family situation can result in outdated or incomplete instructions.
Ultimately, crafting a will without professional help might result in legal challenges, overlooked assets, or unclear instructions for your heirs.
Additionally, Tencap ensures that each client has a medical directive and a financial POA.
The Cost vs. Benefit Analysis of Hiring a Certified Financial Planner®
A Certified Financial Planner® (CFP) crafts a comprehensive plan for your unique financial situation and goals. CFPs bring expertise in investment strategies, tax planning, retirement, and estate planning, ensuring a big-picture approach that DIY methods often lack. In fact, many people feel more comfortable managing their money with the help of a professional
Although the cost can be a frequent deterrent for many, financial advisory services are well worth the fee. Professional guidance can prevent costly mistakes, optimize investments, and provide peace of mind.
Penny Wise, Pound Foolproof
DIY financial planning makes investing more accessible to people in any financial situation. However, it can’t replace professional financial services because of the many pitfalls it presents.
Experts at Tencap Wealth Coaching help avoid these potential mistakes through comprehensive and tailored plans, especially for high-net-worth individuals. Each advice and recommended strategy is based on years of knowledge, training, and practice. At Tencap we are very proud of the reputation we have earned as fiduciaries. Knowing that your financial advisor has a legal obligation to lead with your best interest, feels pretty important! Learn more about our services on our website!
The information contained herein should in no way be construed or interpreted as a solicitation to sell or offer to sell advisory services to any residents of any State other than the State of Utah or where otherwise legally permitted. All content is for information purposes only. It is not intended to provide any tax or legal advice or provide the basis for any financial decisions. Nor is it intended to be a projection of current or future performance or indication of future results. Moreover, this material has been derived from sources believed to be reliable but is not guaranteed as to accuracy and completeness and does not purport to be a complete analysis of the materials discussed. Purchases are subject to suitability. This requires a review of an investor’s objective, risk tolerance, and time horizons. Investing always involves risk and possible loss of capital.
Greg Black, CFP®, ChFC®
Greg Black is the owner and founder of Tencap Wealth Coaching, an independent investment advisory firm founded on academic investing principles. As a Certified Financial Planner, Greg takes an educational approach to helping his clients be settled and responsible with their financial circumstances. Greg specializes in helping his clients create a proactive plan to minimize the exposure of market conditions while still harnessing the incredible power of global financial markets.
Greg specializes in "complexity" and is skilled at turning a complicated situation into an organized strategy for the families he serves. Greg, and each advisor of Tencap, is a stated fiduciary. You never have to wonder if your best interest is being served. Greg has been transforming the investor experience since 2012.
