In today’s digital age, DIY investing has grown immensely.  The promise of high returns with minimal intervention and cost is tempting to everyday punters, especially with the rise of online platforms (such as Robinhood in the US, Sharesies closer to home) and accessibility to crypto currencies. 

However, as some New Zealand investors are now finding… DIY investing carries significant risks that can lead to substantial financial setbacks.

In theory you have control of the wheel while charting your financial course.  But it’s less like following a map and more like the sailors of old who swore there were beautiful sea maidens on rocky outcrops – only for those who came by later to find out the mermaids were manatees, and they had risked danger for naught.

The Illusion of Control

DIY investing seems empowering at first.  With a smartphone, access to a myriad of online trading platforms and a huge array of temping investments, anyone can dive into the (often deceptively calm) waters of financial markets.

This perceived control, however, creates a false sense of security that can leave intrepid DIY-ers washed up.

Many will take the leap without a full understanding of what lies in wait.  Much like the fickle sea, the markets can look to be going one way – and then the tide will turn, or a storm appears.  And that’s only thinking about which way the markets will move. There’s plenty of other challenges lurking in the depths.

Recent warnings from the Inland Revenue Department (IRD) regarding DIY investment highlight a critical issue: Many DIY investors are unaware of the tax implications that are tied to their trades.

Leveraging sophisticated algorithms, the IRD now possesses near-omniscient oversight of financial activities within the country. Their use of advanced data analytics tools allows them to identify and track crypto asset transactions, DIY trading, and other investments with unprecedented accuracy.

This heightened level of scrutiny means that even minor oversights in reporting can quickly come to the IRD’s attention. If there’s one thing you can count on, it’s that the IRD will seek to rectify this – sometimes resulting in steep penalties.

The Knowledge Gap

Successful investing requires more than just basic knowledge.  It demands a deep understanding of the ebb and flow of market trends, regulatory changes, and economic factors.  Professional advisers spend years developing these insights; they know how best to position investors to handle fair weather, stormy skies, and anything in between.

DIY investors, however, often rely on limited information.  This can lead to poor decisions – like tax oversights, however intentional or otherwise they may be. 

Emotional Decision-Making

Investing can be an emotional experience.  Market downturns, sudden losses, and rapid gains; it’s a lot to deal with alone. 

Professional advisers are trained to help investors manage these emotions, making decisions based on long-term strategies rather than immediate gut reactions. 

By contrast, DIY investors often face these emotional challenges with no one to steer them right. This leads to impulsive decisions that can harm their portfolios.

A common misconception is that you need to be active to be successfully investing – this comes back to the illusion of control.  In reality, the opposite is true. Investing isn’t a mad dash in a speedboat, straight to success. It’s a long journey with ups and downs. 

For the DIY crowd, the temptation to trade frequently as markets fluctuate can result in hasty decisions. And hasting decisions often lead to substantial losses or unforeseen consequences.

The Cost of Mistakes

One of the most significant risks of DIY investing is the cost of mistakes. Without professional guidance, errors in judgment can lead to considerable financial losses. That might be through missed tax obligations, such as those recently highlighted by the IRD regarding crypto investors, or from failing to diversify your portfolio.

We’ve been using the metaphor of a ship, but really a diverse portfolio is more like sending a great fleet of ships to every corner of the globe – and sending by road and air, just to be safe. If one falters or fails, you have many more to pick up the slack.

DALBAR’s Findings: The Cost of DIY Investing

According to DALBAR’s 30th Annual Quantitative Analysis of Investor Behaviour (QAIB), individual investors who manage their own portfolios often on average experience significantly poorer performance when compared to those who receive professional advice. 

The report reveals that the average DIY investor’s returns are notably lower than those of advised clients. So, it’s not just us saying it – there’s evidence from very reputable sources that going it alone is less likely to lead to financial success throughout your investment journey.

DIY investors are more likely to get caught up in market timing and emotional responses, i.e. buying high on optimism and selling low due to fear. 

The DALBAR results tell us that this behaviour contrasts sharply with advised clients, who benefit from long-term investment strategies, and guidance to help them stay on track no matter how turbulent the forecast is.

The Importance of Professional Support

The value of a good crew for your financial matters cannot be understated. If you are determined to DIY your investments, at least make sure your taxes are taken care of.

Engaging an accountant or bookkeeper is crucial for ensuring that financial activities are accurately recorded, and tax obligations are met.

While DIY investing offers the allure of autonomy and potential cost savings, it is fraught with risks. Seeking professional advice is often the wisest course of action. 

In today’s complex and highly regulated financial landscape, the benefits of professional advice far outweigh the costs. Working face-to-face with a trusted, local financial adviser provides peace of mind, from someone with a weather-eye to the horizon for any risks.

i https://investmentnews.co.nz/investment-news/ird-flags-kiwi-crypto-tax-crackdown/
ii https://www.ird.govt.nz/about-us/our-use-of-algorithms
iii https://investmentnews.co.nz/investment-news/ird-cracks-whip-on-platform-share-traders/
iv https://finance.yahoo.com/news/dalbar-releases-30th-annual-qaib-172500198.html