The do-it-yourself investor is in a unique position, in that they are both the adviser and the advised. This presents a challenge to sober and objective reflection on investment approaches, securities selection and other critical investment decisions. It’s a challenge, but by no means need it be a fatal one.
Adherence to some fundamental investment principles is critical to anyone involved in the investment decision-making process. That goes for the adviser-using client, the growing legions of DIY clients, and the advisers themselves.
My most recent column addressed one of those principles: that of choosing a single investment analysis approach and sticking to it.
In my case I have a bias for fundamental analysis, but I also admit that others find another approach more suited to their nature, and that’s fine, too.
In the past, I have said the biggest secret to successful investing is the most closely-guarded of all: that there is no secret. It’s all in plain sight. One could easily sum up that secret as a list of solid investment principles:
Choose one analysis approach and sticking with it.
Choose to buy and hold over market timing.
Choose either an active or a passive approach to asset allocation.
Choose blue-chip large-cap dividend paying common shares for the bulk of your common equity over start-ups and penny stocks.
If the DIYer adheres to these principles, the need for sober second thought is greatly reduced, and the chance of success correspondingly increased.
Oh, and one more principle, perhaps the grandest of them all: diversification, especially by asset class. Everyone knows that every investor should have a judicious allocation to cash, fixed income and equities at all times, whether you adjust that actively or maintain it passively. This is one of those secrets “hiding” in plain sight.
Yet it’s not widely adhered to, and my wild guess is that DIYers might be the biggest violators of this fundamental principle. I have seen a great many client portfolios in my time, from one end of the wealth spectrum to the other, and the most striking commonality across the board was how seriously deficient—in many cases non-existent—was the allocation to fixed income securities.
For example, where a client’s circumstances signalled the need for a standard balanced portfolio, with a standard allocation in the 40% range for fixed income (or say 30% to 50% to account for differences in how such things are assessed), in the actual portfolio the client might have 10%, or nothing at all. And these clients were using, but evidently not listening to, an adviser. I wonder whether DIY investors are doing the same, or worse.
Given the way I see the markets shaping up in the foreseeable future, investors will be well-served by having a full complement of fixed income securities in their portfolios. If you don’t have that right now, it may be time to implement one of the most fundamental investing principles there is.