Robo-advisors have become more and more popular as an investment approach, resulting in fewer people choosing to be do-it-yourself (DIY) investors.
In my opinion, this is due to 2 reasons.
The benefits of Robo-advisors and the misconceptions that people have regarding DIY investing
For beginner investors who are exploring the various ways to start investing, this is basically a double whammy for DIY investing – Robo-advisors seems like the obvious way to go.
While I don’t dispute that Robo-advisors are a great investment tool, I think it’s important to clarify the misconceptions surrounding DIY investing so that people can make clearer, more informed decisions when deciding between the 2.
In this post, I will clarify, in my opinion, the 4 most common misconceptions about DIY investing.
1. DIY Investing = Stock Picking
When people think about DIY investing, they often relate it to stock picking.
And that’s probably because DIY investing is the only way to be able to pick anything you want to invest in.
However, DIY investing is not limited to stock picking – many DIY investors are index investors who mostly invest in ETFs.
More importantly, DIY investors can invest in various asset classes.
Aside from stocks, investors can also choose to invest in REITs, bonds, commodities, gold, and more.
2. High Risk
I guess this misconception stems from the previous one.
Since stocks are commonly thought of as a risky asset class, if people relate DIY investing to stock picking, they will naturally perceive DIY investing as a high-risk investing approach.
In reality, this is not necessarily the case.
As mentioned earlier, DIY investors are able to invest in various asset classes and are not restricted to stocks.
By varying the asset allocation of their portfolio, it is possible to control the amount of risk that they are exposed to in order to ensure that it is within their tolerance.
In addition, investors can invest in ETFs for each asset class in their portfolio, resulting in even further diversification to drive down risk.
It is, therefore, possible to craft DIY portfolios that are conservative in nature.
It is also commonly thought that DIY investing requires extensive financial knowledge and is thus only for experts or hardcore, self-taught individuals.
This is true if you’re referring to stock picking or active DIY investing which employs the use of financial knowledge in an attempt to outperform the market average return.
But as we already know, DIY investing is not limited to either of the 2.
For DIY investors who are interested in passive, index investing, there is no need for such expertise.
Of course, it still requires more investing knowledge than investing in Robo-advisors or mutual funds because you need to make decisions yourself.
But you definitely don’t need to be an expert in order to be a DIY index investor – just a strong fundamental understanding to decide which ETFs you want to invest in, how much to invest in, and why.
4. Time Consuming
This is probably related to the previous point – that DIY investing is knowledge-intensive, and it would thus take a lot of time to gain that knowledge.
Not to mention also the time involved in monitoring your portfolio’s performance and performing any rebalances whenever necessary.
Again, this is probably more relevant for stock picking and active DIY investing.
Indeed, the time that goes into doing the due diligence before deciding which stocks to add to your portfolio is often considerably large.
However, if you choose to be a DIY index investor, it does not require nearly as much time.
While some time would have to be spent deciding which ETFs you want to buy and the allocation of each ETF, it hardly compares to the many hours of research that active investing entails.
Especially since the main strategy here would be to buy and hold for long-term growth, there’s no need to monitor short-term price fluctuations and decide when to buy or sell.
And while portfolio rebalancing is important in order to maintain your desired level of risk, for most people, it only needs to be done once or twice a year, if even.
Take it from me: the amount of time I’ve spent rebalancing my portfolio since I started investing in 2019 is a grand total of 0h.
This is because the value of my portfolio is so small that it doesn’t make sense to bother rebalancing it – I will simply make losses in the form of fees that I will incur from the rebalancing.
But if you have a high net worth, it’s probably prudent to rebalance your portfolio at least once or twice a year.
While you definitely need to put in some time and effort to understand what you want to invest in and why, it doesn’t have to take up a lot of time if you’re simply investing in ETFs.
In any case, I feel that this is what you should be doing anyway even if you choose to invest with Robo-advisors or mutual funds – understanding the underlying investments.
To clarify, I’m not saying that these 4 points are false or irrelevant when it comes to DIY investing.
Rather, I’m saying that they can be true, but not necessarily – it all depends on your approach as a DIY investor.
Also, the motivation behind this post isn’t to persuade investors to choose DIY investing over other methods like Robo-advisors.
But I’ve seen many people rule out DIY investing as an option very quickly and limit themselves to other choices when they’re just starting out, usually because they think it’s beyond them.
Instead, I think that people should evaluate all their options critically before coming to a decision – and that can only be done if and when any misconceptions are clarified.
I think it’s good to know when to not get ahead of yourself and to be prudent, but I also think it’s a pity to limit your options, especially without first putting in the effort to learn more about them.
Of course, that’s not to say that investors have to choose between the various investment tools – they can always use multiple approaches simultaneously.
What are some misconceptions that you initially had about investing? Let me know in the comments below!