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Individual investors are responsible for their own choices.

Many financial firms sell products. As an individual investor, you are responsible for due diligence on anything you might consider buying.

Own your due diligence process and the results that flow from the decisions you make.

A fascinating comment exchange caught my eye the other day. It went like this:

Commenter #1: "[Merrill Lynch] dinged me big time with huge fees for around a decade and sold me (stupid me) garbage that lost big."

Commenter #2: "You're saying that you overpaid on fees for 10 years, and you bought stuff that lost you money, and that somehow this is THEIR fault?????"

Commenter #1: "Yes. For example they sold my the hedge fund The endowment fund and didn't make it clear to me that the fund could freeze liquidation if too many people try to sell it..which is what happened to me. may have been buried in small legalized print in the huge prospectus they sent me which no normal person can understand or read...they didn't tell me how illiquid that garbage is/was and I lost a bundle on it and couldn't sell it. Recently..they offered a plan to liquidate it at over 20% additional cost/loss on top of the other losses over 6 yrs or so."

Due Diligence

The reason this exchange caught my eye is that I think that investors are responsible for knowing and understanding what they invest in. It is naïve to think that investment products that are sold are necessarily good for you. When something is sold, it should be obvious that the party selling it has an interest in moving the product. Their interest is in commissions, fees, sales loads, or however they make money from its sale.

This sets up an inevitable conflict of interest. The sales rep, or broker, or advisor, and the organizations they work for have an interest in collecting the fee or commission that they will receive when the sales transaction is completed. Investors need to recognize this. The seller is not incentivized to tell you everything about the product, they are incentivized to sell it.

That means that it is incumbent on each investor to do his or her own due diligence on everything that they consider to buy. Everything. You have to be your own best friend. As the old saying goes, Nobody is more interested in your financial success than you are.

The Self-Directed Individual Investor

I have a mission statement as a writer and contributor. In it, I state that I write for the "self-directed individual investor."

What does that mean? That I want my readers to do their due diligence. They should do it about me, my ideas, and any specific investments that I might comment upon.

Sometimes my audience is referred to as "do-it-yourself" or "retail" investors. I understand both of those terms, but they do not convey the point I am trying to make here. The point is that self-directed investors direct themselves. They might take in ideas, strategies, and specific investment ideas from others, but they own the process of analyzing those things and reaching their own conclusions. In the absence of fraud, they hold themselves accountable for the decisions that they make and the results that flow from those decisions.

Limiting Your Investments

If you accept the above, then you must conclude that there are some things that you will not invest in. The reason is that your due diligence process will require you to understand any stock, bond, ETF, annuity, option, mutual fund, CEF, or anything else that you will ever consider. If you don't understand it, don't buy it. It's as simple as that.

In my own investing, I have a very limited supply of products that I invest in. I won't consider investing in anything that I do not understand. A simple test of whether you understand something is whether you could explain it to someone else. There are lots of financial products that I know I cannot explain to someone else. That means they cannot possibly be investment candidates for me.

Many investment products have been invented. I read once that there were more mutual funds than there were stocks. ETFs are now being created at a rate that makes it seem that at some point, that will be true of ETFs. I loosely follow some ETFs in the general field that I specialize in, which is dividend growth stocks. I have become familiar with the ways in which such products are described and marketed. The marketing materials do not always fully describe the products. And/or they so fully describe them, including their risks, that it can be difficult to pick out the important parts from the boilerplate statements.

In such a situation, it becomes easy, as a consumer, to focus on what you want to hear and disregard the rest. But hope is not a strategy. You may want to believe the good parts, but don't let that hope make you blind to the risks, including the risk that you don't really understand the product at all.

Opportunity versus Risk

Because I limit my investing largely to dividend growth stocks, I get criticized sometimes by readers who say that I am missing opportunities elsewhere, unnecessarily erecting a fence around myself.

That's OK with me. I am sure they are right. Obviously, if I limit myself to investing in things that I understand, I am fencing myself off from thousands of investments. I am sure that some of them could help me financially.

But would they help me sleep better at night? I like this quote from Tom Watson, the founder of IBM:

I'm no genius but I'm smart in spots and I stay around those spots.

And this related quote from Warren Buffett:

What you need is emotional stability. You have to be able to think independently, and when you come to a conclusion you have to really not care what other people say. Just follow the facts and your reasoning. That's tough for a lot of people.

It is tough for a lot of people. But I think it is necessary if you want to be a self-directed investor.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.