Do-it-yourself (DIY) investing is very much in 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 in investing is not as simple as it sounds. There are two prime requirements for it. The first one is availability of time for research and second and the most important requirement is adequate knowledge.
There is no doubt that DIY in investing can help an investor to save money in the form of subscription fees or charges which one would have to pay on availing professional expertise. But there are some drawbacks too which can be hazardous to one’s financial health.
It is said that “Half knowledge can be dangerous.” Just like self-medication which can be dangerous for one’s physical 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 cold and cough. On his way home, he went to a medical store to buy some medication for cold. When he informed the chemist about the problem he was facing, the chemist gave him some tablets.
However, after consuming the tablet, when he woke up the next morning, he felt worse. He was feeling weaker and had great difficulty in breathing as well. To make things worse his face was swollen. So he visited a doctor who told him that he was allergic to the medicine which he had taken and it was causing this side effect.
Bhavesh is just one of the many people 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 get this illusion that they have a golden touch. They tend to attribute their success to their investing knowledge rather than the overall performance of the broader market. This gives them a false sense of over confidence.
However there can be many perils associated with DIY investing. Let's look at the most common perils listed below:
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 some profit from stock markets, he tends to ignore other financial investments and puts all his investments in one basket. In such a situation if the stock market in India crashes the investor may suffer a devastating loss.
Even when it comes to stock market investment, the ideal size of a portfolio should be around 15-20 stocks spread across different sectors.
This can help a stock market investor to maximize the returns of portfolio while minimizing the risk as even if some stock or sector does not perform, the performing stocks in one's 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 has to exercise extreme caution and conduct detailed research to pick the right opportunities.
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 which is in a continuous downtrend and its value is unlikely to increase anytime in the near future.
On the contrast, when a stock price is going 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.
Temptation to invest in low priced stocks
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, has seen its share price fall from 243.90 in Sep 2008 to its current level of 5.35. Many investors have lost money because shares of Suzlon was on a continuous downtrend for many years.
Not reviewing your portfolio regularly
Investors need to keep regular track of the company that they are invested in. If company is not doing well you should exit the stock. But if you still continue to hold stocks of such a company then you lose your money.
The bottom line
Managing your stock market investment portfolio can be a complex and time consuming process. A DIY investor may miss out on small but important things which a professional financial advisory service would not. While DIY investors may save on 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 thus ensure peace of mind. Click here to avail expert advice now.