The last two years have really seen more first-time investors coming into equity markets. While it is encouraging that individuals are gainfully employing their savings, being a do-it-yourself or DIY investor has its limitations.
These will rarely show up at a time when the markets are moving up. It’s only when things turn around and we witness a correction, that limitations can surface.
If you feel certain you are a DIY investor, why not do a quick check and see if you have the skills needed.
Are you objective as a DIY investor?
Human beings are inherently intuitive and biased. This filters into investing too. Take the two IT stocks, Infosys and TCS. Both are large established companies, in business for decades, growing competitively each quarter.
While managed funds often hold both in their portfolios, individual investors tend to pick one over the other. Primarily based on how they feel about the brand; some love Infosys and others TCS.
It is very difficult to train the mind to invest in a company which we don’t like intuitively, regardless of whether the financial and business health suggests so.
Similarly, one can hold on to underperforming shares for way longer than objectively justifiable. This is simply because ‘you know it will deliver in the long run.
Being objective about stock selection, requires time, experience and a change in mindset. This does not always come through for every individual.
Are you independent as a DIY investor?
A lot of DIY investing becomes about what others are doing. As a result of this herd mentality, we see big and small investors rushing to cryptocurrencies. However, not everybody understands them. Retail investors in the futures and options segment are another example of following the herd.
Being a prudent DIY investor requires you to be independent of others’ perspectives. This is important because you are the only individual who has the financial, personal and lifestyle circumstances that you do. No other person or family will have this unique position.
Investing large amounts in small-cap stocks might suit your neighbour who is a homeowner, has a large inheritance and a monetary surplus which is much larger than yours.
Your own net worth may include a large-sized home loan that needs to be repaid or extended family members who are also dependent on your income. In either situation investing heavily in small caps is an unjustifiable risk for you.
Be independent in your investment decisions and stock selection, pick what suits your risk profile rather than what the person standing next to you is doing.
Are you keeping it simple as a DIY investor?
Investing by yourself can also lead to a lot of ideas getting muddled in the head, resulting in too many small-sized investments and an over diversified portfolio. This then adds little value to the outcome you want to achieve.
Keeping it simple means being satisfied with a handful of financial securities that you may have identified and remaining invested in those over decades.
However, this kind of approach requires a lot of patience and discipline. While you may have identified the financial securities yourself, can you assure yourself of the discipline required to keep things simple?
Being a DIY investor is more about behaviour than about the ability to identify investments and filter through numbers. If any of this is hard for you, get an advisor who can guide you through the numbers and the behaviour.