The Cost Of Do-It-Yourself In Retirement Planning And Investment Advisory

Rajesh, a successful software engineer in his early 50s, had always prided himself on his financial acumen. After years of diligently saving and investing on his own, Rajesh felt confident enough to manage his retirement portfolio without professional help. However, his journey into DIY financial planning soon turned anti-climatic. Despite his best efforts, Rajesh fell back on his targets and failed to meet various goals he set for himself. He also experienced significant stress due to market volatility and missed opportunities. Also Read: 3 Financial Lessons To Learn From Duggal Family’s Struggles In The Movie ‘Do Dooni Chaar’ In the age of information, many investors are drawn to the allure of managing their financial portfolios by themselves. The appeal lies in the potential cost savings and the satisfaction of staying in control.   However, the path of DIY financial planning is fraught with challenges. Behavioural biases, lack of expertise, insufficient time, and emotional decision-making can significantly impact an investor’s portfolio performance.   This article delves into the costs associated with Doing It Yourself (DIY).  

Behavioural Biases and Their Impact

Investors often fall prey to several behavioural biases that can detract from optimal financial decision-making. These biases not only influence investment choices but also have substantial financial repercussions.  

1. Lack Of Confidence Resulting In Analysis Paralysis

Many investors lack the courage to make decisive decisions about their money. Lack of sufficient data and not having done enough research may result in this lack of confidence. As a result, they suffer from ‘analysis paralysis’. We have seen investors come back after 6 months to 2 years, saying they hardly got ahead by themselves. In the process, they miss many opportunities. Rajesh had Rs 1 crore to invest, and it stayed in his bank savings account, waiting for him to decide for a long time. Just this delay can cost such an investor almost Rs 40,000 to Rs 50,000 a month. A 2-year delay would cost about Rs 10-12 lakh. Due to a lack of confidence in their decisions, investors tend to allocate assets poorly as well, taking multiple small bets. They end up losing most of the possible opportunities for growth. A 50 per cent exposure vs a 10 per cent exposure to high-growth assets means a difference of Rs 8-10 lakh loss over 5 years on a Rs 1 crore investment corpus.  

2. Greed / Fear Resulting In Multi-Generational Wealth Destruction

Greed and fear are two of the most potent emotions that drive investor behaviour. Entering or exiting the market at the wrong time due to these emotions can lead to significant financial losses. During the 2007 bull run, many investors entered at the peak in December 2007, buying anything and everything at inflated prices. They did not want to miss out on the bull run. When markets fell, they waited and waited for a recovery that didn’t come for a long time. They exited a year later, smarting under a 20–30 per cent loss. Such knee-jerk activities by Rajesh cost him almost Rs 18 lakh in a year. Their impact also leaves such a bad taste in many investors that they refuse to engage with the markets again. This robs them of any chance at recovery, and the loss becomes permanent. After this, they disseminate anti-equity advice to people all around, jeopardising subsequent generations of investors as well.  

3. Lack Of Time Resulting In Not Taking Timely Actions

Proper financial planning requires consistent time and effort. Many DIY investors fail to implement their plans fully, leading to missed opportunities. Partial implementation of plans has cost some of our clients gravely. They made only equity investments, did not buy insurance, failed to build an emergency fund, and purchased gold bonds with an 8-year lock-in, which makes it difficult for the plan to work and causes financial losses and stress. Missing the Systematic Investment Plans (SIPs) robs the portfolio of the benefits of rupee-cost averaging, leading to suboptimal results. Moreover, a lack of regular monitoring and rebalancing can also result in a loss of alpha creation possibilities. All of these can cost about Rs 5-6 lakh a year on a Rs 1 crore portfolio.

4. Lack Of Knowledge Resulting In Missing Opportunities

Investors often follow the herd or work on tips without conducting in-depth analysis. This can result in betting on the wrong stocks or buying at high valuations. These can cost the portfolio dearly. Additionally, missing out on cost-saving or tax-saving opportunities can further cost Rs 1-1.5 lakh. Also Read: All Alzheimer’s Cases Are Dementia, Not All Dementia Cases Are Alzheimer’s: Here’s What Seniors Need To Know

Non-Financial Costs of DIY Financial Planning

Beyond the quantifiable financial costs, DIY financial planning also incurs significant non-financial losses:

1. Not Achieving Financial Goals

Failure to meet financial goals can have far-reaching consequences on an individual's life and retirement plans. This can lead to a reduced quality of life and the inability to fulfil personal aspirations and commitments.  

2. Worry and Anxiety

Managing investments without trustworthy guidance often leads to worry and anxiety. The constant stress of market fluctuations and fear of making the wrong decisions can impact mental health and overall well-being.  

3. Time Investment

DIY financial planning requires a substantial time commitment. Time spent researching and managing investments takes away the time from core income-generating activities or personal pursuits. This opportunity cost can be significant, as it detracts from one's primary career or business endeavours.  

Are The Costs Worth It?

The cumulative effect of these biases is substantial. Over a five-year period, the cumulative costs associated with these common investor behaviours can range from Rs 40-50 lakh on a Rs 1 crore portfolio.   An advisor who charges 1–2 per cent asset under management (AUM) fees would have cost Rs 5-10 lakh over 5 years and, in turn, saved over Rs 40-50 lakh.   All those influencers who advocate DIY for investments should have a solution for all the above before making such suggestions.  

The Role of Professional Financial Advisors

Professional financial advisors offer more than just investment advice. They bring a wealth of knowledge, experience, and a structured approach to financial planning. Advisors help in:

• Objective Decision Making: Removing emotional biases from investment decisions.
• Tailored Strategies: Creating customised financial plans based on individual risk tolerance and goals.
• Continuous Monitoring: Regularly reviewing and adjusting portfolios to stay aligned with financial objectives.
• Tax Optimization: Identifying and utilising tax-saving opportunities.

 

Conclusion

While DIY financial planning may initially seem like it saves big costs, the hidden costs associated with behavioural biases and inaction can be substantial. Especially when it comes to retirement planning - where the stakes are higher - the amount involved is larger and - the margin of error is lesser It is best to get the best possible help to plan your most important part of life. In matters of health and wealth, years of education and experience can make all the difference between a good life and a not-so-good one.   The author is a certified financial planner and co-founder and head of financial planning at House of Alpha Investment Advisers Pvt. Ltd.