How best to invest?
First published on 16 of October 2018 • Updated 21 of January 2019
If you want something done properly, should you do it yourself – or hire an expert instead? The truth is, it depends. IFA Steve Johnson is here with some tips on how to choose the right kind of investing for you.
I’ve been a financial adviser for a few years now, and it’s instructive to see how a client reacts to gains and losses on their investments. My experience is that most clients feel the pain of losing money far more than they enjoy the experience of making gains. Another notable thing is how quickly people get bored. Managing your money can soon become tedious for many people – at least until they start to make big losses, at which point it rapidly becomes ‘exciting’ again, though not in a good way. And I’ve noticed too how many people like to make their financial decisions tomorrow (which of course never comes).
So when should you seek professional investment advice, and when can you go it alone? Here’s how you can decide for yourself.
The rough and smooth of investing yourself
Think about the following potential advantages and challenges of do-it-yourself investments.
- Low cost – you can choose a tracker type fund (for example) which tracks a particular index, and pay very low management fees. Of course, the challenge is in picking the right index to track.
- Interesting – perhaps you take a personal interest in the nuts and bolts of investments, and this is a way to make your hobby into something potentially profitable. Choosing your own investments can be a gratifying experience (though of course the risk is all on you).
- Acquiring new knowledge – your investment knowledge should improve as you go along, so don’t try and swim before you can paddle. Start small and weather at least one market crisis before deciding on whether to commit more money.
- Risk assessment – when investing you must be able to assess risk on an ongoing basis, and this can be tricky for a beginner. Always be very clear about how much you can afford to lose. Also make sure you have the right mix of assets for your personal risk tolerance.
- Tax wrapper allocation – you’ll need to consider your tax position, and also how easy it is to get your hands on your money (what we call ‘liquidity’). This will influence your choice of ISAs and/or pensions. You’ll also need to decide whether you’re investing for gains (a lump sum at some point in the future) or income (a steady return).
- Loneliness! – Investing can be a lonely place if you don’t have someone trustworthy to speak to in times of stress. Even worse, you might have the wrong person to speak to, like Fred down the pub who reckons now is the perfect time to go large on Bitcoin…
The ups and downs of paying for investment advice
There are a few different ways in which you might pay for investment advice. One is to choose a ‘managed’-style fund where you pay a fund manager a small fee to invest at a risk/reward profile of your choice. Another is to have a financial adviser, bank or stock broker acting as your wealth manager. Your wealth manager will consider all your circumstances, e.g. income, background, expenditure, tax position and future plans. They will then construct a portfolio of investments for you, tailored to this unique profile. They should also offer a regular review service to make sure it continues to meet your needs.
- Expertise – you pass on the responsibility for your portfolio to an expert with a lot more experience than you have.
- Consistency – regular reviews from your adviser will ensure that your investment strategy remains in line with both your goals and your risk profile (both of which may change over time).
- Efficiency – your adviser will consider areas such as taxation and maximise your portfolio’s tax efficiency whenever this is consistent with your other objectives.
- Cost – this is the main issue. You’ll need to be confident that the value offered by the adviser will outweigh the cost of their services.
- Asset value – in order to make this approach worthwhile, you’ll probably need investable assets of at least £100,000 (this is in addition to any savings you keep for short-term spending or emergencies).
- Performance – although using a professional increases the probability of your investments performing well, there is no guarantee that they will outperform funds that you could choose yourself. All you can really do is improve your odds.
Think long-term gain, not short-term pain
I always start off with new clients by explaining one thing in particular. There will be times when we turn up for your regular reviews and your portfolio will have fallen in value. So at the start, ask yourself whether you are ready for this.
Timescale is a key factor here – when will you need the money? If the answer is next month or next year, then don’t invest. On the other hand, if your financial goal is five years or more in the future, then you have a good chance of doing better than a cash savings account, and of beating inflation too.
Choosing how you invest
Whether you pay for investment advice or go it alone will depend on a range of factors – from the value of your assets to how confident and knowledgeable you are, and how much you value guidance. Professional advice does cost, but the whole point of it is to make more money that you might otherwise have done. If a financial adviser’s clients don’t see good results, that adviser quickly goes out of business.
So which is best for you personally? If you have the discipline to research and choose funds, and also to carry out regular reviews, then DIY investing can work well and you may well enjoy it. If you’re not motivated or find the subject frightening or boring, then an adviser will be able to show you what you’re missing out on.
Steve Johnson is an independent financial adviser based in Birmingham.
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