Mythbusters: 4 Truths NO ONE is Telling the DIY Investor (Part 2)

Nick Hodges, CPA/PFS, MBA, CFP

In Part 1, I addressed the most common Do-It-Yourself (DIY) myth that I have encountered over my 30 years in the tax and financial industry: If I do it all myself, I will save (A TON OF) money!

I also stated that some arenas should NOT be DIY. When DIY beliefs are taken into the realm of managing your financial world, planning for retirement, or setting up your life’s legacy, they become myths that can cause irreparable damage to your financial world. These myths are usually predicated on incorrect assumptions.

In this article, I will review the other three DIY myths that no one is talking about.

MYTH: Any SMART person can make money in the market.
ASSUMPTION: Information is the same as judgment.

BUSTED: Knowing information is not the same as knowing what to do, when to do it, and what affect it will have on your future.

Many years ago, I had the opportunity to sit in with the president of E*Trade and the president of the largest privately held continuing education company for tax professionals. The three of us were exploring the idea of expanding their platform to provide additional, exclusive E*trade online services to tax professionals for use with their tax clients. They thought that if they involved the tax professional community, E*trade’s client base could be increased with the millions of clients that tax professionals serve, and they would gain a competitive advantage over other trading platforms.

We asked E*Trade to give us testimonials from their online traders that had been successful at “beating the market”. The president of this large online brokerage company had an unexpected answer: he said they had conducted many studies, and even though they had hundreds of thousands of online investors, they could not come up with traders that had consistently outperformed the market. Think about that for a minute. Have you ever asked yourself why we don’t see dozens if not hundreds of successful DIY investors showing up on the nightly news as examples of what we could do ourselves? We are not seeing them because they do not exist – even when tracked by one of the LARGEST online trading platforms in the world!

TRUTH: DIY investors do not have the judgment and self-control necessary to outperform the market. As indicated by E*Trade’s private confession, and fifteen years of independent Dalbar studies, it takes more than research, technology, and information to successfully build wealth through investing.

MYTH: Secret knowledge will make you rich.
ASSUMPTION: There is a shortcut to attaining wealth.

BUSTED: Anything that sounds too good to be true usually is. Since the beginning of civilization, man has looked for get rich quick schemes. These schemes generally end in failure and pain. The promise of secret knowledge is that you can receive high rates of return on small amounts of money with little or no risk, using minimal skill, time, and effort. The truth of this is found in the gambling industry, where it is clearly possible to get rich quickly IF one is willing to accept VERY high levels of risk. Remember, this rule is for gambling, not investing; you should NOT be gambling with your financial wealth.

Remember the technology bubble of the late 1990’s? The media was hyping secret knowledge everywhere. By March of 2000, individual investors put 50% of their new money into the technology sector. Thinking that there was a quick way to build wealth, these investors bought in high and were surprised one month later when their investments dropped 50%-70%.

TRUTH: Good decisions over time make the best course for building wealth. If the folks peddling secret trading systems really got rich from implementing their secrets, they’d be sitting on a beach somewhere – they would NOT be trying to sell something to you! All the American values of frugal living, good sense, and patience should be governing your decisions about investing.

MYTH: Numbers never lie, and advisors can’t be trusted.
ASSUMPTION: There is safety in numbers...number of advisors, that is.

BUSTED: Conflicts between advisors create decision paralysis. Differing perspectives offer different solutions. Solutions in one arena may precipitate costly issues in others. Many times you do not know what is best for you, and most times, you have no idea who you can trust to know what is best for you.

A relatively well-known TV actor in the Southern California region was a tax client of mine. He often asked me to comment on his financial situation; however, he felt that he had to run all my recommendations past his agent first. Even so, the agent did not understand the advice I provided, and hired another CPA to review the work. Rather than operate from a position of education and understanding, the other CPA felt like he needed to justify his fees, so he created a different plan. Now the client had two plans, two CPAs, and an agent all with differing perspectives and solutions. This actor was so confused by the three differing points of view, that he did nothing. He wouldn’t talk with me further because the other CPA had proposed something different. He wouldn’t listen to the other CPA because he didn’t really know him. And his agent didn’t encourage him otherwise because it didn’t make any difference in his fees. The result was that the actor failed to execute critical legal documents, failed to properly structure his assets, and ultimately paid more in income taxes. Additionally, by making no change, his investments were exposed to more risk than necessary. He couldn’t decide who to trust, and so he did nothing.

TRUTH: A trusted advisor will EDUCATE you, not SELL you. Individually managing multiple advisors across multiple disciplines (tax, investments, legal) means you have to know as much or more than the professionals trained and educated in these fields. If you don’t have the resources to thoroughly educate yourself in all of these arenas, find an advisor that can. Working with the right advisor will never leave you feeling confused, stupid, or rushed. Instead, you will feel educated and confident, able to understand the options and choices that are right for you.

DIY investors operate from great American values that are just a little misdirected. Correctly applied in your financial world, this energy can work to your best benefit. Convert your energy from DIY investing to becoming a self-directed investor. It’s easy, here’s how:

• What you need to KNOW: It’s not always how much you know, it’s knowing who you can trust.
• What you need to JUDGE: How much value avoiding a mistake can mean to your plans.
• What you need to DO: Act on information you know is right for you.

A self-directed investor saves money by avoiding costly mistakes, makes smart decisions about their money, and stays in control of their financial world through education and communication with their trusted advisor.