The Hidden Costs Of DIY Investing
Guy Myles, 2 June 2016
While DIY investing - picking your own stocks and investment funds - may seem like a cost-efficient way to look after your money, many of us make simple mistakes that can eat into potential gains. Here's how you can avoid them.
It's great when it goes well, but when DIY investing goes wrong, it's going to cost money - and the person picking up the tab is you. For most people, our home is an investment we work hard to protect, taking action at the first signs of damage. But, when it comes to our hard earned investments, we're happy to stand by and watch as gains disappear before our eyes.
Here are a few ways you can avoid making the most common DIY mistakes and go about creating a sustainable financial plan for the future.
Hide and seek
As a DIY investor it can be tempting to chase returns, regularly switching between funds or hedging on the next big thing.
The problem is that most DIY investors make the classic mistake of buying high and selling low. There's a wealth of evidence out there about how investors embrace a herd mentality, to the detriment of their portfolios.
Based on an in-depth analysis of the UK stock market, Cambridge PhD student Charikleia Kaffe suggests that poor timing and chasing returns could see you miss out on 1.35% additional growth each year.
Chasing the market is one rookie error, the other is ignoring the small print when it comes to charges. Choosing some funds can result in you paying sky-high management costs. As it is, even the average fund eats up around 0.75% of your yearly gains.
The key to maximising your returns could mean considering funds with lower costs. When understanding the fees involved in managing your investment, take the time to calculate the total management cost over the medium to long-term (i.e. 5 - 15 years), not just the immediate cost. It's the basis of long-term financial planning to cut costs wherever possible, with even small fractions of a percentage adding up.
Double digits gains followed by double digit losses can test the patience of even the hardiest investors and lead us to make poor choices.
We all love reading about the latest successful fund manager, and it's exciting to read about people who have beaten the market. But investing in the latest star, or fashionable investment, comes with its risks. In fact, our decisions to invest in certain funds - often those with higher fees - can do damage to even the most well-planned investment portfolio.
It's worth reflecting on the evidence here, that average returns of 5% for a simple 'buy-and-hold' compare favourably with sector-specific experts who will always be more exposed to the changeable nature of the market.
The market is never a place for the nervous investor, but when entering in, make sure your investment portfolio and the returns you're targeting reflect your attitude to risk.
Breaking down the wall
Choice is great, but too much choice can be confusing. Successful DIY investing involves finding the right tool for the job, but with thousands of funds out there, how is the DIY investor supposed to choose?
In many cases, the so-called choices are often an illusion with financial institutions packaging the same bundles of shares or sectors under one heading. Even so, there are still thousands out there, so how do you decide what's the best long-term investment for you?
It involves tackling perhaps the biggest issue for the DIY investor - asking for help.
Research from Kaffe, and others across the investing world highlights how a simple buy-and-hold strategy, regularly drip-feeding investments into a range of well-chosen funds, can help you maximise returns while minimising effort.
DIY is about self-sufficiency and could, at first glance, appear the cheapest choice, but asking for professional help may just be the most intelligent one.
If you'd like to find out how we help our clients invest affordably and aim to maximise returns, call 0333 241 9900 for a chat.