DIY investing is on the rise but is it wise to take your financial wellbeing into your own hands?
The digital revolution has not only democratised access to information; it has also made it possible for anyone with a digital device and an internet connection to perform tasks that were previously reserved for specialists. By simply downloading an app, anyone can publish their thoughts, create artistic designs and even structure their own investments. But when it comes to something as critical as your financial future, the questions is, should you?
The case for DIY
“DIY investing is where someone makes their own decision on the investment strategy they want to follow, without the input of an investment professional,” explains Ester Ochse, Product Head at FNB Integrated Advice. “This includes components such as asset allocation, as well as which instruments they will use, be it either a unit trust selection, share selection, or alternative assets.”
It’s a big responsibility for someone who has no formal training or experience in the field, yet after really taking off during the Covid-19 pandemic, DIY investing has remained an industry trend worldwide.
Nicola Comninos, Chief Risk Officer at EasyEquities likens the rationale behind it to DIYing your home renovations. “When you’re paying specialists for your home renovations, the project is often much more expensive than they originally indicated it would be and the end result often is not exactly how you wanted it, or what you had in mind at the start. DIY renovators decided to take things into their own hands, given they have more control over their costs and the end result. DIY investors often have the same reasons for embarking on their wealth generation and protection journey on their own – they feel they can do it on their own much more cost effectively and are not overly confident that the specialists can do a better job than they can do themselves.”
And thanks to advances in technology, taking charge of your own investments is more accessible than ever. “DIY investing is so much easier nowadays given online access to digital investment platforms and easily understandable and unintimidating information at your fingertips,” says Comninos, who lists EasyEquities, Robinhood and eToro among the resources DIYers can use.
“These types of online share trading platforms offer educational content, which helps you assess how much risk you are willing to take, which types of investment options you should consider, given your appetite for risk, and they help you along the way to make your DIY investing journey much easier. It’s also enjoyable as you learn and have a sense of pride that you have taken your finances into your own hands,” she says.
Risking it all
As enjoyable and empowering as it may feel to take charge of your own finances, however, the stakes are high if you get it wrong. And there is a lot of scope for mistakes to creep in.
“Doing it on your own has pros and cons,” says Comninos. “One of the negatives that you have to take into consideration is that you might choose to invest in certain options that do not deliver the income and/or returns you were aiming to achieve to reach the objectives you have set for yourself. This is often the case when DIY investors invest too much in one asset class or in one investment instrument and not having a well-diversified mix of different assets in their investment portfolio.
“Another downside to DIY investing is that you give up on an investment choice you made by selling it when the price is down instead of being patient and waiting for the price to recover and increase. This is called behavioural finance. Generally [DIY] investors sell when prices drop and buy when prices increase, which is the complete opposite of what you should do to help you get the best investment returns.”
“There are several pitfalls to managing your own investments,” agrees Ochse. “Being overly exposed to one particular asset class and not being properly diversified; making emotional investment decisions – buying high (like when following the herd) and selling low (out of panic); being too conservative, like being overly exposed to cash as it is regarded as ‘safe investing’ but losing buying power when accounting for inflation; and giving in to familiarity bias – investing in a share, because it is a familiar brand without doing proper research.”
Mind the knowledge gaps
While there is no shortage of information out there, a big problem is that people often don’t know what they don’t know. “It’s great that we have information available at our fingertips through a wide variety of online sources, but where there is a pro, there is a con, and in this case the greatest con is misinformation,” says Comninos. “Knowledge is power, and information helps enable that, but the level of credibility of that information is key. Understanding the level of qualifications, experience, depth and breadth of research and analysis conducted by the person and/or institution you source your information from is something you need to assess before you consider that as gospel and act on it.”
An untrained DIY investor might not have the savvy to identify what knowledge they need to acquire. As they wade through the information available, they may also lack the in-depth understanding to make discerning choices.
Paul Nixon, Head of Behavioural Finance at Momentum Investments, explains it well: “In 2016, Paul Glimcher (widely regarded as the father of neuroeconomics), showed in a series of experiments that lovers of Snickers chocolate bars struggled to pick their favourite from a line-up of 20 chocolate bars. The challenge was easy when participants were faced with three choices, but when faced with 19 competing options, some people reported not even seeing their favourite in the line-up. Choices make our glucose-hungry brain fatigued and even in this simple task, many failed. What hope do investors then have in navigating over 1 500 unit trusts?”
Nixon notes that the complexities of investing often lead DIY investors astray. “Because this is a tough landscape to navigate, investors often simply pick the funds that have done the best in the past and when they underperform, move to something else. This is a recipe for behaviour tax: a lower return as the result from doing the wrong things at the wrong time.”
In the South African context, there’s the added concern that many of the resources available were created for international audiences and may not be relevant to South Africa. “While it may be tempting to follow international guides and gurus, one should approach this with caution,” says Ochse. “Books may be a better option, especially when written by someone that is well respected and has a proper track record. Take out of the books what will be universally true – for example a PE ratio will be the same around the world and saving at least three months income for emergencies is important. But when it comes to very specific sectors and investment that will have a regional nuance, then one needs to be cautious. As for social media, ensure again that you are following reputable companies or analysts and planners with a proper track record.”
Another practical consideration is that the investment landscape is changing constantly. A DIY investor may simply not have the time available to focus on their investments and implement some of the strategies they read about.
“A top investment tip is to buy low and sell high, but for DIY investors who have a day job and can’t watch prices the whole time, the best approach is to just be in the market and not try and time the market,” says Comninos. “Consistently invest in your financial freedom by regularly putting money away – for example on a monthly basis putting 10% to 20% of your salary into your investment account and buying a product that gives you a wide variety of assets like a balanced funds and/or Exchange Traded Fund (ETF) in accounts like Tax Free Savings and/or Investment Accounts that are the most tax efficient.”
Proceed with caution
For those who want to go the DIY route, it’s important to be well-informed. Clients need to know what they’re potentially getting themselves into.
Get the knowledge: “Research, research, and then do a bit more research,” says Ochse. “If you are looking at unit trust investments, look at the fund fact sheets, the track record of the fund over a period of five or more years and make sure that the unit trust company is a reputable company.
“When doing share investing, again research is of vital importance. Look at the company’s annual financial statements, analyst reports and forecasts, and then be properly diversified, don’t put all your eggs in one basket. While it may be tempting to make a quick buck with cheap stocks, this can also burn you very quickly. Rather look at quality companies and then remember the old adage, ‘it is about time in the market, not timing the market’.”
Do a test drive: Comninos recommends testing the platform before committing your savings. “One can often open demo accounts, which will give you a chance to try your hand at investing before you commit your hard earned money and for you to get a feel for the features of the platform to help you choose the one that meet your needs,” she says.
Read the fine print: “Make sure you understand all the fees, features and conditions of use of the platform – these and more information is contained in the platform terms and conditions. Be sure to read them familiarise yourself with what the service provider is offering you and what your rights and obligations are,” Comninos adds.
Be vigilant: Comninos also cautions DIY investors to be wary of cyber threats and dodgy dealings. “Always bear cyber security in mind and ensure you only click on safe links and visit protected websites. Look out for https and stay away from unprotected websites (http). Read the service provider’s annual report, understand their financial health, their commercials (i.e. how they make money) and their business model (what product or services they offer). Stay away from businesses you don’t feel comfortable with based on what you read about them, or what others say about them. Always remember to use credible sources and check the legitimacy of information.”
Cover your bases: “Another option is to ensure that all your basics are sorted out with a financial adviser/portfolio manager and then with extra funds look at direct share investing,” suggests Ochse. “Running your own unit trust or share portfolio can be rewarding and fun, but our suggestion is to get your basics sorted with a financial adviser first.”
Safeguarding clients
DIY investing may sound like a great idea in principle, but it’s evident that it requires a lot of work and knowledge – possibly more than people realise. While some may be willing and even keen to put in the effort, working through a financial adviser remains a good option for those who aren’t in a position to do so. And research suggests it’s in their best interest.
“In 2022, a study in the US found that a financial adviser added 4.91% per year in value, of which over 2% is attributable to behavioural coaching. This is easily believable given that recent research by Momentum Investments of the behaviour tax, or value destroyed from shifting up and down the risk spectrum to time markets, is over 3% on average per year since the onset of COVID-19 in 2020,” says Nixon.
“The balance of adviser value added may be allocated to the correct product selection, matching asset class allocation to goals, and portfolio rebalancing,” he adds. “The latter two elements are performed by discretionary fund managers (DFMs), a reason they have become popular in recent times. Furthermore, a ‘value of advice’ study in Canada in 2019 found that clients with financial advisers managed to accumulate approximately 3.9 times the amount of assets over a period of 15 years versus people without advisers.”
Nixon believes some of that may be down to poor decision-making by those untrained in the complexity of investments. “With all of the attention on artificial intelligence of late it is also important to note some research findings of the Beworks Research Institute in Canada that clearly show how something called ‘choice architecture’ can affect our decision making when left unsupervised. Generally, when making complex choices, like choosing a unit trust, we will pick the middle option in a line-up to avoid the extremes, which is known as the ‘Goldilocks effect’. Beworks showed that when adding a more risky fund as an option and removing the least risky fund, participants still chose the middle option, even though this is now a more risky fund. In other words, investors are not evaluating the risk and return attributes of the fund but relying on the shortcut of not being overly conservative or aggressive.”
He says this is why advisers are so important. “In the labyrinth that is investing, picking the right adviser can be the most important decision the client will make.”
Comninos believes even those who are considering DIYing their investments should meet with an adviser first. “Financial advisers have an important role to play in assisting investors,” she says. “Before you decide to embark on a DIY investing journey shop around and meet with financial advisers who can help you along the journey. Carefully weigh up what they have to offer and if you decide it’s not for you, only then embark on a DIY investing journey with your eyes wide open while being prepared to invest in your learning journey along the way.”
So, why are so many people choosing to go DIY instead of working with a financial adviser?
Ochse says that, while there are multitude reasons why investors choose to go the DIY route, some of the main ones she’s encountered include: “Caution of growth assets and wanting to stay in cash or bank deposits, which could be because of a lack of knowledge or a bad previous experience; not trusting that asset managers or portfolio managers add value; only thinking about the fees that are charged; and they believe they have the experience and knowledge to manage their own funds.”
If you consider these reasons, a theme emerges that there is a lot people simply don’t know.
For some, that lack knowledge breeds uncertainty. For others, who think they know more than they do, it may create a false sense of confidence. And there are those who don’t know the value of advice because they have yet to experience it.
As an adviser, it’s important to remember that for many clients, the world of finance is an unfamiliar environment that they don’t understand. Many people fear the unknown. They see it as filled with unseen perils and as an opportunity to be hoodwinked by those with unscrupulous intent.
By taking the time to educate clients and build genuine rapport, advisers can foster a trusting relationship with clients and be in a position to guide them so they don’t make a mistake they will later regret.