I’m a big proponent of DIY financial planning. Unlike a lot of people in this industry, I believe most people will be better served by managing their own finances, for the simple reason that they care about their money more than a paid advisor. Most people can gain the knowledge necessary to achieve their goals. However, there are some drawbacks to going it on your own.
Lack of expertise
Investing may seem like a straightforward task, but it’s actually a complex and ever-changing landscape. DIY financial planners often don’t fully understand financial concepts, such as saving for retirement or planning their estate. They may also struggle with the nuances of different investment strategies, like diversification or risk management. Even if you have those topics down, investing with an eye toward tax efficiency is not something that can be mastered overnight. Without expert guidance it’s easy to miss deductions or overlook potential tax-saving strategies that a professional might know about.
Lack of time
DIY planners often have to invest a significant amount of time in researching and educating themselves on ever-evolving financial topics. Just the mode by which you invest has changed dramatically over the past 30 years, going from high-cost brokers to low-cost or free online trading. Products used by most investors have changed too, moving from actively managed mutual funds to index funds or exchange traded funds.
Additionally, financial planning is not a one-time task—it requires ongoing monitoring, adjustments, and reviews. DIY planners may find it challenging to find the time and mental bandwidth to effectively balance their financial planning efforts with other commitments, such as work, family, and personal interests.
Lack of desire
Since computers became mainstream, I have been something of a DIY computer repair person. I don’t really go under the hood, but can fix software issues and have solved the blue screen of death many times. Yet I realize that I don’t enjoy spending an afternoon deciphering my computer as much as I used to.
This might be how you feel about finances; you’re excited to learn as much as you can now, but how will you feel in 20 years when you’re still spending time researching stocks or rebalancing your investments?
Lack of a plan
I’m as guilty of this as anyone. When I was younger, I was putting random money into my retirement, my kids’ 529 plans, we purchased and sold houses – all without really having a plan. I often got caught up in daily financial decisions without seeing the big picture. Sometimes I didn’t have buy and sell rules, or I would be saving for a goal without having set the goal. Since I’ve grown nearer to retirement, I’ve developed more of a plan to ensure money is there when I need it.
Too emotional
It’s great to manage your money because you know where it’s going, you know why you put it there, and you hopefully have a plan for the future. Yet being that involved can make it even more challenging when markets drop and your account value is cut by 20% or more. You’ve heard before – buy low and sell high. But when the markets tank and you’re panicking, it often turns into selling when the market is down and then not knowing when to reinvest. Many times, DIY investors miss the positive recovery in the market.
Increased costs
As a DIYer you’re going to make some mistakes; some may be expensive. Depending on how quickly you learn, this could end up costing more or less than working with a financial professional. I went through a period where I thought I could pick stocks like Warren Buffett. I couldn’t. I lost what was – at the time – a substantial amount of money. However, if you can set buy and sell rules properly, you can keep these early losses to a minimum.
It doesn’t get easier
Picture this – you started investing in your 20s, learning much of the ins and outs to being a successful investor. You put it on auto-drive as you enter your 40s, enjoying the increase in your net worth over time. You figured it out! Uh, not so fast. When you get near retirement, you have a completely different set of financial rules to learn. Now you will be taking money out of your accounts to live on, not saving up. How much will you withdraw? What accounts do you pull from? How do you keep from being eaten alive by taxes? Being a DIY financial planner means a lifetime of learning.
I still believe DIY Is the best way to manage your money. You can overcome a lot of the limitations by continually educating yourself on the markets, financial concepts, and investment strategies. I like to read blogs about what others have done and found successful, comparing it to my methods and calculating if a similar strategy shift would work for me.
But I plan to seek professional advice before retiring. I want to have a professional evaluate my plan and double-check my draw-down strategy before I get too far into the spending phase. Then I will implement the plan and hopefully enjoy a fully-funded retirement.
Photo by Mikhail Nilov