We are living in the age of what I call the “Home Depot trader.” Online brokerages have essentially taken a page from the Home Depot marketing playbook by saying to the average Joe, “you can do it, and we can help.” The enormous gap in the capabilities of pros and novices has been narrowed as a result of these brokerages handing extremely powerful tools free of charge to anyone who wants them. Overall, I think this is wonderful for more reasons than I can articulate here. However, it has been said that with great power comes great responsibility. It’s great to see investors taking their money from Wall Street brokerages that don’t owe their clients any fiduciary obligation to work in their best interests, yet the “self-directed” alternative is often much worse. I’ve never seen so many retirements blown up, marriages crumbled, and savings accounts evaporated as when I’ve spoken to self-directed clients who treated their life savings as an experiment in money management.

I spent the better part of my early career working with a top online discount brokerage. During part of my tenure, I traveled the country teaching trading seminars for a fee to clients who were most motivated to learn. During this time, I got a look behind the curtain. I got to hear what self-directed investors said about their trading, versus what was actually happening in their accounts. I don’t think these aspiring traders actually meant to lie; I just think humans have a tendency to avoid bad news, avoid admitting defeat or simply deny pain. This is dangerous for anyone who talks to self-directed traders because of the emotional roadblocks and psychological defenses that keep them from seeing things the way they really are. Listening to them can give you a false sense of how easy it is. Pulling from what I learned during my time in that world, I give you the 5 most costly lies self-directed traders tell you.

1. I’m up 20% this year already! People have a tendency to over-report the good news and under-report the bad. I’ve looked at the statements of people who make these claims and see they picked their two best trades to report on while not factoring in their losing trades. “What about these 3 trades–looks like they all lost a lot.” The person will reply “yea, but one of those is going to come back, and the other two were just mistakes, and I figured out what I did wrong.” The person’s overall account is actually down on the year, but he’s justified himself in only reporting the good! He would never let an investment advisor make these kinds of excuses, yet he allows them for himself. I’ve also seen people only look at what they’ve done this year while not factoring in the bad investments they made last year that continue to weigh down the account as a whole. If you bought something last year that has gone down $20,000 so far this year, you are hardly having a good year this year, even if your current trades are up $10,000! The bottom line is that the account is down. This leads right into #2.

• My picks are doing really well now; I think I just bought a little early! This happens a lot with people who have made huge blunders but don’t want to admit defeat. They put $100,000 into some trades, then watch them go down 15% to $85,000. When it goes back up to about $90,000, they report that their picks are up 6%! Then it goes down to $70,000. But when it bounces back up to $75,000, they proudly report they are up around 7%! I’ve seen this cycle repeat itself for much longer than you’d probably believe, because they “can’t sell.” That’s an error in logic itself. Is it important to you to make money, or to make money in this particular investment? Anyone without an emotional bias will tell you making money in general is more important. But when faced with the circumstance above, that person will forsake better opportunities to stay on a sinking ship, all the while reporting their short-term success.

• I know I lost in the past, but I’ve been doing a lot better now that I’m paying more attention to it/doing more research. Maybe it’s not technically a lie if they are actually up in the last few weeks, but it’s definitely unwise and displays poor understanding because they are almost always attributing recent success to skill instead of the real factor. For example, maybe the market experienced a wide rebound in the last few weeks that carried everything up with it. That would’ve happened whether he was paying attention or not. Extrapolating short-term success into the future is a lamb leading itself to slaughter. The market doesn’t reward skill consistently. In other words, sometimes it rewards all skill levels, and sometimes it doesn’t. Sometimes certain trades are easier or more profitable than others. Sometimes you can do everything wrong and get lucky. There is no more dangerous deception than a trader who is accidentally right but attributes it to skill. Like a gambler, this trader will become overconfident because of a few wins, which will lead him right to the his next big loss.

• I’m beating my advisor! I used to hear this one ALL the time, and I literally can only think of one time it was ever true. In that situation, the guy happened to be a retired professional trader who simply couldn’t handle all his money himself. There are a couple reasons saying you’re beating your advisor is almost always a lie. First, people tend to choose whatever time period suits them. Their advisor could be up 8% in that last 12 months compared to their 2%. But if in the last 2 months, the advisor has not grown atn all while the client has grown his own account 1%, the client may claim to be “beating” his advisor. Whether you are beating your advisor or your advisor is beating you, if you look at the short term only, it’s irrelevant. Second,people often don’t look at returns on a risk-adjusted basis. Let’s say the client and advisor are both driving the 200-mile trip from Dallas to Austin, TX. The client is essentially saying the advisor made it there in 3 hours, so he “beat” the advisor by himself making it in 2 hours. He got a “better return” than his advisor on this trip. The error in this logic is obvious when reframed to note that the client had to drive an average speed of 100 mph, while the advisor drove an average speed of 65 mph. Neither had an accident on this particular trip, but this is just one trip of many. The chances of negative outcomes (being in an accident, death, getting a speeding ticket, going to jail) are dramatically higher for someone traveling at an average speed of 100 versus someone doing 65. Investing requires us to make that trip thousands of times–not just once. Thus, it’s a potentially catastrophic mistake to judge performance quality based on the outcome of just one trip, without taking into the account the risk one took to get that outcome. If you don’t take into account the risk you are taking compared to your advisor’s risk, returns are irrelevant. If you are concerned with results, talk to your Certified Financial Planners™ (CFP®  professional) about the risks of driving just a little faster–maybe the risk is worth it to you to get there 15 minutes faster, or maybe not. Maybe road conditions are looking better and would suit you going a little faster–or maybe you both need to proceed with more caution.

• I’m fine now; I’m only doing safe investments. The ability to quantify and understand risk is possibly the biggest shortcoming I see. Risk is not constant. Bonds are less “safe” sometimes than other times. So are stocks and options. Or different types of any of these, or different strategies for investing or trading them. As conditions change, risk metrics change. Which has the optimal mix of safety and performance: a 4-wheel drive truck, a snowmobile or a Ferrari? It all depends on the environment and terrain: is it a hilly ranch in West Texas, a narrow mountain path in Colorado, or a racetrack in California? Because conditions and terrains change in the market, that means sometimes riskier investment become safer for a while, or more conservative investments become more risky for a while. That big truck that is so safe and performs so well on the ranch isn’t going to feel so safe on 6-foot wide snow-covered strip of mountain!

There is nothing wrong with being interested in trading some of your own money if you have the will, the skill, the time and the discipline to do it. I encourage folks who are interested to set up a play account to learn with. But start realistically. Treat it with the same attitude you would when hiring an advisor. How much would you trust an advisor to manage who had no track record and who said he was in the middle of trying to learn and figure it out? When you manage a portion of your own money, you hired yourself to do a professional job. The main takeaway is that if you hold yourself to the same criteria and standards that you do your advisor, you’ll trade the appropriate amount of money and judge your results much more realistically.