Thinking of DIY investing? Here’s some things you should know

Thinking of picking your own investments? Here’s what you should know...

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DIY investing is on the rise. Fed up with pitiful interest rates and rising inflation, many savers are turning to online brokering platforms and fund supermarkets as an alternative way to grow their money. But with the cost of financial advice putting it out of reach of many, and seemingly limitless options for building your portfolio, DIY investing can be a potential minefield for the uninitiated. Here’s some things to consider…

1. Get ready to do lots of homework

The most obvious point about DIY investing is you’ll be responsible for selecting and buying your own investment. Will you pick stocks, bonds, property, or plump for some more exotic investments? Funds are a good way to buy lots of investments at once, but which of the thousands currently available should you go for? The type and variety of investments you pick will affect how much risk you take, so starting by thinking about how much risk you’re happy to take should help with your selections. It might be useful to keep the old adage ‘don’t put all your eggs in one basket’ in mind too, as putting all of your money in just a few investments, or picking too many similar investments, will also increase your risk. Do your homework in detail before you start, so you have some idea of what to look for when you start and don’t get railroaded into the first ‘hot picks’ list you come across.

2. Be prepared to keep an eye on EVERYTHING (and kick the tyres from time to time)

Investing isn’t simply a case of picking investments and sticking with them indefinitely. The markets are dynamic, ever-changing beasts and all manner of environmental factors can mean your investments are flying high one minute and in the doldrums the next. BP, Tesco and RBS are just a few recent examples of FTSE 100 companies whose share price has plummeted following high-profile blunders, so if you’re invested in stocks, DIYers should be prepared to keep at least half an eye on the news and the markets, and be prepared to react if necessary. Then there’s ‘rebalancing’, where you review and adjust your investments to make sure they’re still appropriate for your chosen risk appetite. It’s something all professional investment managers will do periodically, and so should you.

3. Beware of spiralling costs

Online brokering and fund platforms tend to have a long and complicated list of fees and charges. As well as a ‘platform’ or management fee for use of the service, there can be transaction fees, rebalancing fees, charges for withdrawing your cash and even inactivity fees for not using your account. Some charges depend on the type of investments you choose – buying or selling company stocks and shares will usually incur a fee for each transaction, whereas in some cases, investing in funds will not. With fees and charges varying widely across providers, shopping around is always advisable. You should try to keep your fees as low as possible when investing, as every penny extra you pay in fees is an extra penny off your returns.

4. Mind the jargon

The world of investing has a reputation for being somewhat mysterious and opaque. Investing jargon can play a large part in this, with terms like ‘OEIC’, ‘ETF’ and ‘passive investing’ commonly banded around on broker platforms with no explanation for the novice investor. Successful DIY investors will therefore need to be up to speed on the terminology, and know their derivatives from their dividends, especially when you’re making key decisions about what to do with your hard-earned money. Our Glossary of terms may be a good place to start.

5. Don’t expect overnight success

It’s easy to get seduced into thinking that investing is a route to overnight riches. Playing the markets to make big, short-term gains is certainly possible and many billionaires have been made, but just as many, if not more, make big losses – it’s just you don’t hear about them. Even the pros don’t get it right most of the time – proof that it’s not as easy as you might think: a startling 99% of actively-managed US* equity funds underperformed the market between 2006 and 2016 – meaning their clients would have been better off buying a cheap tracker fund. Sound advice can be found in the words of economist and investor Benjamin Graham who said ‘Investing should be like watching paint dry’ – in other words, be patient and prepare for the long-haul.

*According to the S&P Dow Jones. Source: https://www.ft.com/content/e139d940-977d-11e6-a1dc-bdf38d484582

There is another way…

If this seems like a lot of hard work, there is another option. You could get the experts to build you an investment portfolio and manage it for you. They’ll cut through the jargon and do your homework for you, using their experience and some smart technology to select your investments based on how much risk you tell them to take. What’s more, they’ll keep a daily eye on the global markets, so you can get on with your day, and they’ll ‘kick the tyres’ every so often to make sure your investments are on track. Best of all, it won’t cost you the earth. If it all sounds too good to be true, why not see for yourself? Create a Wealthify plan

 

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The comments and opinions expressed in this article are the author's own and should not be taken as financial advice from Wealthify.

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