DIY Investing is Booming

Couple reading off a tablet computer

Do-It-Yourself (DIY) Investing in stocks and bonds has never been easier. Unsurprisingly, many Americans have rejected managed mutual funds to manage their investments personally. A 2022 survey found that one-half (59%) of Americans manage all or a portion of their investments individually.

Covid restrictions in 2020-2021 stimulated a surge in DIY investing. U.S. Millennials opened more than 780,000 accounts with three of the biggest online brokers in March and April 2020. Canada and England witnessed similar increases in self-directed investment accounts during the same period.

Investment professionals credit the availability of investing phone apps for the transition to personal investing. The impact of DIY investing continues to grow. In 2010, individual investors accounted for 10.1% of equity orders in the U.S. By 2020, their share had almost doubled to 19.5%. In early 2021, retail investors accounted for nearly 25% of trading volume.

Reasons for DIY Investing

Various factors precipitate the trend to individual investing, especially confidence in their personal capabilities and the belief that "If you want something done right, do it yourself." Specific causes for the move include

Need for a Custom Approach

One-size-fits-all planning or investments do not fit the individual's needs or circumstances. The approach that works for Sam, a conservative 55-year-old investing for retirement, is inappropriate for Mary, an unattached 25-year-old computer programmer planning to open a business in ten years. Managing one's investments enables a unique strategy to fit individual circumstances.

Available Time and Interest to Manage Investments

An increasing number of people take control of their finances and become more 'hands-on with their investments. They want the satisfaction of knowing where their money goes. They believe managing their assets is like managing their business career. Making their own decisions gives them a chance to counter low-interest rates and raging inflation.

Alex Lambert of the British broker Hargreaves Lansdown says: "The last two years have highlighted the importance of taking responsibility for your own financial resilience, leading to a surge of younger people engaging with their savings and investments."

Availability of Financial Information

Investing and research: online platforms, along with the emergence of free robo-advisers, have made market information more accessible, understandable, and customizable. Investors can follow stocks across industries with up-to-the-minute data and news, complete with pre-calculated ratios and financial projections. Multiple charting methods are available to those reviewing past prices. Some platforms allow investors to test investment strategies, online forums for investors to discuss firms and assets., and specialized tools and training in portfolio diversification and risk assessment.

Marketwise was founded in 2017 expressly to help investors manage their own investments. The company's eleven subsidiaries offer Best-in-Class research analysts with different perspectives and expertise and access to the latest technology to collect, analyze, and display market data in easily-understood and manipulated formats.

woman reviews financial documents

Dissatisfaction with Professionally Managed Accounts

In 2020, a New York Times headline noted, "Mutual Fund Winners Don't Stay Ahead for Long." DIY investors believe they will make better decisions than advisers and brokers whose fees are unrelated to results. Forbes magazine in 2021 noted that "fees that appear insignificant can substantially reduce your wealth over the long term." Mutual funds typically include various fees:

  • Percent of assets under management. Annual fees from 0.5% to 1.5% of assets under management (AUM) are typical. The payment is due whether the asset values move up or down.
  • Trade commissions. Fund managers pass on the cost of buying and selling securities owned by the fund. The more a fund trades, the higher the costs and these hidden fees are in addition to an expense ratio.
  • Sales charges. Some funds charge a front-end fee at purchase or a back-end fee on a sale. A typical front-end load fee in the mutual fund industry is 5.75% of the amount invested.

Investopedia notes mutual fund disadvantages include "high fees, tax inefficiency, poor trade execution, and the potential for management abuses." Unsurprisingly, almost $52 billion flowed out of mutual funds in August 2022.

Estimated Flows* to Long-Term Mutual Funds
Millions of dollars
Estimated Flows to Long-Term Mutual Funds
*Note: Flow estimates are derived from data covering 98 percent of industry assets. Components may not add to the total because of rounding
Source: Investment Company Institute

The environment of private money management is especially fraught with danger since claims of credentials and experience are not verified. The magazine U.S. News & World Reports warned investors in January 2022 that you can’t tell who really has your interests uppermost in their actions – yours or theirs.

According to the magazine, the abuses of private financial advisers range from failures to disclose conflicts of interests to fees that would make a public mutual fund manager blush. Double-dipping by a broker/adviser is common, i.e., charging a fee for their advice and collecting a commission for providing the assets they recommend.

Ease and Breadth of Online Investment Tools

People born after the 1970s — the beginning of the Digital Age — expect economic and financial information to be quickly accessible, easily understood, and available in all viewing media. The rise in trading apps and accessibility technology underpins the growth in personal investing.

Within seconds, anyone with a mobile phone can review company data, stock trends, multiple analysts' opinions and transact buys and sales of securities, options, commodities, and cryptocurrencies. A personal computer linked to information providers is superior to the past decade's sophisticated trading desk.

Tradesmith, a Marketwise subsidiary, offers a variety of analytical tools to evaluate individual stocks and portfolios in the current markets. The effort and time to maintain a private portfolio in decades past has been eliminated by technology, making it easier than ever to “investigate before you invest.” Finally, the site includes an Education Center for beginners and those who need reminders of how financial markets work.

Getting Started in DIY Investing

Some people purchase mutual funds or let others manage their investments, fearing that financial issues are too complex to understand without an MBA or years of training. Learning about investments is easier than learning to play a musical instrument or repair an automobile.

Warren Buffett, considered the greatest investor of all time, frequently notes that intelligence is less important than common sense, effort, and the will to believe in oneself. "To invest successfully, you need not understand beta, efficient markets, modern portfolio theory, option pricing, or emerging markets. You may, in fact, be better off knowing nothing of these." "Investing is not a game where the guy with the 160 IQ beats the guy with the 130 IQ."

First Step. Learn the Basics

A couple reviews financial documents at their kitchen table

Hundreds of excellent books are available that explain the stock market and investments. Financial pros universally recommend the following five books to learn the mechanics of investing and stock analysis:

Successful investors never stop learning. Stay up to date with the news of the day. Look for trends and patterns, especially how different industries and companies react to changing economic and political environments. Subscribe to Marketwise investment newsletters like DailyWealth, The Bleeding Edge, and Louis Navellier's Market 360 for insights and opinions from those constantly watching the market for opportunities.

Second Step. Identify Your Risk Profile

Warren Buffett once claimed, "When forced to choose, I will not trade even a night's sleep for the chance of extra profits." A corollary to Buffett's advice is "Never take action without thoroughly understanding the risks and rewards of an investment." Aggressive brokers persuade too many people to take risks they don't understand because they are reluctant to ask questions.

The perception of risk is affected by one's degree of knowledge and previous experience. A beginning snow skier views a downhill run differently than a veteran of many ski trips. When venturing into unknown territory, it's always wise to scout the terrain before endangering significant portions of your assets. Market fundamental knowledge enables one to better quantify the risk and rewards of investments and investment strategies.

Third Step. Define Your Investment Objectives

The importance of a targeted, quantified objective cannot be overstated. Goals expressed in straightforward language include financial terms and the expected due date, such as a retirement portfolio of $1 million or a $40,000 house down payment in ten years. Your initial decisions will lead to the optimum strategy to meet your objectives.

woman takes notes from her laptop

Keep in mind the DIY Investing principles:

  • Never take a risk without a premium return. All investments have a variety of risks. Risk and returns are positively correlated; they move in the same direction. Investors constantly weigh risk and return when investing. For example, an investor choosing between a high-rated bond with a low-interest rate or an unrated bond with a high rate must decide: Is the extra interest worth bearing the greater risk of default?
  • Time is on the investor's side. A 30-year-old who begins to build a retirement portfolio can invest less money or accept a lower return than a person aged 50. The 30-year-old regularly investing $500 per month over 35 years at %% will have a portfolio value of $573,280. The older person would have to invest more than four times the younger person's investment ($2,100 monthly for 15 years) or earn four times the return each year to match the 30-year-old's portfolio value.
  • Diversify your assets. No one knows the future. Almost one-half of the Fortune 100 US companies (46) in 2000 had disappeared from the list in 2021, replaced by companies like Apple, FedEx, and Tesla. Technology has accelerated the pace of change, and whole industries are subject to disruption. Putting all your hopes on a single asset is an invitation to disaster.

Fourth Step. Minimize Uncle Sam's Tax Bite

The United States Tax Code is 6,871 pages of complex, convoluted jargon and boilerplate that can test the patience of a saint. Nevertheless, the regulations provide ample opportunities for investors to minimize and delay annual tax payments.

Traditional IRAs offer the opportunity to deduct significant deposits into a retirement account from current income and grow the accumulated deposits within the IRA on a tax-deferred basis. While money paid out after retirement is taxed, it is typically at a lower rate than paid while working.

Roth IRAs allow after-tax contributions to grow tax-free during one's working years without tax payments of any kind.

High-income investors or those who have accumulated significant portfolio values should consider the services of a competent CPA or tax attorney to limit the government's share to the legal minimum.

Fifth Step. Start Investing

Open a low or no-commission brokerage account and make your initial investment. Remember that, in the short term, emotions drive the market more than logic. Anything can happen. Slow and steady wins the race. Investors build great fortunes by consistent investments over long periods. Aim to achieve excellent returns over a 5- to 25-year period. Stock market investing is a long-term exercise extended over a lifetime.

Final Word

Be prepared to make some mistakes. Even Warren Buffett buys a lemon from time to time. Before buying a stock, write down your reasons. (Buying because your neighbor Bill or a friend of a friend has inside information should never be a reason to acquire an asset). Monitor your results, especially news about the company or its competitors.

Unless you expect to be a day trader — not an investor — there is no reason to watch every price movement of your investment. That is like picking fly waste out of pepper. If the price of your asset goes down, but the reasons for your purchase remain intact, stay steady, knowing time will prove you right. You could consider the drop a buying opportunity.

Some might question whether starting to manage your own investments in the Fall of 2022 due to the questions about the future economy and stock prices. During uncertain times, many investors have concerns. They forget that the economy recovered, businesses continued to grow, and investors returned to the market with a vengeance each time.

If you're not yet ready to control your investment future, use the time to educate yourself about the different types of investments, their pros and cons, and how they relate to one another. Subscribe to any of the Marketwise newsletters to see how professionals view the future opportunities and risks. Investing in your personal knowledge is an opportunity you do not want to miss.