Since the global financial crisis in 2008, there has been a gradual upward trend of DIY investing; people who take to the share market on their own rather than employing professional financial adviser services.
But this gradual trend is now accelerating with the introduction of many low cost share trading platforms.
The era of DIY and social trading is well and truly here but unfortunately it can actually mean people lose a significant amount of money.
We look at some of the main reasons why DIY investing tends to fail.
What is DIY investing?
Do it yourself or DIY investing is a strategy where individuals choose to create and manage their own investment portfolios. They often use digital platforms or discount brokerages to build their shares, instead of professional full-service money management teams.
As you can imagine, creating your own investment portfolio gives you complete control over the assets you invest in and there’s no denying it can save you some money in fees. But it also means you are completely responsible for all investment decisions, and you don’t necessarily have the protection of experience and industry knowledge when you face volatile market conditions.
While DIY investors tend to educate themselves and are committed to building their wealth, they don’t necessarily have the market insight or the nerve to weather tumultuous times.
What can go wrong?
When stock markets are strong and there is solid performance, DIY investors do well… along with every other type of investor. It’s easy to make decisions about a portfolio when everything is calm and delivering solid returns.
Where things start to unravel for the DIYers is when the markets begin to shift. Uncertainty can have a dramatic effect and trigger poor decisions that could decimate the value of a portfolio and directly impact the investor’s financial stability.
Procrastination is one of the first problems DIY investors face. If they feel overwhelmed by the decisions they need to make, they might choose to hold off doing anything until they gain more information. But this inaction and attempting to ‘time the market’ can mean that their money simply sits in limbo… doing nothing in a savings account waiting until they pick the perfect time to invest.
The reverse of inactivity is overconfidence… when people believe they have all the knowledge they need to make it rich and dive straight in. Of course, it’s great to be motivated, but this presumptuous attitude can lead to people not correctly assessing risk, or letting their emotions sway their focus.
With so much different financial advice readily available online, DIY investors often find it challenging to cut through the noise. They can end up constantly changing their asset allocations chasing a short-term return rather than having a sound long-term plan.
Panic selling is by far the most detrimental action a DIY investor can take. In their mind they might think it’s better to sell it all before they take an even greater hit… but this type of hyper-emotional response is where the most failure occurs.
Selling based on solid research and implemented through a well-structured plan is no problem at all. However, if it is impulsive and triggered by stress then it’s likely they didn’t have the right mix of investments to start with.
Understanding attitude to risk is key to building a successful portfolio.
Seek professional advice
Here at First Financial, we have a team of professional financial advisers utilising a methodology that creates an investment portfolio that truly meets your needs. It should include an asset allocation that is appropriate for your personal financial circumstance, while also aligning with your attitude to risk.
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