As of the end of Q1 this year, many online or do it yourself (DIY) investment brokerages saw surges in interest from new users, in fact, according to the Wall Street Journal saw platforms saw increases of 90% of new users. Was this due to the boredom of lockdown or some of the headlines exclaiming that now is a good time to invest?
Whatever the reason, it’s a good thing that many more people have taken the time to take control of their money and learn more about investing. The rise of online and digital investment services improves the ease of access to investments and at a lower barrier to entry.
However, for investors, there is much more to think about when looking for long term financial success. Going it alone as a DIY investor, new or experienced, can leave you vulnerable to behaving in a way that may not necessarily benefit you long term.
This article looks at the common shortfalls of DIY investing and how working with a professional, regardless of your investment experience, can set you up for long term success.
Proper Financial Planning Is Not Just Investing
You may have taken an interest in investing and had some success in it. But that’s not the full picture. Other areas of your financial life such as budgeting, tax, insurance, retirement & estate planning are just as important as investing and are not necessarily covered by DIY options.
If investing is not considered in context with all the other bits of the puzzle, then it can lose some relevance to what you are trying to achieve in life.
A life-centered financial planner has taken the time to develop expertise in many areas to help you simplify your financial life, so you can focus on what matters.
Short Term Behaviour
As an investor, your money is on the line, so it may be tempting to pay much attention to the performance of your investments or financial news, and subsequently act on this. This may mean trying to ‘time markets’ to generate quick wins. However, time and time again it has been proven that market timing doesn’t work .
Even for professional investors, it’s incredibly difficult to time markets as news is quickly built into market prices.
Selling out of the market to try to buy back in higher or vice versa will not be successful the majority of the time. From 1980-2018 if you missed only the best 5 days of the market, your portfolio value would have been 35% lower compared to if you had remained invested for the whole period.
DIY platforms may even encourage this kind of short-term behaviour by promoting new funds or products that can distract you. Not only that, but this speculation is akin to gambling and is not investing.
Disciplined, simple, boring, long term investing is proven to be key to a successful outcome.
A good Financial planner will educate you on sound investment principles and help you implement a sensible strategy that is appropriate for your life goals and risk tolerance.
Overconfidence & Emotions
Humans are naturally overconfident in their abilities, and this is no different from investing, Even more so in periods of high volatility.
A study on recent data during the pandemic (data period of February 24th – April 3rd) found that on more than two-thirds of days where investors were net buyers, the value of their shares went down the next day.
When looking at people’s ability to withstand market volatility, a recent study by fidelity investments found that between February and May this year, around 17% of people completely sold out of their portfolios into cash. What is more concerning is that in the 65-69 age group, 30% of people sold out of their portfolio into cash. For people at this stage, possibly entering into retirement, cashing out of their portfolio could have a huge long-term impact on their lifestyle in later life.
While all investors may feel the ups and downs of markets emotionally, a DIY solution may not provide emotional support.
Your financial planner should act as a sounding board around your investment decisions to ensure you don’t make investment decisions that harm you unnecessarily. They ensure you maintain a sensible strategy regardless of what is happening in the markets and keep your emotions in check.
Working with a professional will cost you more than DIY investing. But I think its important to measure the value in terms of time saved and the wider benefit it brings to your life.
The unprecedented level of access that DIY investing brings makes it easier than ever for investors to research and implement investments by themselves. However, more choice and easier access does not necessarily lead to better decisions.
You may be investment savvy and enjoy investing. However, the time and expertise required to ensure your financial life is optimal over the long term may take your time away from what you enjoy most.
A financial planner can save you the time and energy required so that you can sleep at night knowing everything is as it should be so you can focus on living your life. If you would like to find out more, then get in touch today.