Let’s face it, the decision to hire someone to do things like home maintenance or renovations versus doing it yourself really boils down to time and cost.
If you have the time and inclination, Do-It-Yourself (DIY) has never been easier or more cost effective. Building that new deck is as simple as a bit of research, a free weekend and a trip to your local home improvement store.
Is DIY the right choice for your health – physical or financial?
However – and I am not going to beat around the bush here – I do not believe things like physical health or personal finance should be part of the DIY.
People should take care of their financial health in the same way as their physical health. Most people would never make a serious medical decision without consulting a doctor. Why should personal finance be anything different?
Do you have what it takes to DIY and reach your personal financial goals?
For personal finance, the odds of success are stacked against individuals generally and even more so with DIYers. Remember, the cost of making investment mistakes can be the difference between meeting your personal financial goals and not.
I am not saying that personal finance DIY isn’t possible; I am saying the percentage of people who can do this successfully over the long run is a lot lower than people would think.
Let me share a story… about 10 years ago, I read an article called The Probability of Success (Or, Confessions of a Personal-Finance writer) by William Bernstein. At that point, I had read a number of Bernstein’s articles and books and would agree with his self-assessment as a surreal cross between a Nobel Prize winning economist and Johnny Appleseed – spreading sound investment wisdom to the DIY John Q. Investor.
The article was basically a mea culpa of how he had finally come to the conclusion that the vast majority of investors could not do it for themselves.
Bernstein’s rationale was that you needed all of the following 4 things to be successful:
- An interest in investing – which is no different than with anything else. If you don’t enjoy it, you’ll do a lousy job.
- The horsepower to do the math
- The knowledge base
- The emotional discipline to execute faithfully
He assigned an “optimistic” probability of a 30% success rate for each. If you do the math that means that the odds of getting all 4 correct is less than 1%.
In reviewing this article, I came across a rebuttal on a personal finance blog written by a doctor for highly educated professionals like lawyers and doctors. This article justified different probabilities for each of the 4 and came to a vastly different conclusion … a 64% success rate!
Having worked with individual investors for over 20 years and having a pretty good knowledge of statistics, my take is that 1% is probably too low, but much closer to reality than 64%!
Even if the 64% conclusion was a lot less, the thought process in itself is the ultimate problem for DIY investors. Specifically, it represents the unfortunate combination of over-confidence coupled with a lack of understanding of statistics and probabilities.
In my experience, I wouldn’t weigh all four things equally. I would put much more weight in the emotional discipline to execute faithfully. As Bernstein pointed out in this article, the emotional game is completely independent of the other three.
In fact, you could assign 90% probabilities of success to the first three, but a more realistic 10% to the emotional discipline and you are still left with an overall success rate of around 7% or less than 1 in 10.
What are your DIY financial success odds?
I cannot remember how many times investors have very confidently said they will never, ever panic in a down market. My response is usually, “If things were only that simple…”. Not panicking is only one part of emotional discipline equation. How about not getting caught up in a fad or highly concentrated portfolio in an up market? Investors tend to make more mistakes in good markets than bad.
Everyone thinks they are above average, but with DIY investing being “above average” isn’t good enough. If you realistically look at the odds and are aware of the common behavior bias of over-confidence, you would have to be way, way above average to be successful.
So, here the question that someone considering DIY investing should be asking themselves:
Are you the 1 in 100 or even the 1 in 10 that can be successful in all 4 crucial areas of DIY investing?
If not, it’s time to talk to a wealth advisor who has the interest, math horsepower, knowledge base and emotional discipline to help you meet your personal financial goals.