The dangers of DIY investing
31 May 2019

The appeal of ‘doing it yourself’ comes from a heady combination of saving money and challenging yourself to master useful skills.

But, much in the same way you’d have a hard think before tackling the tiling at home, ask yourself – is DIY investing really for me?

Do you have the time and the aptitude? And, most importantly, can you afford to make mistakes? Here’s where we think the dangers lie.

Underestimating costs

As with any self-managed project, when it comes to DIY investing, costs must be closely monitored. Even if you pick some attractively rising stocks, the associated costs could leave you struggling to keep profit levels up. You’ll need to offset various trading, transaction and platform fees, as well as commissions.

The taxman will also want his cut. When you buy shares over a certain amount, you will usually have to pay stamp duty, at 0.5%, on the transaction.

Choosing investments that don’t match your appetite for risk

Nobody has a crystal ball when it comes to investing, but at the very least you need to choose investments that are appropriate for your situation. Understanding exactly where to pitch your risk level and finding a suitable mix of investments could be your biggest challenge. You could think of this as the equivalent of a DIY gas installation – possibly dangerous if you get it wrong!

Measuring performance can be a performance

Depending on what your goals are, you’ll need to track a range of measures – including market price, pattern of earnings, future prospects and income. If you’re drip-feeding money in, you may find that you struggle to compare how you’re doing with the relevant benchmarks.

Following the crowd

Buying low and selling high sounds great in theory, but actually picking the right moment is a difficult task. Human nature makes people prone to grabbing the latest hot trend and buying high. Read about how your lizard brain is hurting your investments here. At the other end, those struggling with the pain of losses often end up selling low. The time to sell is often when things look most promising, which is oddly counterintuitive. A lack of diversification can make these misfortunes even more painful.

Handover issues

You might relish the challenge of investing, but what happens if you’re suddenly not here anymore? Is your partner able to take on the responsibility? Do they understand your investment strategy? Can they grasp the administration involved? Be aware of the risks that come from you being the only person to fully comprehend your portfolio.

Overconfidence

DIYers tend to be enthusiastic in their pursuits, but make sure this doesn’t push you into the ‘getting carried away’ zone. There’s a risk of developing ‘hubris’ – a state of mind named after the ancient Greek quality of excessive pride. After all, performing well in 10 years of bull markets doesn’t necessarily mean you’re a brilliant investor. How would you feel if you lost 20%, 30%, 40% of the portfolio you’ve built up?

If you’d like to speak to someone about your investments give us a call on 020 3823 8678 or complete the form below.

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