The Biggest DIY Investing Mistakes
Money Guy Show
Brian and Bo from The Money Guy Show break down seven common mistakes DIY investors make, ranging from structural portfolio errors to emotional trading pitfalls. They
Key takeaways
- DIY investors often hold overlapping funds that create an illusion of diversification while concentrating risk in the same underlying holdings.
- Proper asset location can boost returns by nearly a full percentage point; placing tax-inefficient bonds in tax-deferred accounts and equity index funds in taxable accounts minimizes drag.
Main topics
- Overlapping funds and diversification illusions
- Tax-efficient asset location strategies
Notable quotes
"Instead of trying to beat the market, just be the market and save the money on those internal expenses."
Conclusion
The episode provides a practical self-audit framework for DIY investors to eliminate tax drag,
Transcript preview
Speaker 3 (0:00) If you're a do-it-yourself investor, this episode Speaker 2 (0:02) is for you. Brian, I am so excited because today we're going to talk about some of the biggest mistakes that we've seen do-it-yourself investors make and how to fix those mistakes so they don't end up derailing your entire wealth building journey. I'm Brian, he's Beau, and Speaker 3 (0:17) this is The Money Guy Show, where two financial advisors help you figure out how to save and invest for your future. And with that, let's dive and jump right in. Speaker 2 (0:32) Brian, the origin of this episode is we get a bad rap where people all the time assume that we are anti or against do-it-yourself portfolio managers, financial professionals, and that's just not the case. We actually think that there is a place for do-it-yourself. There's a lot of folks out there that are fantastic do-it-yourself advisors. You know, Speaker 3 (0:53) I'll take us all the way back to 2006. That's the year that we started podcasting. The whole purpose was I felt guilty. that we had minimums, Speaker 2 (1:02) you know, Speaker 3 (1:02) that we Speaker 2 (1:02) couldn't work with people. Speaker 3 (1:03) And a lot of people just needed help with, how do you start open up a Roth IRA? How do you make sure that you're paying off your credit cards, that you're budgeting, you have emergency reserves? I was like, man, somebody needs to tell people how to do money better because there really is a better way to do money. That is the heart of why we created the show. So we are all about you being empowered and becoming the best version of yourself. Because guess what? Yes, if you do this well, complexity is going to find you. So we want to load you up so you can be your best version, even as a do-it-yourself. And Speaker 2 (1:38) it's interesting, with all the technological advancements that we've seen. Two-thirds of workers right now, 64 % of folks say that they're not currently working with a financial professional. Rather, they're able to find different sources, different mechanisms to get their financial information. If you look at this, this was a study done by the Employee Benefit Research Institute that said, okay, where do people get information for retirement planning? Like, how do they... inform and educate themselves if they don't do this profession. It was interesting. A lot of folks get their advice from family and friends. A number of people do it from like online resources or personal research. There are some that work with financial professionals, but there's also people who depend on their employer's HR department. There are some people who strictly just watch financial commentators and media producers. And then as one of the metrics that I think has grown certainly over the last couple of years, and I think will probably continue to grow, is artificial intelligence is now becoming a real tool that can be used to answer financial questions. Speaker 3 (2:45) But even if you're using things like the growing trend of using artificial intelligence, you're going to need to have knowledge. Because as we've seen using artificial intelligence, even in our practice, there's all kind of echoes or phantoms or ghosts or things that just show up in the system. You're like, Where did that come from? So today we're going to cover the seven mistakes we see do-it-yourselfers make. Speaker 2 (3:08) Yeah, what we're going to do is we walk through each of these seven common mistakes that we've seen over decades of working as advisors. We're going to walk you through not only what the mistake is, we want to explain to you why in fact is it a mistake, and then we even want to show you how to fix it. What are the things that you should be aware of? And you can do sort of a self-audit. Okay, if this is true, if this exists in my financial life, What are the things I can do to change it and prove it and not make that mistake moving forward? Speaker 3 (3:34) So with that, let's jump right into number one. And I see this one way too often. Too many overlapping funds. Now, look, I've shared with you guys that I had a family member at one of the holidays come up to me and asked me if I had to look at their 401k. And I looked at the 401k and I was like, what? did you use to choose the funds that went into your 401k? And they said, I'm keeping the gender out on purpose. They said every fund that had growth in, I chose. I Speaker 2 (4:05) got the growth Speaker 3 (4:05) one and the growth one and the growth one and the growth one. So I was like, well, yes, growth is a great objective. But that's not a great choice because you'll see a lot of funds that have growth in the title will have a lot of overlapping holdings, meaning that the top holding in this fund is going to be the same top holding in this fund. Speaker 2 (4:27) That can create a problem. Yeah, you know that we espouse and we talk all the time about diversification and why it can benefit you. A lot of people think if I just have a number of different holdings, by default, that's going to mean I'm diversified. Not necessarily the case, even if you have a bunch of different mutual funds and a bunch of different ETFs. And here's a real easy example. Let's assume that you have investment A. And in investment A, you have five companies in this fund. You've got Acme, Cyberdyne, Wayne Enterprises, Stark Industries, and Dunder Mifflin. That's investment A. That's a great portfolio. You decide that you want to diversify, and you're going to add in some of investment B. Well, when you actually get into the underlying holdings, investment B holds. Acme and Cyberdyne and Wayne Enterprises and Stark Industries and Weyland-Yutani. And so when you actually look at these two funds combined, even though you thought you were diversifying, there's actually an 80 % overlap between these investments based on the underlying holdings. And we see this inside of do-it-yourselfer portfolios all the time. We see the number of holdings they have when you actually dive into what they're truly exposed to. It's really a whole bunch of the exact same thing with no real diversification at all. Speaker 3 (5:40) So here's what the solution is, is streamline your funds. Actually know what you own. The good news is a lot of the custodians out there, the big providers that are holding your Roth IRAs, that are holding your after-tax brokerage accounts, they will provide a tool to where you can type in all the ticker symbols and then compare and contrast how much overlap is going into this. Go do that exercise so that you're not just ending up with a super concentrated portfolio that you think is diversified. Speaker 2 (6:09) And then just as a quick little note, beware of funds out there that are really just closet index funds masked as something else. If you see that the top holdings in your mutual fund that you're investing look the exact same as the top holdings in the investment in the S &P 500, but yet the internal operating expense of yours is... 10 times that of the S &P 500, perhaps you'd be better off buying the low-cost index fund. You'd be amazed. Just doing a little bit of work on the front end can save you substantially over the long term. Speaker 3 (6:39) It's almost like the saying, instead of trying to beat the market, just be the market and save the money on those internal expenses. Speaker 2 (6:46) All right, Brian, let's talk about do-it-yourself investing. Mistake number two, and this is one we see all the time. It's not using or not understanding. the right accounts to use inside of your portfolio construction. Yeah, Speaker 3 (6:58) guys, you hear us all the way. You know, if you think about fundamentally the financial order of operations, which is completely free to you, if you go to moneyguy.com slash resources, taxes play a big part in why we choose what we choose. And so if you think about Roth accounts are tax-free. Your 401ks, especially your employer in the past, those have been tax deferred. And then your after-tax accounts are considered, you know, those are your brokerage accounts. They have their own way of being taxed. Well, you've got to figure out how to navigate this so that you come out on the other end and keep as much money as that possible while playing the tax game. Speaker 2 (7:33) Yeah, we talk all the time about asset allocation, how you diversify and spread out your assets. But we also want to think about asset location. What types of investments do I hold in what type of accounts? it can have a material impact. Think about this case study. Let's assume that you have Ivan the investor. And Ivan the investor has two investments that he's going to hold. He's going to have an index fund that's going to make 12 % annually per year. It's going to go up in value 12 % per year. But then he also has a bond fund that's going to pay a 5 % dividend out to him at the end of every year. Well, let's also assume that Ivan has two different investment accounts that he can have. He has a 401k and he has a brokerage account. $100,000 in each. So Ivan has some decisions to make in terms of how he structures his portfolio. Speaker 3 (8:19) Well, this is where the education comes in. Index funds are, especially equity index funds, very tax efficient. You have the dividends, but dividends