The Downside of Individual Investing

After two straight calendar years of strong equity market returns, some individual investors may not only be tempted to get back into the market, but they also may be feeling that they can do it all themselves. While it is only human nature to get swept up in the momentum of a good thing, it is important to consider all of the risks of a go-it-alone approach. Studies have shown that individual investors tend to significantly lag the returns of the overall market, generally due to a few common mistakes.

Failing to lay out a sound long-term strategy, creating a less than fully diversified portfolio, chasing the hot stock, mutual fund or asset class, and not understanding all types of investment risk can all lead to an underperforming investment portfolio.

Setting a long-term investment strategy involves quantifying a level of risk that is acceptable for the investor. From there, the investor must decide how assets (stocks, bonds and cash) should be allocated within the portfolio. Without this important set of parameters, short-term market movements can substantially deteriorate the value of the portfolio during extreme circumstances.

Similarly, holding too few securities within the portfolio may lead to drastic underperformance. While an individual security may have very strong prospects based upon the fundamentals, there are always unforeseen factors that can lead to severe underperformance. A diversified portfolio has little exposure to this type of security-specific risk.

The trailing returns of a security are very often not indicative of future returns. For instance, the strong performance of high-yield bonds over the past two years coincided with a narrowing of the yield spread between corporate and government bonds. With treasury yields now on the rise, it is not likely that we will continue to see these strong returns persist within this asset class. Without knowing the relationship between high-yield returns and the level of credit spreads, an individual investor may simply rely on recent returns in order to make an investment decision.

While there are always opportunities to be had in the markets, individual investors need to keep in mind that there is an entire industry full of experienced professionals devoted to exploiting these opportunities. There are also a multitude of risks that are at play at any one time in the markets, and each asset class has its own set of investment risks that need to be considered. Going it alone may seem like a low-cost way of getting great returns, but over the long-term this strategy has left many individuals earning less than the market.

For more information, contact Pat Fisher at pfisher@schneiderdowns.com or (412) 697-5301.

Interested in receiving more timely articles like this one with topics that are relevant to your businessClick here to sign up for our weekly newsletters.  Or, if you'd like more information on Schneider Downs Wealth Management services, visit our webpage.

 

 

Schneider Downs provides accountingtax, wealth management, technology and business advisory services through innovative thought leaders who deliver the expertise to meet the individual needs of each client. Our offices are located in Pittsburgh, PA and Columbus, OH. 

This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax-related matter.

our thoughts on

array(1) { [0]=> string(2) "36" }
I Want Mine - Social Security Simplified
Financial Fitness: Setting SMART Goals
Financial Fitness
Financial Fitness - Are my personal finances on the right track?
Year-End Giving from IRAs: Traps to Avoid
The Changing Landscape of Qualified Retirement Plans

Register to receive our weekly newsletter with our most recent columns and insights.

Have a question? Ask us!

We’d love to hear from you. Drop us a note, and we’ll respond to you as quickly as possible.

Ask us

contact us

Map of Pittsburgh Office
Pittsburgh

One PPG Place, Suite 1700
Pittsburgh, PA 15222

contactsd@schneiderdowns.com
p:412.261.3644     f:412.261.4876

Map of Columbus Office
Columbus

65 East State Street, Suite 2000
Columbus, OH 43215

contactsd@schneiderdowns.com
p:614.621.4060     f:614.621.4062