To make the most of DIY investing, you need to know the right strategies. Photo / 123rf
It’s one of the more uncomfortable truths in investing: while markets tend to rise over time, many individual investors don’t capture those returns.
Decades of global data show a consistent pattern – the average DIY investor underperforms the very funds or markets they are investing in. Annual studies from Dalbar, for example, show the average investor has historically earned several percentage points less per year than the market itself, largely because of poor timing decisions.
Over a 20-year period, the S&P 500 has delivered returns of around 9-10% per year, compared with roughly 5-6% for the average equity investor – a gap of 3-4% annually. That might not sound significant but over decades, the impact of compounding can be substantial. The reason isn’t a lack of intelligence or access to information. It’s behaviour.
Investing is less about what you know and more about how you react – particularly in periods like today, where war, inflation and volatility are testing investor nerves.
One of the most common mistakes is trying to time the market. It sounds sensible: sell when things feel risky then buy back when conditions improve. In reality, it rarely works. Markets tend to recover before the news does and some of the strongest gains occur during periods of peak uncertainty.
Missing just a handful of the best days in the market can have a significant impact on long-term returns. JP Morgan research shows that missing the 10 best days over a 20-year period can roughly halve annual returns. Miss the 20 best days, and returns fall to around 2-3% per year; miss the 30 best days, and returns can drop close to zero. Crucially, many of these best days occur during periods of heightened volatility, often close to the worst ones – making them particularly easy to miss. Markets can also move sharply overnight, with shares often “gapping up” at the open following a weak day, meaning investors who step out during downturns risk missing the rebound before they even have a chance to react.
Many investors today are sitting in cash waiting for clarity around interest rates or geopolitics. But markets don’t wait for clarity – they anticipate it. By the time the outlook feels comfortable again, prices have typically already adjusted higher. Managed funds, by contrast, are structured to stay invested. While they may adjust positioning, they don’t attempt to jump in and out based on headlines – and active managers can reposition portfolios without abandoning the market altogether.
Closely linked to this is panic-selling when markets fall. Seeing portfolio values drop – sometimes sharply – triggers a natural instinct to protect what’s left. But selling after a downturn locks in losses and often means missing the recovery that follows.
This has played out repeatedly – during the Global Financial Crisis, through Covid and following Donald Trump’s “Liberation Day” last year.
Periods like this also tend to create opportunity. Market pullbacks – which are both normal and inevitable – can push high-quality companies temporarily below their intrinsic value. Active investors can selectively add to these positions during periods of weakness, while passive approaches, by design, simply follow the market’s direction.
Another common trap is chasing what’s “hot”. Every market cycle has its theme – from artificial intelligence (AI) to cryptocurrencies to gold, to property booms. The pattern is familiar: strong performance attracts attention, attention attracts inflows and many investors only get involved after prices have already surged.
We’ve seen this play out time and again. During the dotcom boom, investors piled into internet stocks late in the cycle, only to see many collapse. More recently, surges in areas like crypto or thematic technology have drawn in investors after periods of rapid gains, often followed by sharp pullbacks. The fear of missing out is powerful, but it can lead to buying high and eventually selling low.
A more disciplined, valuation-aware approach helps avoid overexposure to crowded trades driven by hype rather than fundamentals. Rather than chasing momentum, professional investors focus on what an asset is actually worth and how that compares to its price – a distinction that becomes particularly important later in a cycle.
Diversification is another area where DIY investors can fall short. Portfolios are often more concentrated than people realise – a handful of local shares, a few global names, or a heavy tilt towards one sector or theme. This can work well for a time, particularly when those positions are performing strongly, but it also increases risk.
A concentrated portfolio means a single company, sector or region can have an outsized impact on overall returns – both positive and negative. It can also mean missing opportunities elsewhere. Managed funds, by design, spread investments across sectors, regions and asset classes, helping to smooth returns and reduce reliance on any single outcome. Active strategies can go a step further, adjusting these exposures as market leadership changes over time.
Underlying many of these behaviours is overconfidence. With more information available than ever – real-time data, endless commentary and constant news flow – it’s easy to believe that successful investing is simply a matter of effort or insight. But information alone doesn’t translate into better outcomes.
Consistently outperforming markets requires process, discipline and experience across different market environments. Even professional investors don’t get every decision right, but they operate within structured frameworks designed to manage risk, control emotions and remain consistent through both good times and bad.
This is where the key difference lies. Managed funds aren’t necessarily about being smarter – they are about being more structured. They stay invested, follow a consistent process, maintain diversification and make decisions based on analysis, rather than emotion. Active managers can go further, adjusting portfolios as conditions change – rotating between regions, avoiding overheated sectors and taking advantage of opportunities when markets fall.
That flexibility is particularly valuable in today’s environment. Markets are shifting quickly, leadership is rotating and sentiment can change almost overnight. In these conditions, reacting emotionally can be costly, while a disciplined approach becomes even more important.
DIY investing isn’t inherently flawed. For some, it can work – particularly those with the time, temperament and expertise to stick to a long-term strategy and avoid reacting to short-term noise. But for many investors, the biggest risk isn’t the market itself – it’s their own behaviour.
Trying to outguess markets, reacting to headlines and chasing performance are all natural instincts. They are also the reason many investors fall short of the returns markets themselves deliver.
In environments like today – with geopolitical tension, oil-price volatility and uncertainty around inflation and interest rates – those instincts are amplified. Markets can move sharply on news flow, sentiment can shift quickly, and the temptation to act can be hard to resist.
But these are also the periods where discipline matters most. In investing, success is often less about doing more, and more about doing less – but doing it consistently.
Generate is a New Zealand-owned KiwiSaver and Managed Fund provider managing over $8 billion on behalf of more than 180,000 New Zealanders.
This article is intended for general information only and should not be considered financial advice. The views expressed are those of the author. All investments carry risk, and past performance is not indicative of future results.
To see Generate’s Financial Advice Provider Disclosure Statement or Product Disclosure Statement, go to www.generatewealth.co.nz/advertising-disclosures/. The issuer is Generate Investment Management Limited.