We live in a do-it-yourself society. Just look around at all the home hardware stores. But anyone who has flubbed a basement reno can tell you that sometimes it pays to get expert advice.
That’s certainly true with financial planning. Online investment tools have led more and more people to try to manage their own money. We all like to think that, with a little research, we can outfox the experts. After all, 2008 proved those experts aren’t so smart after all, right?
Wrong. Far too often individual investors just don’t have the tools to get it right. Here are three reasons.
The first reason is simple human nature. There just seems to be a part of make-up that causes us to put our brains on hold and react emotionally in some circumstances. Like when we watch a stock we own start to plummet in value, for example.
These powerful emotions hit everybody. A lot of very intelligent people - people who study the markets and should know better – freak out when something unusual happens.
This happens in both directions. When the markets are dropping, people panic. When markets spike up, they get greedy and take extreme risks, certain that nothing bad could happen.
Have you ever played a game of backyard football with your friends? Does this make you qualified to play for the Roughriders? Of course not. Yet this is exactly what most amateur stock market players think. On the basis of some Google research, they think they can outwit professional investors who have tremendous resources and spend all day every day studying the markets.
It’s a game of David versus Goliath. Unlike the legend, most of the time Goliath – with better resources and deeper pockets – will crush David like a bug.
A third danger area in amateur investing is the constant temptation to try to get rich quick.
There are cases of people getting rich quick –lotteries, for example, although the odds are not in your favour. In investing circles, you occasionally hear stories about someone who hit a home run by investing in a penny stock at just the right time. These stories spur hordes of amateur investors to take outrageous risks.
What you don’t hear are the many, many other cases of people losing a lot of money the same way. Going broke quick is much easier and more likely than getting rich quick. You don’t hear those stories because people don’t tell them. Nobody – and I mean nobody - brags about getting poor quick.
This doesn’t mean things are hopeless for individual investors. They just need the right advice and some education into the fundamentals of investing.
You’re an Owner
The first fundamental to understand about equity investing stares you right in the face yet many stock speculators ignore it. What are your stocks called? They’re called shares. You’re not buying a lottery ticket; you’re buying a share of a business. You are, essentially, becoming a co-owner of a company.
So, don’t think like a gambler. Think like a business owner. Does this business have a good product? Does it have a market advantage? Does it make money?
Or A Lender
Besides equities, you can also put your money into bonds and other interest-bearing investments. Basically, you are lending your money to someone. In this case, you have to think like a banker. You don’t just want to know the interest rate; you also want to know that you’re going to get your original money back. How reputable is the borrower? What is the borrower’s track record? What are the odds of the borrower going bankrupt?
If the Government of Canada asks to borrow your money, the odds are very good that you’ll get your money back. Some guy you don’t know who needs money for a sure-fire real estate development – you’d want to think twice about that.
Help Is Out There
Possibly the only thing worse than do-it-yourself investing is not investing at all. People are often intimidated by the process. Faced with the overwhelming number of decisions and choices, paralysis sets in.
The role of a qualified financial planner is to help our customers shake the stiffness and work through these decisions while guiding them through the incremental steps, providing the road map that will get them to where they want to go.