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Kevin Greenard: Do-it-yourself investing — 10 common mistakes

Although trading platforms have become easier, and news has become more plentiful, the management of money has never been more challenging.
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Kevin Greenard

The benefit of do-it-yourself investing is reducing the transaction costs for executing trades to a minimal level. There is lots of free financial advice on the web that can assist with making decisions on the investments that you buy, hold, and sell. It is very easy to get information and it is very easy to do transactions through discount brokerage accounts — maybe too easy.

After over 20 years in financial services, one thing that I have learned is that the management of money is not becoming easier. Although trading platforms have become easier, and news has become more plentiful, the management of money has never been more challenging.

1) Types of news they follow

Two decades ago, it was common to review analyst reports and focus primarily on company specific news. Fast forward to today, we have a variety of sources of news to digest. Media reports, social media, special interest groups, lobby groups, all of which may or may not have a bias. Fake news and manipulative trading practices are also present within the cracks. All types of news spread at an alarming rate that did not exist years ago. Deciphering fact from fiction is as important as determining whether the news will have a material impact, or is it just a headline? Is the news immaterial to the overall earnings? Does the story sound awful but really is just a drop in the bucket?

2) Giving into emotional cycles

If you look at the typical upward cycle of the markets it typically begins with hope, relief, optimism, excitement, thrill and then peaks at euphoria. The downward cycle is comprised of anxiety, denial, fear, desperation, panic, capitulation, despondence, and depression. The reason why these cycles have names is that history does repeat itself. Every time, we hear people say “this time is different” – it is not different. People that manage their own money will continue to sell at low points in the market. There are many studies on the psychology of money. When your investments start to go down, your fight or flight instincts kick in. Professional money managers, and the wealthy, will always benefit by purchasing at lower levels. One of the number one reasons to work with a Portfolio Manager or Wealth Advisor is to ensure that you don’t do anything irrational at the wrong time.

3) Trying to time the markets

It is often very humbling when you try to time the stock market. In practice it sounds like a great idea to sell all your investments when you feel they are at higher levels with the plan to repurchase when they go down. What typically happens is that the investments continue to rise and then the do-it-yourself investor will be left scratching their head and wondering what to do now. The outcome is that cash is held for a long time and not even invested. Missing out on some of the best days in the stock market can have a material impact on your long-term returns.

4) Not taking a disciplined approach to rebalancing

When managing your own investments, many do-it-yourself investors do not take their profits when they should. Taking a disciplined approach to rebalancing can force you to buy low and sell high. By having this discipline, you will trim your profits from those companies that have outperformed and allocate the proceeds to companies that have been lagging. While it may feel counter-intuitive, over the long run having a disciplined approach is key.

5) Not taking greater care with their lifesavings

I’ve often talked to people about how many hours it takes to save money and build up the nest egg – it takes a lifetime. It is a mystery to me why people don’t put a greater effort into ensuring that the money they have spent a lifetime earning, is managed with the same, or greater, energy. While you are working hard to earn money, is the money that you have already earned also making you money? If you don’t have the time to adequately manage your savings, then ensuring you have someone that does is important. Over time, the management of your nest egg should become your most important financial objective.

6) Not taking advice from professionals

Working with a financial professional reduces stress in our clients’ lives. As our clients age, their desire to make complex decisions decreases. When markets enter periods of uncertainty, or volatility, it is nice to be able to have an advisor to meet with to discuss modifications to the portfolio, if any. When we work with couples, we encourage both to come into meetings. Together we can set the risk tolerance and investment objectives for each account. We assist in educating our clients on what they can expect with different options. Afterwards we also assist with reviewing the markets against the portfolio. Having a benchmark understanding and tools to compare how you are doing relative to the markets helps when looking at the returns.

7) Lack of Total Wealth Plan

Financial challenges are one of the biggest reasons for disagreements with couples. All too often we hear about couples having fights about money, or simply not talking about it at all – both are obviously not good for a healthy relationship. Having an independent manager that helps create a total wealth plan and budget templates can reduce the financial pressure for couples. We try to initiate money conversations and create a congruent set of goals that couples can prioritize and work towards.

8) Haphazard approach to retirement income

A couple of decades ago, people in retirement could simply set up a ten-year bond ladder. Interest rates were normalized and at significantly higher levels than we see today. Every year, interest income would be credited to the account, and on maturity of any bonds we would set aside a portion of the matured value. The remainder of the funds were used to purchase a ten-year bond. The effort that was put into the management of investments was minimal: some smaller equity trades and a few bond trades a year. Today, many retirees cannot live off the low yields that bonds, and guaranteed investment certificates are currently offering. This is especially the case with inflation rates at 30-year highs. The result is that retirees today will have a significantly greater portion of their investments in dividend paying equities. The greater the portion in equities, the more important it is to have a qualified Portfolio Manager monitoring the markets and ensuring you are getting the cash flow and overall returns desired.

9) No risk management strategy

Often couples are not communicating as well as they can with respect to financial matters. In some situations, investment accounts are at different financial institutions. One person may have an investment professional, and the other is opting for the “do-it-yourself” route. Tracking transactions and managing risk is challenging when investments are spread out at several financial institutions, especially when some are professionally managed, and others are not. Risk is not a bad word; however, we often see do-it-yourself investors taking unnecessary risk without the potential for upside return. We structure portfolios with the goal of managing risk in a way that will enhance overall returns.

10) Complete avoidance of tax-efficient structure

Do-it-yourself investors are often unaware of tax treaties between countries and how that impacts the types of investments that should be held within a Tax-Free Savings Account, Registered Retirement Savings Plan, or non-registered account. One of the first things we do when we begin working with a client that was previously doing their own investing is to ensure the placement of investments is corrected. Care always needs to be taken when looking at those investments that pay dividend income, foreign income, interest income and capital gains. We are often able to switch the location of certain investments between accounts, to enhance the after-tax rate of return.

Kevin Greenard CPA CA FMA CFP CIM is a Portfolio Manager and Director, Wealth Management with The Greenard Group at Scotia Wealth Management in Victoria. His column appears every week at timescolonist.com. Call 250-389-2138, email greenard.group@scotiawealth.com or visit greenardgroup.com/secondopinion.