Why DIY Investors Earn Less

Peter, very good to see you.

Welcome back, everyone. We are talking through why DIY investors earn less. According to Vanguard's Advisors Alpha Study, a good financial advisor can add about 3% in net returns per year through behavioral coaching, asset allocation, rebalancing, and tax planning. 3% per year, Peter. I mean, that bears repeating. So explain, please, what is behind that performance gap?

Well, I'm going to actually take issue with that a little bit. Not every year, right? Because there are some years where do it yourself investors, especially ones that have a very high risk tolerance that are being ultra aggressive. If the year is an advantageous up year in the market, and they're picking the right individual stocks, they could make a ton of money. Then bad years happen, right? And just as extreme, those same kind of people can be exposed to larger losses. So I would say that the important part of that stat is that it is over time per year, not in any one specific year.

And it is on average. But you know, I've seen this firsthand, where there have been investors who have who have made a boatload of money, but like missed opportunities, or didn't understand the tax implications of it, or held too long, and then lost just as much money. So yeah, there are things that we have access to these days. I mean, investment has been largely democratized and commoditized.

And every financial institution out there makes it easy for you to open an account, but just opening an account, depositing some money, and picking funds. It's not always that easy. And there's more to it than just that part in order to really be successful over time. And just to throw a few more stats at you, you've heard of the infamous Dalbar study that found DIY investors often underperform the market, because we as humans are driven by emotions. Explain what's behind this significant study. Yeah, the old Dalbar investor behavior study.

Yeah, yeah. So I think it's now for the last 25 or 30 years, they do this annual study of market returns versus investor behavior, and then investor returns, and pretty consistently show that the market outperforms the average investor due to the fact that we are emotional. We have FOMO. We have fear of missing out. We have fear. And then on the other side, we have greed. And so we get in when things sound like they're doing really well. And we want to take part in that because, oh, no, what if we miss out on this fantastic market run? Well, we ultimately hear about it after it's already run up. And then at the wrong time, we become investors or invest in something that's already gone up and then ride the roller coaster down to the bottom. And now we're fearful and I can't take much more of this. So we get out as as it reaches a trough and bottoms out and then repeat that process until we go broke.

Right. It's like the old joke about Wall Street. How do you make a million dollars in the market?

Well, you start with two. That's unfortunately a little bit more real than than the joke would would seem, because people tend to make the wrong moves at the wrong time, react emotionally. And therefore, having an adviser or somebody to kind of handle the psychological elements of seeing the market, which is volatile, go way, way up and go way, way down and ride through it and maintain an approach that makes sense long term is going to be helpful. We are going to see those downtimes in the market.

Right. We're going to see those uptimes in the market. It doesn't mean that you you you completely derail a solid plan just because of the direction of the market day to day. And some of the best days happen after some of the worst days.

And people miss that. So we just want to have a plan, stick to it, a plan for long term success. If we want to do some day trading or something, have some fun, wild, crazy money account over on the side. I've got clients who do that, but no more than they are comfortable losing. And once it gets up to a certain point that they would not be comfortable losing this much money, we'll take some of that off the table and start back over. Right. Having that plan that is in line with your risk tolerance brings peace of mind so that you don't make these knee jerk reactions.

I mean, it makes sense. Many DIY investors believe that they can save money by avoiding advisory fees. So, Peter, how do you help clients understand the value you provide? Well, there's a value in getting more out of Social Security. I mean, that can be several hundreds of thousands of dollars over somebody's lifetime. That's not in the investments themselves. There is a value in being efficient with taxes.

Right. And we've helped clients get millions of dollars into Roth and post tax. And now and forever, tax free accounts. We did that when taxes were on sale and they are on sale still.

So that's a great opportunity. You know, as tax laws stand, as we are recording this program, the 12 percent bracket is slated to go up to 15 percent at the end of this year. That is not a three percent tax increase.

That is a 25 percent higher tax bill. So an adviser is adding some costs to spot and identify those kind of opportunities that are going to save somebody long term significantly more. That's where the value is in working with an experienced, qualified professional who spends their time identifying these opportunities and the situations that apply to them, where they are beneficial, where they have disadvantages, the pros, the cons, being able to weigh those things. So, yeah, just thinking outside the box on investments, your financial progress, the total plan is more than just the stocks that you pick in an account.

And by the way, like I've dealt with this often over my career. A lot of times where there is a more DIY kind of mindset in one spouse, it's not the other spouse's thing. And leaving a spouse completely in the dark about what's going on in the finances. Like I've asked this question and talked with a lot of people who were very confident, kind of self-managing their accounts. They had done well for themselves and come to find out they don't have their wills or legal documents.

They have too much money sitting around in CDs that could be earning more. And I ask, well, if something happens to you, is your spouse equipped to handle this? And they're like, oh, no, this isn't their thing at all.

Well, you know, then maybe we should rethink the complete self-management DIY mindset and be a little bit open minded to there might be other opportunities. And at the end of the day, a resource that both people can feel comfortable relying on. So then for Peter, for somebody who is thinking about hiring an advisor, what is the best way to start that conversation to determine if they should? What should they even expect in that first conversation?

Well, I mean, it's it's a bit of a mutual interview, right? The advisors are going to want to get to know a little bit about you. You're going to want to get to know a whole lot about the advisor. Ask them direct questions, their experience, their their their methods, their mindset, their compensation, what qualifications they have.

All of those kind of questions are important. And the advisor, you should expect them to ask you questions, personal questions, financial questions. I think there's some hesitancy about that, like people pause on getting started or wanting to talk to an advisor because of that, because of the potential for cost, because of the time commitment that people think it it may involve. I would say that like handling all of your finances on your own, that in and of itself is a pretty hefty time commitment. And for do it yourself investors, a lot of them like the money is not the issue. The time is is actually more of an issue is handling the finances, keeping up with the investments, keeping up with changes in tax laws like is that the most efficient use of your time?

Or could you interview a couple of people, take a few hours doing that? Find somebody that you trust that is knowledgeable and allow them the job of keeping up with all that stuff on your behalf. And, you know, identifying things that you might not have thought of because we don't know what we don't know. A lot of times those are the things that end up hurting us. So, you know, just just be open minded. If you have been hesitant in starting that conversation, maybe because you're worried you'll hear something bad.

Right. Like go into the doctor. If you've had a little ache in your in your side or something some way and you're like, hey, this has gone on too long.

What's really going on? I'm going to put off going to the doctor. I'm going to put off going to the doctor. And then eventually it's like, I've got to go see one. You don't want to wait that long.

When when your financial future is on the line or your health future, either way, like people who have routine regular physicals find those issues far, far, far ahead of time of the people who don't. Right. And that really helps people from a health perspective and from a wealth perspective. Well, if somebody wants to have that again, no obligation conversation with you, Peter, how can they get a hold of you? Yeah, no cost, no obligation. We put a plan together. We call it the optimized retirement plan to get that conversation started to find a time that works conveniently for you. Give us a call at the office at Rashan planning nine one nine three zero zero five eight eight six nine one nine three hundred fifty eight eighty six.

Or you can go online. The website looks like rich on planning dot com. Rich on planning dot com. It's my last name, Rashan, Rashan, planning dot com.

You know, it's not just your finance, it's your future. So set up a time and we're here willing to talk. We don't make it hard. We don't make it difficult.

There's no cost to it. So just get over that initial hurdle, whether you haven't had a plan put together or you've been doing things yourself and just want to double check to see if you're missing anything. Yeah. It could just be good news.

It could just be. Yeah, absolutely. Yeah, you've got it. All right. Perfect. Peter, thank you so much for your time today. I appreciate it. Aaron, thank you. Hey, folks.

Rashan here with Rashan planning. So glad that you are enjoying the podcast Planning Matters Radio. You know, one of the tools that we've put out there that people really seem to appreciate and really are our finding of value is at nine one nine retired dot com. It is your retirement tax bill calculator. If you've got any kind of retirement account, your tax deferred 401K or IRA. This is the Web site.

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So if you have not yet, go to the Web site nine one nine retired dot com. Run your numbers on the retirement tax bill calculator. This has been Planning Matters Radio. The content of this radio show is provided for informational purposes only and is not a solicitation or recommendation of any investment strategy. You are encouraged to take investment tax or legal advice from an independent professional advisor. Any investment and or investment strategies mentioned involve risk, including the possible loss of principal advisory services offered through Brooke's own capital management. A registered investment advisor, fiduciary duty extends solely to investment advisory advice and does not extend to other activities such as insurance or broker dealer services. Advisory clients are charged a quarterly fee for assets under management while insurance products pay a commission, which may result in a conflict of interest regarding compensation.