In the digital age, DIY investing has experienced a meteoric rise, fuelled by the promise of high returns and easy access through platforms like Robinhood and Sharesies. While the appeal of autonomy in managing one’s financial future is strong, the risks associated with self-directed investing are becoming increasingly apparent, especially in New Zealand, where many investors are facing serious financial setbacks.
The Allure of Control: A False Sense of Security
DIY investing offers the illusion of control. Armed with a smartphone and an array of online platforms, everyday investors are diving headfirst into the world of stocks and cryptocurrencies. However, as Nick Stewart, CEO of the Stewart Group, explains, “It’s less like following a map and more like the sailors of old who swore there were beautiful sea maidens on rocky outcrops—only for those who came by later to find out the mermaids were manatees.”
For many, the illusion of control fosters a false sense of security. While markets may seem to follow a predictable pattern, they can shift unpredictably, leaving inexperienced investors struggling to stay afloat. And that’s only part of the problem. Navigating the complexities of taxes, regulations, and market trends adds layers of difficulty that many DIY investors are unprepared for.
Inland Revenue Department Cracks Down on DIY Investors
Recent warnings from New Zealand’s Inland Revenue Department (IRD) further highlight the dangers of DIY investing. Using advanced algorithms and data analytics tools, the IRD now has unprecedented oversight of financial activities, including crypto transactions and online trading. Minor oversights in tax reporting can quickly come to the attention of authorities, leading to steep penalties.
As Stewart notes, “The IRD will seek to rectify this—sometimes resulting in steep penalties.” Many DIY investors, unaware of the tax implications tied to their trades, find themselves facing costly mistakes that could have been avoided with professional guidance.
Knowledge Gaps and Emotional Pitfalls
Investing is not just about picking the right stocks or cryptocurrencies; it requires a deep understanding of market trends, economic factors, and regulatory changes. Professional advisers spend years honing these skills, positioning clients to weather financial storms and maximise gains. In contrast, DIY investors often rely on limited knowledge, which can lead to poor decisions, particularly when it comes to tax obligations.
One of the biggest challenges for DIY investors is emotional decision-making. Market fluctuations can evoke strong reactions—fear during downturns, overconfidence during surges. Professional advisers help investors stay focused on long-term strategies, steering them away from hasty decisions. By contrast, DIY investors are often left to grapple with their emotions, which can lead to impulsive trading and financial losses.
The True Cost of Mistakes
Perhaps the most significant risk of DIY investing is the cost of mistakes. Without professional advice, errors in judgment can result in substantial financial setbacks. A common issue is the failure to diversify portfolios properly. As Stewart explains, “A diverse portfolio is like sending a great fleet of ships to every corner of the globe. If one falters, you have many more to pick up the slack.”
Moreover, data from Dalbar’s 30th Annual Quantitative Analysis of Investor Behaviour (QAIB) shows that DIY investors tend to underperform compared to those who seek professional advice. According to the report, the average DIY investor’s returns are notably lower, largely due to emotional trading and poor market timing.
The Value of Professional Support
In today’s complex financial landscape, the benefits of seeking professional advice cannot be overstated. Working with a financial adviser offers peace of mind and a steady hand to guide investors through market volatility. For those committed to DIY investing, Stewart advises at least consulting an accountant or bookkeeper to ensure tax obligations are met and financial activities are properly recorded.
While the allure of autonomy may be tempting, the risks associated with DIY investing are too great to ignore. In the long run, professional support offers a more reliable path to financial success, protecting investors from the pitfalls that come with navigating the markets alone.
