Do-it-yourself (DIY) investing is very much in the news these days. But only time can tell how long this fad will last. It is an investment approach where the investor chooses and manages his investment portfolio instead of hiring the services of an expert or a financial advisory service.
However, DIY investing in stock market is not as simple as it sounds. There are two prime requirements for it. The first is the availability of time for research, and the second essential requirement is adequate knowledge.
There is no doubt that DIY investing can help an investor save money in the form of subscription fees or charges that you would pay to avail of professional expertise. But there are some drawbacks, which can be hazardous to your financial health.
How is DIY Investing Dangerous?
As they say “Half knowledge can be dangerous.” Just like self-medicating can be dangerous for your health. Let’s take a look an example of the same.
Bhavesh, a software programmer, left early from work one day as he was not feeling well because of a cold and cough. On his way home, he went to a medical store to buy over-the-counter medication. When he told the chemist about his issue, the chemist gave him some tablets.
However, after consuming the tablet, when he woke up the next morning, he felt worse. He felt weaker and had difficulty breathing as well. To make things worse his face swelled. So he visited a doctor who told him that he was allergic to the medication he had taken and the weakness and swelling were side effects. Bhavesh is just one of the many who have suffered the side effects of self-medication.
While the dangers of self-medication are more evident, do-it-yourself (DIY) investing also carries multiple risks for those who aren’t careful.
When the stock market is going up continuously, most DIY investors feel nothing can go wrong. If their stocks are doing well they believe they have a golden touch. They tend to attribute their success to their investing knowledge rather than the overall performance of the broader market. It makes them overconfident.
However, there can be many perils associated with DIY investing. Let’s look at the most common perils listed below:
1) Not diversifying the investment
An ideal portfolio should include a variety of good quality stocks from diverse sectors, bonds, some debt, and other investment instruments. When a DIY investor makes a little profit from the stock markets, he tends to ignore other financial investments and puts all his investing surplus in one basket. In such a situation if the stock market in India crashes the investor may suffer a devastating loss.
Even when you invest in the stock market, the ideal size of your portfolio should be around 15-20 stocks spread across different sectors.
Diversifying can help a stock market investor maximize the returns of the portfolio while minimizing the risk. For instance, even if some stock or sector does not perform, other performing stocks in your stock market investment portfolio can compensate for the losses. Click here to read more about the importance of proper diversification, while Investing in the stock market in India
However, while choosing those 15-20 stocks an investor must exercise extreme caution and conduct detailed research to pick the right opportunities.
2) Not knowing when to exit
Most DIY investors in the stock market are not sure about the exact time when they should exit a stock. If they buy a stock and it falls around 15%, they still prefer to hold it in the hope that it will recover. But, in many cases, the price falls even further. It is very important to exit a stock that has been spiralling down when its value may not increase anytime in the near future.
In contrast, when a stock price goes up continuously it is important to stay invested by doing away with the urge to sell to make a small profit and thereby compromising on larger gains.
3) The temptation to invest in low-priced stocks while DIY Investing in the stock market
DIY investors often make the mistake of assuming that falling prices always present a buying opportunity.
However, it would be best to stay away from companies that have a failing business model. Share prices of Suzlon Energy have seen share prices fall from 243.90 in Sep 2008 to their current level of 6.65. Many investors have lost money as shares of Suzlon have been on a continuous downtrend for many years.
4) Not reviewing your portfolio regularly as a DIY Investor
Investors must keep a track of the company that they are invested in. If a company is not doing well you should exit the stock. But if you still continue to hold stocks of such a company then you will lose your money.
The bottom line
Managing your stock market investment portfolio can be a complex and time-consuming process. DIY investors may miss out on small but important things a professional financial advisory service would not. While DIY investors may save on the fees of a professional financial advisory service what they don’t realize is that the advice that they receive from an expert can pay for itself many times over in the form of excellent returns and a stable investment portfolio.
Expert advice can ensure peace of mind. Click here to avail expert advice now.