Kevin MurphyIn today’s digital age, self-directed investing has surged in popularity, with more households deciding to take control of their investment portfolios. The rise of online platforms, access to a vast amount of information, and the simplicity of investment vehicles like Exchange-Traded Funds (ETFs) have made it easier than ever for individuals to manage their own money. While this democratization of investing is a positive trend, Faisal Al Hashim, Managing Director of Maxiam Capital, cautions that it can come with significant risks.
“It’s great that more people are taking an interest in investing,” says Faisal. “Tools and platforms are making it easier for everyone to get involved, but the overwhelming amount of information and rise of influencers can often mislead investors, especially when they’re overly confident about their abilities.”
Maxiam Capital, a firm that manages client portfolios in a discretionary manner, makes investment decisions on behalf of clients based on their specific goals, risk tolerance, and long-term financial plans. However, Faisal notes that even within the firm’s client base, there are individuals who maintain their own DIY accounts. While Maxiam Capital focuses on building trusting relationships with clients, ensuring everyone is on the same page with a cohesive financial strategy, it’s not uncommon for clients to seek guidance after a misstep in their self-directed accounts.
The Overconfidence Trap
One of the most common issues Faisal encounters with self-directed investors is overconfidence bias—especially among those who have achieved success in their professional fields. It’s easy to assume that the skills that make someone successful in one area of life will translate to investment success, but the stock market operates under an entirely different set of rules. “Just because you’re successful in your career doesn’t mean you’ll automatically be a successful investor,” Faisal says. “The stock market is complex, non-linear, and can be influenced by countless factors, many of which are out of your control.”
For many DIY investors, it’s not unusual to be drawn in by financial influencers or general investment advice that seems applicable to everyone. However, as Faisal points out, one-size-fits-all advice rarely aligns with an individual’s unique financial goals. “Many people follow what they hear online, but investing is a deeply personal journey,” he notes. “What works for one person might not work for another, especially when long-term goals, risk tolerance, and family situations are factored in.”
A study conducted by DALBAR from 1993 to 2018 revealed that the average investor consistently underperformed the market, largely due to poor decision-making and emotional reactions to market movements. “Investors often get caught up in emotional trading—buying high and selling low,” says Faisal. “When you don’t have a clear plan or someone to keep you grounded, it’s easy to make decisions based on short-term market swings, which can really hurt your long-term returns.”
The Misconception of “Just Invest in the S&P 500”
A popular approach for many DIY investors is to simply invest in the S&P 500, believing it offers broad market exposure and is a safe, easy strategy. Even Warren Buffett, one of the most respected figures in the investment world, has advised people to invest in low-cost S&P 500 index funds. He’s often quoted as saying that for most people, sticking with the S&P 500 is the simplest way to grow wealth over time.
However, as Faisal Al Hashim notes, while Buffett gives this advice to others, he has never followed it himself. “Buffett’s advice is valuable for the average investor, but it’s important to understand that he personally invests in individual companies, conducting deep analysis before making decisions,” Faisal explains. “The S&P 500, while effective for many, still carries its own risks, particularly concentration risk.”
What many DIY investors may not realize is that the S&P 500 is heavily weighted toward large-cap tech companies, meaning that a significant portion of their investment is concentrated in a few dominant firms. This can create unintended risk exposure, especially during periods when these sectors face volatility. “It’s easy to think you’re diversified by investing in an index,” Faisal says, “but when a few companies start becoming heavily weighted in the index, you’re exposing yourself to concentration risk, which can lead to significant swings in your portfolio if those companies stumble.”
Buffett’s success has always been tied to his ability to select individual companies that he believes in rather than simply relying on broad market indices. His advice on the S&P 500 is practical for those who prefer simplicity, but understanding the full picture is essential for investors looking to fine-tune their strategies.
The Risks of Being the Sole DIY Investor in the Family
Another important factor that many DIY investors fail to consider is the responsibility they carry as the sole decision-maker for the family’s financial future. “If something were to happen to that one person managing the finances, it leaves the rest of the family vulnerable,” Faisal points out. “Too often, we see families scrambling to understand what to do next when the primary financial decision-maker is no longer able to manage things.”
Maxiam Capital places a strong emphasis on building trusting relationships with clients, ensuring that not only the individual investor but the entire family is aligned with the financial plan. By having everyone on the same page, clients can rest assured that in the event of a life-altering event, the plan is clear, and the family’s financial future is protected.
“A big part of what we do is help clients understand that their financial plan isn’t just for them—it’s for their families,” Faisal says. “It’s important to have a strategy in place that ensures everyone knows what to do if something unexpected happens.”
The Intellectual Appeal of DIY Investing
For many high-achieving individuals, DIY investing can feel like a rewarding intellectual challenge. Managing their own portfolio provides a sense of control and can be seen as an extension of their personal success. “It’s not uncommon for successful people to believe they can translate their expertise into the world of investing,” says Faisal. “But the markets are far more unpredictable and complex than many realize.”
Investing requires experience, discipline, and a deep understanding of how markets work. The financial markets are constantly evolving, influenced by global events, government policies, and investor sentiment—factors that even seasoned professionals find difficult to predict. DIY investors often fall into the trap of creating a linear system to manage their investments, only to be blindsided by market volatility that doesn’t follow their expectations. “The markets don’t operate in a linear fashion,” Faisal adds. “DIY investors are often surprised when their system fails them, leading to significant losses or missteps.”
The Value of Professional Guidance
While self-directed investing offers flexibility and control, it’s important to recognize the value of professional guidance in navigating the complexities of the market. Maxiam Capital’s discretionary approach allows the firm to make investment decisions on behalf of clients, ensuring their portfolios are aligned with their long-term goals. By working with a financial advisor, investors can avoid common mistakes and benefit from years of market expertise.
“Having a professional on your side doesn’t mean giving up control,” Faisal explains. “It means having someone to provide insights and guidance so you can stay focused on your long-term goals without getting caught up in the day-to-day noise of the markets.”
Ultimately, successful investing is about building a sustainable strategy that works for you and your family over the long run. With Maxiam Capital’s commitment to personalized guidance, investors can avoid the pitfalls of DIY investing and ensure they’re on the right path to achieving their financial objectives.
Disclosure:
The views expressed in this article are those of the author and do not necessarily reflect the views or opinions of Maxiam Capital. This content is for informational purposes only and does not constitute financial, investment, or professional advice. All investments carry risks, and past performance is not indicative of future results. Maxiam Capital does not endorse or guarantee any third-party content’s accuracy, completeness, or reliability. The reader is solely responsible for any actions taken based on the information in this article and is strongly advised to seek financial advice from a qualified professional before making any investment decisions.
Kevin Murphy
