Anyone can invest, whether you can set aside £50 a month or have a multi-million pound portfolio. Online trading platforms provide the means, while any number of forums, guides, and online courses supply the know-how.
But filtering out the noise and finding genuinely useful information can take time. It is also easy to make mistakes and second-guess yourself without an objective third party guiding you.
So, how can you create your own investment plan, and how do you know when it is time to seek professional advice?
Getting Started
Many DIY investors jump straight to the investing stage. This is the equivalent of going on holiday without making any travel arrangements. It can work for some people (and can lead to some fantastic adventures), but most of us can benefit from a little more planning.
Before you even think about investing, there are a few other priorities to address first:
- Making sure you have an emergency fund of around 6 months’ expenditure to deal with unexpected bills or unemployment.
- Planning to clear any expensive debt.
- Ensuring you have enough life insurance, critical illness cover, and income protection so that you have peace of mind if something goes wrong.
To start your investment journey, you should consider the following:
- What are your short, medium, and long-term goals?
- How much will you need to achieve your goals?
- How much can you afford to save?
- What level of risk are you comfortable with?
A basic cashflow plan can help you decide how much to invest, and to set an appropriate risk level based on the returns you need to achieve.
How to Create Your Own Investment Strategy
Once you know what you are trying to achieve, you can start the process of investing. Consider the following before you start to select assets:
- Decide on a risk level for your portfolio. This is not an exact science, but a portfolio with a high level of equities will normally produce higher returns over the long-term. It is also likely to be more volatile, especially over shorter periods. The longer you invest, the more you will benefit from equity investing.
- Aim to hold a wide variety of assets in your portfolio. As well as diversifying across the main asset classes (equities, bonds, property, and cash), you should also spread your investment across market sectors and world regions. Diversification can help to keep volatility under control.
- Keep an eye on costs. While performance can vary, investment charges are a known quantity that will have an impact on your returns.
- Invest tax-efficiently. This could involve using your ISA allowance, paying into your pension, and making effective use of your capital gains exemption.
You can invest directly in shares, funds, investment trusts, exchange-traded funds (ETFs), single-asset funds, multi-asset funds, model portfolios, and many other options. They all have their own pros and cons, which you need to consider in addition to the underlying asset allocation.
For DIY investors, index tracking funds or risk-rated multi-asset funds can be appropriate options. These have the following benefits:
- They can be accessed with a low monthly investment.
- Costs are usually reasonable, especially for passive investments. However, it is worth checking this and comparing funds to their peers.
- They benefit from the governance and oversight of a fund manager.
- Stock picking is taken care of for you.
What to Avoid
As a DIY investor, there are some potential pitfalls to be aware of:
- Avoid placing too much money in any single asset. This is particularly risky when you hold direct company shares, as you will be overly exposed to the fortunes of a single business. If you look at the investment breakdown of a typical multi-asset fund, you will see that it is very rare for fund managers to hold more than 5% in one company (it will usually be more like 1 – 2%).
- Trying to time the market or steer your portfolio towards opportunities is usually pointless. Markets are efficient, which means that world events are already priced in. If professional fund managers cannot consistently get it right, DIY investors are unlikely to fare any better.
- It can be instinctive to want to take money out in a falling market to avoid further losses. But the best trading days normally follow the worst. By taking money out, you can’t benefit from the recovery. Years of data indicates that staying invested for the longer term is the best way to smooth out volatility and avoid real losses.
- Don’t be tempted by hyped stocks or trendy assets that you don’t understand.
Is DIY Investing for You?
DIY investing could be for you if:
- You don’t have complex financial planning requirements.
- You are prepared to do the research yourself.
- You understand how markets work and are prepared to stay disciplined.
- You will keep your investments under review and ensure your plans remain on track.
When You Should Seek Advice
But you might benefit more from financial advice if:
- You would like someone to coach you, give an objective view, and hold you accountable for achieving your goals.
You don’t have the time, inclination, or expertise to manage your own investments and would prefer to delegate this to a professional. - You would like to benefit from a professional adviser with the tools to compare the whole of the market before selecting an investment for you.
- You are a higher earner or have significant lump sums to invest. A financial planner can help you not only with your investment strategy, but also to ensure that your affairs are as tax-efficient as possible.
- You have several existing investments and pensions, and would like to smoothly consolidate them.
- You feel you could benefit from a co-ordinated plan, which takes into account your income, expenditure, assets, liabilities, and protection needs, giving you the best chance of long-term financial security.
Please do not hesitate to contact a member of the team if you would like to find out more about investing and financial planning.
