The dangers of DIY investing

Have you ever noticed that once something is in your mind, you notice it all around you? Like if you buy a red car, and then afterward all of a sudden you see red cars everywhere? Of course, the red cars were there all the time, you just didn’t notice them before you started thinking about them.

Well nowadays my red car is goals-based financial planning. Over the last few months, I have been working on a financial planning app that will help people identify their financial goals and help them make decisions that are consistent with their objectives. So naturally I have been noticing all the times that I see people stray from making goals-based financial decisions.

This type of behaviour has always been there, and I have always known it was there. It’s just now I am paying more attention to it and, like the red car phenomenon, it seems everywhere.

You may ask, “who would make decisions that aren’t aligned with their objectives?” I agree that making decisions that are consistent with your objectives does seem obvious, self-evident to the point that it goes without saying. And yet, let me share with you some of the stories I bumped into this week.

There are a number of online discussion forums that cater to do-it-yourself (DIY) investors. Which is totally fine. There are people that are knowledgeable and skilled enough to make informed decisions about their money. But there are also a number of people who do not fit into this category, and you will find both types in the DIY discussion forums.

Case in point: I stumbled across a DIY discussion thread titled, “Lost life savings in the markets today. Not sure what to do.” Let that one sink in for a bit.

What happened is that this person made a huge speculative bet on an investment they did not understand, and got wiped out. But it wasn’t just the tale of woe that was interesting. It was also quite revealing to read the comments. It was clear to me that very few people understood this investment — and people buying investments that they don’t understand rarely ends well.

Going all-in, casino style with your investments is one thing. But this next one is even more puzzling.

Recently, car rental company Hertz filed for bankruptcy, a victim of the Covid-19 economic slowdown. Despite this, the stock soared, with the move attributed to day-trading DIYers.

The stock soared. After filing for bankruptcy, the stock soared.

As if that wasn’t already absurd enough, the management of Hertz, seeing the renewed interest in buying stock, applied to the bankruptcy court for permission to raise cash by issuing another billion dollars worth of stock in the bankrupt company.

Just so we are clear, we have people buying so much stock of a bankrupt company that management is actually wanting to issue even more shares of the still bankrupt company to new investors. Make no mistake, this is total madness. Hertz themselves even warn prospective new stockholders that the bankruptcy proceedings may render the stock worthless.

Friends, buying stock should not be the 2020 version of Pokémon Go; a cool new use for your smartphone that everyone seems to be trying out. Know that you could lose part, or all, of your money. Just ask the DIYer who lost his life savings in the markets, and is now turning to the internet for advice on what to do next.

I’m not saying that people can’t practice DIY investing. But, based on absolutely no science at all, just purely anecdotal evidence that include a number of recent discussions on what stocks to buy now that the markets have rebounded mightily in such a short span, a 25-year career watching DIYers turn $5,000 into $2,000, and an hour perusing a DIY discussion forum, I will assert that maybe 10% of the people that attempt DIY investing are reasonably suited for it.

Just please stop buying stock in bankrupt companies.

Brad Brain offers Investment products and services through Aligned Capital Partners Inc. (ACPI). ACPI is regulated by the Investment Regulatory Organization of Canada and Member of the Canadian Investor Protection Fund. The information contained in this publication has been compiled from sources believed to be reliable, and the opinions expressed are those of the author and do not necessarily reflect those of ACPI. This material is prepared for general circulation and has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. This is not an offer to sell or a solicitation of an offer to buy any securities.

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