Full Time DIY Investing : Masterstroke Or Stupidity?

Retail investors who manage their portfolio on their sometimes consider becoming full time DIY investors. At first glance, making this shift sounds quite exciting. We would get to make money without much work. We would have more time for ourselves. This is hard to say no to. But there is a lot more to think through to make this transition effective. So in today's post I'm going to talk about the considerations to be made when we consider becoming full time investors. I will thereby show whether or not making the shift is viable.

The Lure Of Supernormal Returns

Most of us consider making the shift when our investments generate supernormal returns over a short period of time. Supernormal returns give us the erroneous perception that they were generated owing to our own skill. But there would be periods during every market cycle when investments generate supernormal returns. It would happen regardless of underlying quality and fundamentals. So the returns our investments generate would have very little to do with our skill as investors. Of course, supernormal returns are welcome. But they simply don't last.

Therefore, it is simply not advisable to consider full time investing after a short period of supernormal returns. I would rather say that we must wait until at least two full market cycles have been safely negotiated. Doing this would help us gauge our patience and emotional stability. That would give us a more realistic understanding of whether or not full time investing really is our cup of tea.

Making The Shift For The Right Reasons

Most of us feel the temptation to embrace full time investing because we feel it would help us escape the rigours of our jobs. The desire to break away from our day jobs is of course justified. After all, the major reason why most of us invest is to be able to achieve financial independence. But that doesn't mean that we turn to full time investing without thinking things through. We must realise that quitting our jobs early wouldn't change a lot of things. There would still be expenses which need to be met. There is inflation to combat. Doing this without a secure job would be extremely challenging. Add to that the high degree of risk that is inherent with full time investing, and we would have a recipe for financial disaster.

Therefore, wanting to shift to full time DIY investing just to break away from our jobs is imprudent. Before making the shift, we must ensure we are fully prepared to do so. And that means being capable of meeting our expenses smoothly in absence of a job, regardless of market conditions. We would also need to understand and manage risk effectively. This is only possible when we possess a certain level of experience first.

Planning For The Extra Time Available

On the face of it this may seem a trivial issue. But it is actually a very pertinent one. Most of us lack the discipline to do nothing over long periods of time. This automatically means that we run the risk of being hyperactive with our investments. And being hyperactive as investors is never a healthy sign. Being hyperactive as investors doesn't just imply indulging in frequent transactions. It also includes constantly tracking and analysing our portfolios. The more we track our portfolios, the more conscious we become. And the more conscious we become, the more we feel the urge to act on our portfolios. Such interventions are more likely to be naive than well thought out. And this would only lead to suboptimal outcomes.

Therefore, even if we do decide to become full time investors, we must always have something outside of our investments that keeps us busy and takes up most of our time. The plans we make for our time must be built around a clear routine and not an activity. This would increase the likelihood of our plans being sustainable. Of course, we still need to give a reasonable amount of time to our investments. But planning our time ensures that we won't overdo it.

A Personal Take

For me, making the shift to full time DIY investing is not worth it. It involves a high degree of risk, without the guarantee of reward. Life post making the shift may not be as rewarding as first expected. This may leave us feeling unfulfilled. But ultimately, making the shift is a purely personal choice. Those of us who are innately confident of making the transition may definitely do so. But it is important to be consummately prepared to do so. Those looking to make the shift must ensure that they have substantial experience across market cycles. They must ensure that their decision is not solely motivated by the wrong reasons. Also, they must ensure that they have plenty to do with their time after making the shift. Making the shift to full time DIY investing in cognisance of all these factors would mean that the decision is much more likely to be a masterstroke rather than a stupid one.