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.
SPECIAL NOTE: Any
reference to a share is not a recommendation to buy and careful research should
be done before making any decisions. Past performance is not guide to the
future and investments can fall as well as rise.
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