From DIY Investor to Financial Planner: Learning from My Mistakes

As a financial planner with a decades-long history of being a do-it-yourself (DIY) investor, I understand firsthand the allure and challenges of managing your own investments. I've made my fair share of mistakes, and I'm here to share my journey and the valuable lessons I've learned along the way.

1. The Overconfidence Trap:

One of the most significant dangers I encountered as a DIY investor was the overconfidence bias. Like many, I believed I could outsmart the market and make consistently profitable decisions. Overestimating my knowledge and abilities, I sometimes made impulsive choices or choices based on insufficient evidence and saw my returns suffer.

Lesson Learned: Behavioral finance taught me that humility is key. Recognizing my limitations and seeking professional guidance for objective, informed advice was a pivotal step in my financial journey.? Oversight and discussion with those who were more informed or being more patient is important.?

2. Battling Loss Aversion:

As a DIY investor, I vividly remember the emotional turmoil I felt during market downturns. The pain of losses seemed unbearable, leading me to holding some investments too long or selling investments too soon.

Lesson Learned: Loss aversion is a common pitfall. Understanding that market fluctuations are part of the investment landscape and seeking a long-term perspective helped me weather market storms more effectively.? Of course, some of this I learned with time, and fortunately, I’m a quick learner so I didn’t make this mistake often, but it’s human nature, which is part of what studies of the psychology of money tell us.

3. Herding Behavior and Confirmation Bias:

I too fell victim to herding behavior and confirmation bias. During market frenzies, I followed the crowd without conducting thorough research. I sought information that confirmed my existing beliefs, neglecting contradictory evidence.

Lesson Learned: Behavioral finance illuminated the dangers of herd mentality and confirmation bias. I now emphasize the importance of independent research and critical thinking to my clients and my own portfolio.? I also work with a team of advisors and we talk about issues, investments, the economy and even our own portfolios.? It’s much more difficult to simply seek evidence that confirms my current view if I’m constantly discussing issues with other competent and knowledgeable advisors.

4. Overtrading and Short-Term Focus:

Overtrading and a short-term focus were issues I didn’t have to learn the hard way.? It’s one of the common errors that I saw in others but managed to avoid myself.

Lesson Learned: Behavioral finance underscored the value of patience and a long-term perspective. Fortunately, my parents taught me the value of long-term thinking and discipline.? I urge clients to think this way as well.? Of course, everyone has short term goals as well, but those goals normally require short-term thinking for asset allocation and not attempts at short-term higher risk speculation.

5. Behavioral Biases in Market Timing:

I, too, attempted to time the market, buying low and selling high. But as behavioral finance showed, market timing is notoriously difficult due to emotional biases.? What made matters worse is that sometimes I was right, which encouraged me to time the market even more.? For example, I sold all of my tech holdings just before the NASDAQ market dropped in February of 2000.? However, I did not see the market drop coming in the S&P 500.? I don’t know anyone who has consistently timed the market over any long period of time, and research confirms that time in the market is far superior to market timing.

Lesson Learned: I now advocate for a disciplined approach to investing, steering clear of market-timing attempts that often lead to subpar returns.? I do massage my advice and my own investments due to some signals in the economy and general research, but avoid making large bets on market swings.?

My journey from DIY investor to financial planner was marked by learning from my own mistakes as well as continual research and increasing my self-discipline to avoid emotional decision or decision based on innate human impulses. Behavioral finance has been my guiding light, revealing the emotional traps that can hinder investment success. As a financial planner, I use these lessons to guide my clients, helping them avoid the same pitfalls and achieve their financial goals with discipline, objectivity, and informed decision-making.?If you’ve considered consulting with a financial planner just to get a little extra perspective, contact me.?We’ll figure something out.?If I could change your life, wouldn't you want to know? Wouldn't that be worth a conversation?