In the first of two new blogs I want to consider the danger of emotion when it comes to DIY investing, and in the second blog I want to highlight the one thing that many DIY providers do not deliver as part of their service.
In all my blogs, and tweets I have always said that DIY investing will work for some people, and likewise advice will work for others. The danger is that we have a swing so strongly towards DIY investing that we have a danger that people are entering into a very difficult world where emotion can be dangerous. We have of course seen this before, not in investing but with DIY in the home.
A raft of TV programmes, books etc made us all believe we could be DIY experts. As we gained confidence we thought we could do the electrics and plumbing, for some there was no doubt they had a natural talent but for a larger proportion it led to disaster and extra cost. We now have a reverse trend where perhaps the more basic DIY is still being done but the more complex work is going to the experts.
To some extent this is happening in investing and for many it will end in disaster. Let me talk about emotion, there are two emotions which the likes of Money Week and Hargreaves play on. The first is making money, and the second saving money.
Let me take the first one, a lot of the marketing we see in the likes of Hargreaves will talk about if you had invested x in a particular fund over a particular time it would now be worth y. This plays on emotions, all we see is the end figure and we want some of that. Did we not see this with the tech bubble and others? The savvy DIY investor will do one of two things with Hargreaves mailings; bin them without reading, or perhaps take the tip and research it further and then decide whether it fits with their plan. The less savvy investor will almost certainly invest in that fund. We know that very few DIY investors actually monitor their investment, and therefore if that investment doesn’t deliver what it did in the past those investors will be disappointed.
Of course Hargreaves are about selling a product so selling on emotion is part of the process of getting people to invest. Money Week is not about selling a product (but it is about selling their magazine), it is about giving information to people about investing; effectively it provides ideas and highlights opportunities. We have seen a couple of times that their journalists do not like financial planners and believe that you can make money on your own. This fits well with the aim of the magazine but it forgets that unless you really understand investing you will not understand what constitutes good returns.
So for example it will show the top performing shares for the previous week, and the worst performers. Emotion will say I want some of that but now may not be a good time to invest. Take two examples of shares I have purchased – Apple I purchased at around $400 and sold at around $500, sounds like a shrewd investment but at one stage the shares were around $700 and I allowed the noise to distract me and believe that the shares would only go one way and that is up. Another share is Lloyds; I have purchased these shares at 20p, 30p, 40p and 50p. Even at 70p I think they are very cheap. I was buying the shares when people were saying not to, and now people are starting to take interest. In reality people won’t really start taking notice until they are perhaps nearly £2 a share and paying dividends. Now an adviser can’t normally advise on shares but the point here is about emotion. I have two things in place, a return I expect to get from these investments and a point where I will bail out. Over time if I can get somewhere between 5 to 7% a year on my investments over a long term time horizon I am happy.
So the emotion of greed (making lots of money) is played on heavily and it looks at the past and not the future. Hargreaves and Money Week may give you ideas but ultimately it is your own research, and your own plans which should determine whether those ideas are good or just worthless marketing hype!
The second emotion is that of saving money, so looking back at my previous example. If I fit my own kitchen, do the electrics and plumbing how much will I save? Perhaps £2,000 or £3,000 or perhaps more – of course I could do some of it and perhaps get some help and still save a considerable amount. When the budget is tight this is a strong emotion but reality needs to kick in – firstly do I have the time to do this and secondly do I have the expertise?
Investing is the same Hargreaves and Money Week will make you think that you should ditch your adviser because they take high fees. The premise is that if you are paying your adviser 1% a year then this is reducing the returns on your investment and actually if effectively you pay yourself that (i.e. going direct you don’t pay it) then you will make a lot more money. There will be people who do make a lot of money going direct and they are likely to be those people who are confident about investing, they understand about financial planning, they understand about goals and they understand about emotions.
So the point of this blog is this – headlines like “ditch your adviser” are playing a dangerous game and one that could in time reverse the so called decline in people seeking advice as they search for financial planners to sort out the mess they are in. If you are confident to go it alone, then what I am saying about taking what Hargreaves and Money Week with a pinch of salt will make sense, if you are just starting out then consider this carefully. And ultimately if you are not sure then that is where advice comes in, you can swim against the tide – there is nothing wrong with that and actually you may find investing in a financial planner is the best investment you make. If you want to go direct then patience, planning and research are key to success.
NOTE: This is written in a personal capacity and reflects the view of the author. It does not necessarily reflect the view of LWM Consultants. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author. This is not a recommendation to buy any product or service including any share or fund mentioned. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.