The 7 essential traits of DIY investors

Do-it-yourself investing? Go for it.

For someone like me, an investment professional, I could come off as self-serving when discussing do-it-yourself investing. That's why I want to get straight to the point.

Is there anything wrong with do-it-yourself investing? No, of course there isn't. I don't knock anyone who invests without the guidance and expertise of an experienced professional. I'd have my head in the sand if I did. Here are just a few of the reasons why:

1. There are more tools available to the do-it-yourself investor than ever before.
All of the online trading firms offer an array of charts, quotes, research and educational materials. Not to say that investing is easy and that these tools will make you a better decision maker, but some of you reading this will no doubt do a great job for yourselves. Some, dare I say most, will not. Only one way to tell, right? You are more than welcome to try, learn, and grow your net worth on your own.

2. There are more "age-based" portfolio products—also known as target-date funds.
These funds of funds can plot out an investment course over a lifetime, and on something close to autopilot.

3. We also have the rise of the robo-advisors.
These highly advanced computer programs armed with algorithms, data, and speedy processing power can offer you advice on investments and planning. Major financial services firms that have built reputations to help do-it-yourself investors have invested great sums of money into these. And let's dispense with the idiotic broker phrase that I've heard all too often, "Would you perform surgery on yourself, or would you use a surgeon?" As if this metaphor works with investing on your own; pure stupidity for a holder of a securities license to utter.

Last but not least, low commissions are available.

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Now, before I hear from someone who is a retired CPA, investment banker or NASA rocket scientist, and the guy who gets his advice from his uncle, the inventor of the wheel—and before you quit your day job—let's also be very direct about what indicates you've got what it takes to be a DIY investor.

First, titles haven't proved to make one a good investor.

Second, expertise in one field doesn't automatically transfer to wealth management.

Third, anyone can say, "I bought this" or "I sold that," but if you are in the securities industry, you actually have to be able to put that in writing. It speaks to credibility.

Depending on you—the one who has to make the decision—here are some of the factors you may want to consider when deciding whether or not to employ the help of a financial services professional or go it alone. This is by no means an exhaustive list, but I've identified 7 factors I think should rise to the top before making the decision.

Time to put yourself to the do-it-yourself investor test and ask yourself some tough questions.

The 7 essential traits

1. Time
Investing takes time.

  • Do you have the time to reassess your personal financial situation after the birth of a child, after your honeymoon, upon your retirement, upon a divorce or even after the death of a loved one?
  • Do you have the time to take steps to start adjusting your investment portfolio ahead of major life events the way you're supposed to?
  • Do you have the time to follow up on each individual investment in your portfolio? To check recent news? To rebalance your account?

2. Discipline
Discipline takes discipline. I've written about this before. You have to do what you need to do. Pick and choose, buy and sell, and follow and follow. A few questions to ask yourself:

  • Were you one of the ones who didn't open your brokerage or 401(k) statement in 2001 or in 2008?
  • Did you bail out of every investment and convert to cash at the bottom?
  • Did you forget how to be a long-term investor?

3. Confidence
It does take a certain kind and amount of confidence to make investment decisions. A few more questions to ask yourself:

  • Are you a procrastinator?
  • Do you tend to overreact to stressful situations?
  • Did you buy that stock when it came down in price, just like you said you would the last time you checked out the quote?

4. Risk management
Mistakes happen. Every investor, including Warren Buffett, makes investment mistakes along the way. But how you handle them and what you learn from them are much more important. Mistakes are unavoidable when it comes to investing.

  • Have you taken proper steps like diversification to help mitigate costly mistakes, which is what risk management is all about?
  • Do you have a strategy, or do you kind of go with whatever is working or being touted on TV or in a newsletter?

5. Experience
OK, this one is a little tricky because it implies that if you don't have investment experience, then you shouldn't even attempt to try investing on your own. That is not what I mean; we all start out as novices.

  • Do you have peers from whom you can draw the lessons of the mistakes of those who came before you? This is a big plus that comes with being in the securities industry; more than 100 years of cumulative experience has provided its workers with a vast amount of data, experience and judgment.
  • On an individual basis, have you worked with people who have lived through various market, economic and personal situations and learned from their mistakes and which strategies they used to get them through tough times?

6. Staying current
I think that both following current events and having a strong sense of history to draw upon are critical inputs to making investment decisions. I know many will disagree with me—and I am a self-admitted news junkie—but I will ask you to ask yourself these questions:

  • Are you a news junkie?
  • Do you follow economic stats?
  • Are you up to date on Federal Reserve policy?
  • Do you follow politics?
  • Do you keep up with foreign events?

7. Sweating the details—and thriving on them

  • Has your portfolio grown in value? Would a mistake be more costly as a result?
  • Are you aware of holding periods regarding capital gains treatment?
  • Are you taking undue risk in trying to juice your passive income in this low-interest-rate environment?
  • Do you know which assets are best in a retirement account and which are best in a regular taxable account?
"Investing is not an easy thing to do successfully. Bear markets make all of us look like unsuccessful investors while they last. And this is often when investors walk away from the market. But here's the key, whether you go it alone or seek out a professional: You have to employ a strategy that includes the possibility of—no, the certainty of—corrections and bear markets."

In my 25 years of industry experience, I have seen do-it-yourself investors do well for short periods of time (like some who flaunted how good they were at picking stocks during the tech bubble of the late '90s), but aggressively trading tech stocks isn't a long-term, disciplined approach to investing. I've seen investors slam cash, calling it trash, remaining fully invested without a sell strategy and with no room to maneuver if things in the economy turned sour (like 2007 to 2009). I have also met investors who have done quite well on their own.

I have a problem when someone needs help and they are too proud to admit it. And I also have a problem with the professionals who have the attitude that only they hold the key to success.

After you think deeply about the seven factors above, you may conclude you are strictly a do-it-yourself investor, or find you need the help of a professional, or decide that you are somewhere in between. And that's fine, too—there is room for an investing value proposition that is part self-directed and part professionally guided. We are in an era of choice. The consumer rules, and that's the way it should be.

Here's the key. It may seem obvious, but it's at the root of this debate. Investing is not an easy thing to do successfully. Bear markets make all of us look like unsuccessful investors while they last. And this is often when investors walk away from the market. So whether you go it alone or seek out a professional, or somewhere in between: Make sure you have a strategy that includes the possibility of—no, the certainty of—corrections and bear markets. That makes for better financial advisors and better do-it-yourself investors.