Why DIY Investors Perform Poorly During Periods of High Volatility

Here's how DIY investors and Investors with advisors did during the COVID crash

Photo by Christina @ wocintechchat.com on Unsplash

When the stock market takes a nosedive, what do you do?

For many DIY investors, the temptation to act—to move money out of stocks, shift to bonds, or sit in cash—feels almost irresistible (that is because our brains are hardwired to have a bias toward taking action).

But here’s the hard truth: those knee-jerk reactions could be costing you big time.

A 2022 study on investor behavior during the COVID-19 market crash reveals why and the lessons DIY investors can take away might just transform your financial future.

The Cost of Emotional Trading

The study looked at over five million U.S. retirement plan participants and found that DIY investors, who actively manage their own portfolios, were the most likely to trade during the COVID-19 market crash.

Anyone who has read my book can probably guess how those DIY investors making big moves during extreme market volatility faired, in a word, badly.

These investors often moved money out of stocks after the market had already dropped, locking in their losses and missing the recovery that followed. I describe this phenomenon in The Rational Investor as “buying high and selling low,” which is a perfect way to achieve terrible investment outcomes.

It’s easy to see why this happens. Market downturns are scary. Fear takes over, and the idea of “doing something about it” feels like the only way to regain control. But the data shows that this reaction is exactly what hurts DIY investors the most.

By contrast, investors using target-date funds (an investment that automatically rebalances) or accounts managed were far less likely to make these costly mistakes.

Target-Date Funds: Set It and Forget It

Target-date funds are the ultimate “set it and forget it” strategy. They’re designed to match your risk level—and how much you have invested in stocks vs bonds— with your age, automatically adjusting as you get closer to retirement.

Because TDF investors trust the automation and rarely monitor their portfolios, they’re less likely to panic and sell when markets drop. This phenomenon, known as cognitive offloading, can protect you from making rash decisions.

For DIY investors, this is a wake-up call.

If your “hands-on” approach means you’re constantly reacting to market moves, consider whether a more hands-off strategy might actually serve you better.

It’s much easier said than done; in most situations in life, there is a positive correlation between how hard you work at something and the outcomes you experience. As frustrating as it is, investing is one of the few areas where the reverse is often true: the harder you work to become a “great” investor, the worse your outcomes are likely to be.

The Power of Professional Advice

Investors who had a financial advisor help manage their account took had the best results of any group in the study.

Not only did they have customized portfolios tailored to their risk tolerance, but they also had access to professional advice when they were most fearful.

While these investors were more likely to check in with their advisors during the market crash, they were the least likely to actually trade. '

Why?

Because behavioral coaching works. Having someone remind you of your long-term goals and talk you out of emotional decisions can be invaluable.

Now, I get it. Financial advisors come with fees, and for a lot of DIY investors, the idea of paying someone to do what you think you can handle yourself feels unnecessary.

But consider the potential cost of bad decisions. If you’re prone to emotional trading—and most of us are—then the value of a steadying hand during turbulent times might outweigh the expense.

It’s at least worth consideration.

What you can do to achieve better investment outcomes

So, what can DIY investors learn from this study? Here are three actionable takeaways:

1. Automate where you can. Even if you prefer managing your own investments, use tools like automatic contributions or portfolios that automatically rebalance to reduce the need for constant monitoring.

2. Stick to your plan. Write down your investment goals and strategies. When the market crashes, go back to that plan instead of reacting in the moment.

3. Consider professional advice. If you’ve found yourself making emotional trades in the past, it might be time to bring in an advisor or use a service that offers behavioral coaching.

Final Thoughts

The COVID-19 crash was both severe and short-lived—with the market recovering at break-neck speed.

This made it the perfect testing ground in how different investors respond to market volatility.

For DIY investors, the lesson is clear: emotion is your enemy and a solid strategy—whether it’s automation, professional advice, or a mix of both—is your best defense.

So, the next time the market tanks and your fears bubble up, ask yourself: will this decision help me reach my long-term goals? Or am I just reacting to short-term noise?

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This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any significant financial decisions.