How to Handle the Dangers of DIY Investing

Wall Street devoutly wishes you to believe that you need professional help to manage your money. But most investors prefer to go it alone.

A survey earlier this year from the Deloitte Center for Financial Services looked at the state of the retirement planning industry in America. When asked about getting professional help for their retirement planning, 57 percent of those surveyed said they were simply more comfortable handling their retirement planning on their own. Another 38 percent saying that they don't actually advice from professionals, while 29 percent don't trust advisors to objectively represent their interests.

You can practically hear the collective cry of professional money managers across the country: "DIY investing? But how are we going to make a living off that?!"

Deloitte has an idea: One of the conclusions that the survey made was that financial advisors should target do-it-yourself investors with marketing campaigns about the dangers of going it on their own with their retirement savings.

Let's take a look at some common mistakes investors make, with an eye toward seeing whether professional advice can help prevent them.

1. Being Too Conservative

One of the biggest mistakes retirement investors make is to invest too conservatively. When stocks have fallen, they're too scared to buy into the market. Yet at times like now when stocks are high, they fear that the market is too expensive and that a downturn is imminent.

Despite their greater risk, stocks provide much better opportunities for growth than alternatives like bonds and cash investments. For those with years or even decades to go before retirement, investing in stocks gives you the best chance to see your money grow enough to meet your long-term financial goals. Finding the right mix of investments is certainly something you can do on your own with a little research.

2. Chasing Performance

Retirement investors who embrace stocks often make another mistake: paying too much attention to past performance. Buying the latest hot stock or sector of the market can be extremely tempting, but by the time an investment has done well enough to reach the high-performance radar screen, it has often already seen most of its growth opportunity play out. Unfortunately, this is also a trap that many professional brokers fall for, recommending the latest hot thing to clients even though the upside potential isn't there anymore.

The better choice is to look among stocks or investments that done well. Often, there will be good reasons for that bad performance, and you'll want to stay away from those investments. But some beaten-down stocks have far stronger future growth potential than high-flying investments that investors have already discovered.

3. Failing to Plan for Worst-Case Scenarios

People planning for their own retirement often end up focusing solely on investing. That's a key component of financial security, but it's far from the only one.

Another major factor is insurance protection, with needs like supplemental Medicare and long-term care insurance playing a vital role in keeping retirement costs down and helping preserve your nest egg as long as possible. Estate planning is also a key element of a successful retirement plan in order to ensure your family is taken care of after your death and that your financial affairs will be kept in order if you face a serious illness or injury.

Here, it's a lot harder to do your own legwork with insurance and estate planning than it is with investments. Insurance almost always requires contact with professional salespeople, and although do-it-yourself legal documents are available, personal attention yields a better-tailored plan.

4. Ignoring Taxes

Do-it-yourself investors sometimes ignore the vital role that tax planning can play in handling investments. For instance, many investors gravitate toward short-term investment plays, looking to make a big score quickly. Yet high tax rates on short-term capital gains can take half or more of those gains away when you consider both federal and state taxes.

By being smart about not only using tax-favored accounts like IRAs and 401(k)s but making the of them, you can greatly improve your after-tax returns. If you ignore the tax implications of your actions, you could easily find that the IRS benefits from your best investment ideas as much as you do yourself. So if you find yourself facing a complex tax situation any given year, it may be worth spending a few hundred dollars for the advice of a tax professional who can help you deal with the previous year's return, but also give you advice on how to best proceed in the future.

Get Help Where and When You Need It

Of course, what financial professionals fail to point out is that they're far from perfect in handling these potential pitfall areas. Few brokers have the training to provide in-depth legal or tax guidance, and they're often prone to conflicts of interest on the investment and insurance front that can put you into financial products that aren't the best available.

So don't take the Deloitte survey results as meaning you should give up on handling your own finances. By being aware of common mistakes like these, you'll greatly improve your odds of avoiding them.