2 July 2024

Top 9 Mistakes When DIY Investing

News & Insights

Rick Gosling

Top 9 Mistakes When DIY Investing

With investments more accessible than ever and reams of information available online, the idea of ‘doing it yourself’ can seem an attractive prospect to save on advice fees. Part of the value offered by advisers is navigating the potential pitfalls when making a financial plan and managing investments. Below are some of the most common mistakes we see in ‘DIY’ financial planning.

  1. Unrealistic growth assumptions

When planning for the future, assumptions need to be made around investment growth, and in most cases, it makes sense to look back historically over various time periods when creating those assumptions. Individuals can be swayed by recent events and after a particularly good period for markets, this can lead to heightened expectations of returns going forward. This can be dangerous for the financial plan if the actual performance falls short of those assumptions.

  1. Not understanding risk

Most people have a reasonable understanding of the concept of investment risk. Markets can go up and down and it’s all about the long term. However, where things get tricky is understanding how we would expect different types of assets to react in certain economic scenarios, and how much investments could fall. Perhaps more importantly, individuals sometimes fail to marry up their investment risk with the amount of risk they can reasonably afford to take given their own circumstances.

  1. Panicking!

It’s natural to want to sell investments and limit losses when markets have tumbled, but it’s important to continue to take a long-term view and ride out period of volatility – the recovery will come, and you want to be invested when it does!

  1. Unexpected tax consequences

A little bit of information can be a dangerous thing. One example here would be a high earner making large pension contributions. A perfectly reasonable and prudent action to take on the face of it, but it can occasionally saddle the individual with an ‘Annual Allowance Excess Charge’ if their earnings and contributions breach certain thresholds.

  1. Leaving things too late

Burying your head in the sand is extremely common. Whether it’s planning for retirement, putting insurance in place or simply just sitting down and mapping everything out, the sooner you start, the better. Another regret we occasionally hear is around failing to get family members involved in financial planning early enough, whether it’s children or a spouse.

  1. Scams

People can be influenced by what they see on social media and especially around unregulated investments with promises of ‘safe’ 10% + returns. The old adage of ‘if it looks too good to be true, it usually is’ is one to remember here.

  1. Not holding enough cash

When you compare long term returns of stock markets versus cash, there would appear to be only one winner. However, that completely overlooks the main reason for holding cash – liquidity. Holding too little cash can mean that investments have to be sold, often at inopportune times, should unforeseen expenditure arise.

  1. Being under-insured

The more exciting part of creating a financial plan is usually the investments. People can become focused on the returns they can generate and the early retirement they might be able to afford. Less glamorous, but equally important, is putting in place protection to cover the unfortunate circumstances where an individual becomes ill or passes away. This can have huge implications for a family, or even fellow business owners.

  1. Assuming the status quo

It can be easy to assume that things will continue as they are currently, however change is inevitable. In 2020 and 2021, few people were predicting that interest rates would shoot up as much as they have done over the subsequent years, and that will have caught out those who borrowed large amounts with short term fixes or tracker rates. When designing a financial plan, it needs to be flexible enough to navigate changes in the economic outlook, legislation and personal circumstances.

A good adviser should help you avoid making these mistakes, which at worst can be catastrophic to achieving your goals. Even setting aside the financial impact, it’s hard to put a value on the peace of mind that an adviser can deliver.