Here's what’s wrong with DIY investing

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A recent study by financial services research firm DALBAR says do-it-yourself investors are leaving massive returns on the table, underperforming the S&P 500 by 4.2% per year for the last 20 years.

The No. 1 reason why DIY investors do so poorly?

They get scared when the market retreats and ditch their investments. This is the worst mistake of investing — buying high and selling low.

Investor education has proven a failure, the study concludes. Americans need something else to help improve returns.

That something should be a financial adviser, an online portfolio management service or — better yet — both.

Saving for retirement often is just too hard to get right on our own. Here are 4 reasons why.

Reason 1. We're bad at making buy-and-sell decisions.

Any adviser or service that prevents you from buying or selling when you shouldn't will probably more than cover its fee in the higher returns you’ll earn from staying invested through good times and bad.

A December 2013 study from Charles Schwab looked at how five different investing styles would have fared over any 20-year period from 1926 through 2012.

Schwab concluded the best strategy — outside the near-impossible prospect of perfect market timing — is to invest your cash as soon as it's available and then hold on to what you purchased.

But time and again, Americans appear incapable of buying and holding on their own.

That's where online services like Hedgeable, FutureAdvisor and Wealthfront come in. While some sites merely make recommendations and leave it up to you to execute the plan, these three invest your money for you.

They'll keep your money in the market when you might not, as long as you don’t close your account.

If you need encouragement or validation, a financial adviser is the way to go; an online service can’t talk you off a cliff.

Reason 2. Admit it: We need help sticking to a financial plan.

This is where a real, live expert comes in handy.

While online portfolio management services are great for basic investment strategies, financial advisers can help you design and execute a financial life plan.

"A real financial adviser helps clients make better decisions and pushes them to actually get things done," says Robert Cucchiaro, a certified financial planner and principal of Summit Wealth and Retirement Partners in Walnut Creek, Calif. "This includes a lot of polite persistence and hand-holding along the way. I've yet to see the algorithm that can offer any of these services, and I doubt in my lifetime that I will."

When you’re overspending, a good adviser will help you figure out a budget that leaves enough cash to invest for your long-term goals.

When you think you're too busy to figure out how to start saving for your child's college tuition, a financial adviser can convince you to sit down for a 30-minute phone call to figure it out.

financial adviser

Are you convinced you need an adviser? Great.

Now you need to learn how to pick the person right for you and your financial goals. You need someone who won't steal your money, make decisions that only benefit himself or charge excessive fees.

Our 10 smart moves will show you how to pick a financial adviser

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Reason 3. We're no experts on fees, commissions and taxes.

Expense ratios and trading commissions eat into your long-term returns. So why would you add an adviser or online service’s fee to the mix?

In addition to guidance and decision-making, they might give you access to a broader universe of investments at lower fees than what you'd pay on your own.

When you use a brokerage, you'll be able to make some investments commission-free, but others will cost money. If you want to expand your portfolio beyond those commission-free options, you’ll have to pay up or open an account at a different brokerage.

Another option: online services like Wealthfront or Betterment, which charge no trade commissions.

Advisers, and some online services, also can figure out which holdings to sell to minimize your tax bill.

Reason 4. Getting the right investment mix is hard.

Depending on your age and risk tolerance, you should allocate a percentage of your portfolio to riskier investments, like stocks, and the rest to less-risky investments, like bonds.

Achieving and maintaining your desired allocation is more complicated.

How often should you rebalance your portfolio — sell some assets and buy others — to get back to your target allocations as the value of your investments changes? And how do you decide what to sell and what to buy?

Financial advisers and online services will make these decisions for you.

This service is especially helpful when your household has more than one investment account.

Say you have a 401(k) and a Roth IRA. Your spouse has a Roth IRA and a self-employed Keogh plan. You also have a joint, taxable investment account.

What's your asset allocation?

To find out, you have to look at the combined investments in all these accounts, something that’s challenging to do on your own but easy with an online tool such as NextCapital (formerly LikeAssets).

If your allocation is off, you'll either be taking more risk than you're comfortable with or earning less than you could be, and you probably won't even realize it.

Another option, Betterment's service automatically rebalances your portfolio whenever you deposit money in your account by purchasing "whatever security you are underweight in."

It also rebalances your portfolio when you "are more than 5% away from your target allocation."

Betterment's strategy avoids the need to sell in order to rebalance, which achieves the goal of holding your investments through all market conditions.

piggybank chalkboardYou want to take control of your life? This is the way to do it. You'll feel great as you see your savings grow and begin to appreciate what financial security is really all about. Follow our 6 smart moves and you'll learn:

How to start saving in your 30s

How to start saving in your 40s

How to start saving in your 50s

In the end, paying for professional money management will be a great investment if it means pacing the market instead of underperforming it.

Financial advisers typically charge 1% of assets under management. Some online services are free; others cost 0.15% to 0.5% annually.

Paying 1% per year or less is certainly better than paying 0% and underperforming by 4%.

Fear, lack of time and lack of knowledge don't have to keep you from growing a comfortable, even spectacular, nest egg.

Get the help you need.