“I can probably handle it.” Famous last words (mine to be exact) regarding more than one home improvement project I attempted to save some money on by doing it myself. With HGTV a constant reminder of how cheap “DIY” is, it’s hard not to consider it a legitimate alternative to hiring a professional. With some projects it makes sense – I can give up an afternoon to paint a room and if I prepare well enough, it will look great. But build a deck, install crown molding, or construct a feature wall? My garage is littered with the remnants of these and other delusions of grandeur that serve as object lessons to a central truth: many times it is cheaper, easier, and better to hire a professional.
I learned the hard way that if you don’t know how to do something, it’s best to ask for help. So, you can guess what my reaction is when I hear people describe how much they need financial planning and lack familiarity with advanced financial planning, investment advisory strategies, and markets in general, only to end the conversation with “but I can continue to do it myself.” Yes, you can – but should you? The easy things like contributing to retirement accounts or creating a household budget are analogous to painting a room – spend enough time doing it and you can do a great job. But the complex issues – tax optimization, portfolio rebalancing, estate & trust work – let’s just say they have more in common with my non-existent crown molding.
If you search “Reasons Not to DIY” on Google you come up with over 329 million hits, mostly about why home renovations are a bad idea to deal with personally. But the reasons why are just as applicable to managing your own finances. So, in the interest of highlighting why “Financial DIY” might not be a good idea, here are 8 things to consider before making a DIY financial plan on your own.
8 Reasons Why You Should NOT Make a DIY Financial Plan
1.) You Don’t Have All the Tools
Contractors have trucks full of specialty tools – so do financial advisors. Professional financial planning and investment management typically require access to a wide variety of software and information that is unavailable to the average consumer. While trading platforms like Robinhood might be free and accessible most of the time, the axiom of “you get what you pay for” rings true in moments of exuberance – as evidenced by their back-to-back crashes in March of 2020.1 Additionally, many low-cost investment platforms offer only a smattering of investments – certain mutual funds or ETFs. This contrasts with a typical registered investment advisor (RIA) who can utilize the entire investment universe to build portfolios, often with more favorable expense ratios or limited transaction costs depending on the client and the type of investment.
2.) It Costs More Than You Think
Maybe you want to buy all the tools necessary to do a job (which will vastly increase the cost of the project, but ok). Assuming you are interested in paying for first-class research and execution options, it is quite possibly outside your budget. In my experience, just the necessary software packages for financial planning, analytics, trading, and charting to be a semi-professional day trader will cost roughly $1,000 month – and that is before transaction and account fees. You could operate without these costs, but that would be analogous to building a deck with only a hammer and screwdriver. Not to mention you’ll be learning valuable lessons as you go – which is a nice way of saying losing money by making mistakes.
3.) It Takes Longer Than It Should
Last year I had to build three identical bookshelves from Ikea. The first one took me an hour; the second one about 30 minutes; the third was done in 20. This is because once I knew what to do, I didn’t have to look at the instructions between each step or triple check that I read things correctly. If you do something repetitively you typically improve the speed and accuracy with which you do it. The same is true of tasks in the financial markets. If you know what to look for when researching stock positions or rebalancing portfolios, you can do it quickly enough to take advantage of opportunities. If you don’t, you are likely to waste precious time learning what it is you should be doing in the first place.
4.) You Don’t Have the Time
Even if you know what you should be doing, that doesn’t mean you have the time to do it. The financial markets are most active during the standard workday when you are most likely unavailable. While that might not seem like a big deal, those are the times you want someone engaged with your portfolio. High-frequency and algorithmic trading have changed the way the markets operate in the twenty-first century, opening the door for “flash-crashes” and periods of tremendous volatility. Not being available could mean being exposed when something happens. Worse, it could mean pulling yourself away from your real job to handle your personal finance needs.
5.) You Have No One to Help You
Some jobs require more than one person. If you doubt this, try to mount a ten-foot piece of crown molding without an extra pair of hands – it is not likely to go well. I believe the same is true of investing or any other complicated process. To do something alone is to exist in an echo chamber of your own thoughts; there is no one to confirm or challenge your positions. With no devil’s advocate it is easy miss vulnerabilities that could otherwise be addressed; that is why many successful firms use committees to determine portfolio changes.
6.) You Don’t Know if You Can Trust It
Even before I learned my lesson about DIY, there were some projects I knew to call a professional for. Case in point, the ceiling fan above my daughter’s bed. I have installed ceiling fans before and I could probably have installed hers – but how do I know 100% that it would never fall and hit her at night? How many hours of sleep or work would I lose worrying I didn’t tighten the screws enough or wondering if the blades were attached properly? Self-doubt is a common tendency when we are doing the unfamiliar, and just because it looks right doesn’t always mean it is. I would have never known if that fan was attached properly until something happened – the same way an individual with portfolio exposures might not realize they exist until something catastrophic occurs in the market. It’s important to ask yourself if the cost savings of managing your own finances is worth the anxiety of “am I sure I did this right?”
7.) You Can’t Afford to Get it Wrong
Failing to complete a home improvement process stings – you have likely wasted time, money, and bruised your ego in the process. But you are unlikely to be ruined if your feature wall is lobsided and needs to be rebuilt by a professional. But your financial life? Messing that up can mean years of time and savings lost – just ask anyone who intended to retire in 2009. It took years for the equity markets to recapture the losses experienced during the last financial crisis, and not everyone can afford to lose that kind of time.
8.) You Don’t Know What You Don’t Know
It takes years of formal and on-the-job training to become a master craftsman – and I believe the same is true of good financial advisors. I would never pick up a “Carpentry for Dummies” book, read it, and expect to be at the Master level – there are so many nuances and techniques that you can’t learn by reading a book. So, I fear that anyone who thinks they can do the same for financial planning or investing is in for a rude awakening. The financial industry has dozens of advanced degrees, certifications, and licenses for a reason: it is an incredibly complex industry with very high stakes. A 12-year bull market has made plenty of amateur investors overconfident in their abilities, but all bull markets eventually come to an end, and when the mean reversion occurs it would appear that many individual investors are going to be exposed.