You’ve established you attitude to risk, set your financial objectives and done your research; you live by the British Army’s ‘Rule of the Seven Ps’ (worth a Google) – what could possibly go wrong?
DIY Investor looks at some of the things the DIY investor needs to consider
Forgetting Asset Allocation
The key to successfully managing an investment portfolio is deciding on an appropriate asset allocation strategy to suit your objectives and risk profile.
Asset allocation is nothing more intimidating that the mix between equities, bonds, property, alternatives and cash in your investment portfolio as well as how its spread between different countries, industries and between large, small and medium sized companies.
Studies have shown that asset allocation is a bigger driver of differences in returns between portfolios, than the individual funds or shares selected.
Model portfolios are becoming increasingly widespread and several sites deliver the opportunity for investors to share or mimic asset allocated portfolios.
Failing to Understand Risk
In the investment world, the more risk you take, the greater the potential gains – obviously these gains are not guaranteed or it wouldn’t be risky.
Generally speaking, the longer your time horizon the more risk you can potentially take because you have more time to ride out any short-term volatility – if you have the stomach for it.
There are many ways to quantify risk, and a useful measure is to understand the volatility of a portfolio, which is the extent to which it could fluctuate in value, in a range of circumstances based on historical data.
Back to the Future
An inexperienced investor may be tempted to assume that DIY investing is as straightforward as choosing the best performing funds or those with the lowest costs.
An inexperienced investor may be tempted to assume that DIY investing is as straightforward as choosing the best performing funds or those with the lowest costs
However, past performance is no guarantee of future prospects.
Selecting an investment purely based upon historical data has been described as akin to driving a car at high speed while only staring in the rear view mirror.
Good quality, objective research is invaluable in helping you make informed decisions about the future potential for a particular asset. There are plenty of sources of unbiased information available online and of increasing importance are social media and affinity groups.
Deviating from the Plan
The newbie DIY investor should take time to understand their attitude to risk, set their financial objectives and start to construct a portfolio of investments that reflects their individual circumstances and requirements – and then stick to it.
The vast amount of information and content, not to mention marketing collateral that confronts us every day means that the inexperienced investor runs the risk of ‘self-mis-selling’ i.e. buying investment products that are not suitable for their goals, time horizon and circumstances because of what is topical or heavily tipped or promoted.
Successful investing is founded upon a well thought out strategy with decisions made in the context of how they fit with the overall portfolio; ad hoc investments can lead to unnecessary levels of risk and a deviation from its core objectives.
Neglecting to Monitor
If you are going to invest in an actively managed fund look at the historical performance of the fund and the career track record of the manager currently responsible for it; some enjoyed almost rock star status in the past, but the Woodford scandal left an awful lot of investors out of pocket because of their loyalty and with the FCA demanding greater transparency there is every incentive to do your own research.
If you are going to invest in an actively managed fund look at the historical performance of the fund and the career track record of the manager currently responsible for it
Once invested, you need to be aware of any potential changes that could impact future performance, such as a change in key personnel or dramatic changes in the size of the fund.
The DIY investor needs to do their homework prior to making an investment but ongoing monitoring is essential – some establish a regime for reviewing the balance of their portfolio but ongoing research and setting alerts can ensure that there are no nasty surprises.
However carefully constructed a portfolio is it is vital that the DIY investor monitors changes over time and periodically rebalances their mix of investments to bring it into line with its original parameters.
Over time, the performance of funds and asset classes will vary, meaning that the original asset allocation will drift, potentially resulting in the portfolio changing risk profile.
An annual review may suffice but it is important to ensure that at any given point the balance of the portfolio is appropriate to deliver the objectives that shaped it in the first place.
Self-directed investing is not for everyone and however affronted some may feel by the fact that the ‘free’ advice they received pre-RDR was nothing of the sort some will prefer to bite the bullet and pay for professional guidance.
However, for those wishing to dip a toe in the DIY water there has never been more education, information and community support available and the application of common sense and discipline can safeguard against the most often seen mistakes that negatively impact investment performance.