South African consumers are increasingly deciding to take their finances into their own hands and starting to manage their own investment portfolios. Do it yourself (DIY), by its nature, is often appealing as it represents an opportunity to minimise costs, but before considering DIY investing, consumers need to consider whether they have the knowledge and ability to perform the required tasks competently the first time round.
This is according to Martin Poole, Institutional Asset Consultant at acsis, who says that many DIY investment tasks appear deceptively simple but then prove much more difficult in practise. “The reality, and I quote Warren Buffet, is that ‘investing is simple but it is not easy’. In order to implement a financial plan effectively, you need a good understanding of financial concepts, the stock market and other assets, the pitfalls of their behaviour, taxation rules and estate planning, to name just a few.
“Even though the desire to do DIY investing may be undiminished, greater wealth generally translates into more complex arrangements and the need for expert guidance increases.”
He adds that there are various pros and cons of DIY investing. “The pros for DIY investing include, among others, a sense of satisfaction, higher control over initial costs and the understanding of tools and how they work. The cons include greater time consumption, having to maintain and operate tools and the risk that consumers could make bad investment choices and ultimately have to call experts to assist them.”
Poole offers the following pointers for consumers considering DIY investing:
- Beware of dabbling
Running a shared portfolio in your spare time may not be sufficient to cater for all the aspects of a comprehensive plan, such as what will happen in the event of your death or how you will be paying for your children’s education.
The focus of DIY financial plans tends to be on what the individual knows, which is most often investments. Other areas, such as estate planning, tax planning and retirement are often neglected. It is important that a financial plan covers all of an individual’s needs, as well as the financial risks they may face.
- Watch concentration
Electing to implement and manage certain parts of a financial plan yourself should be based on your knowledge and personal interest in a particular function, such as a portfolio of shares or a handful of properties.
In the event that you choose a DIY approach for your investments, the allure of buying what you know increases the concentration risk and as a result particular attention must be paid to diversification, particularly at the outset.
- Behavioural pitfalls
Probably the most pertinent pitfall for DIY investors is the potential for procrastination, especially on aspects of the financial plan that may not be of personal interest to the individual. Certain elements may get lots of attention, while other parts of the plan may continually be shelved until another day.
Another behavioural pitfall is to switch strategies when the market dips due to panic, which can result in losing much more money had the DIY investor waited to see what the markets were doing. Incessantly switching strategies can also result with a mix of investments with no regards for the overall portfolio construction.
Although the DIY option seems like the lowest cost option, it may not always be. When evaluating the full cost of different alternatives it is vital to consider the direct costs as well as any opportunity costs.
The main saving by doing it yourself is that you don’t pay an adviser. This needs to be weighed up against the value that an adviser may add as he may save you from incurring far greater costs. A good adviser will help you do the parts that are of interest to you and manage the less interesting matters on your behalf.
Once you have a clear framework in place you need to remember that this is not a once-off exercise. It is important to be disciplined about your DIY project and to critically evaluate your own performance. Even the best laid financial plans can be undone if they are not maintained and if they do not adapt to suit your changing circumstances and the changing financial environment. It is therefore imperative to review your financial plans on at least an annual basis to keep them up to date.