Posted: May 23, 2013
Here are some tools you'll need to DIYBy Wayne Farlow
The Wall Street Journal recently ran an article entitled A New Era for Do-It-Yourself Investing. This article evaluated the low-cost and free investment tools available online to help investors who wish to manage their own investments and receive investment advice for little or no cost.
As with any DIY project, DIY investors should be willing to research and execute an investment strategy that matches their risk profile to the time they are willing to dedicate to investing. If you are a DIY investor, here are some investment tools that may be worth adding to your investment toolbox.
1. Develop an investing plan and stick to It.
DIY investors often do not have a written, well-defined investment plan. A good investment plan includes strategies for both bull and bear markets. The plan should include strategies for obtaining risk-adjusted returns that meet or exceed the investor’s expectations over a complete market cycle. The key to a successful investment plan is to have an “all-weather plan” and to stick to it. Investment plans often fail when the investor decides their current plan isn’t providing adequate returns and begins making wholesale plan changes because a market is rapidly increasing or decreasing.
2. Diversify your portfolio.
Having 10 mutual funds does not a diversified portfolio make. A well-diversified portfolio contains a) U.S. equities and/or equity funds with all market Caps, b) international equities and equity funds, c) alternative investments such as gold funds, REITs, business development companies and long/short equity funds and d) fixed income from direct bonds and bond funds, appropriate for current market conditions.
3. An investor is not a trader
Successful investors in individual securities find stocks that are appropriately valued, with good long-term growth potential and an increasing dividend yield. Fund investors find appropriately diversified, low cost index funds, or lower cost actively managed funds, with an investment management philosophy matching theirs. Short-term trading of securities and/or funds leads to high trading costs, higher taxes and often significant under-performance.
4. Do your research
DIY investors often buy a security or fund after receiving a “hot tip” from a TV show or an investment newsletter. When investing, it is critical to thoroughly research the security or fund with multiple investment resources. Investments should be made only after all required research is completed. If the investment fits your plan, then and only then should the investment be added to the investment portfolio.
5. Acknowledge your emotions
Emotions are an inevitable part of investing, whether the investor is a DIY investor or a professional investment advisor. Fear can be overwhelming when markets are tumbling. Because investing is both uncertain and involves the investor’s funds, it is impossible not to be emotionally engaged. By having an “all-weather” investment plan, and sticking to it as the market recedes, an investor can decrease their emotional turmoil. If emotions are pushing an investor to take action that is contrary to their investment plan, they should carefully analyze whether to change the plan or change the investment decision.
If one is committed to securing the appropriate investment tools and spending the time and energy required for DIY investing, there is no reason why they cannot be successful. DIY investing is similar to DIY furniture making. With the proper tools, expertise and patience, some people are capable of building beautiful furniture. A successful DIY investor should have many of the same characteristics as a DIY furniture maker.
Wayne Farlow is the founder of Financial Abundance, LLC, a Registered Investment Advisor firm. He is a Certified Financial Planner (CFP®), focusing on Retirement Planning, Investment Management, Small Business Owner Planning and Sudden Wealth/Inheritance Planning. His book, “Financial Abundance Guide,” is available free at www.farlowfinancial.com . He can be reached at firstname.lastname@example.org or at 303-554-0309.