Since the introduction of new regulatory rules to make the true cost of financial advice transparent, you may have noticed a significant decline in the amount of high street banks offering financial advice. You might also be one of an increasing number who has chosen to manage your own investments without the aid of an adviser.
There are a lot of potential pitfalls when managing your own investments, so in this article we identify the seven key pitfalls you are likely to encounter and how you can avoid them.
1. Mis-selling to yourself
When making a new investment it is important to keep in mind your personal goals, time horizon and circumstances. However, the abundance of topical articles and write-ups heavily tipping particular funds makes this difficult; something that might sound attractive may not be suitable for your circumstances. What’s more, investing without advice carries less regulatory protection than taking it, so having a well thought out strategy and making decisions based on the context of how an investment fits alongside your portfolio is vital. Buying investments on an ad hoc basis can lead to unnecessary levels of risk and a lack of overall balance. Having access to intuitive tools that make it easy to monitor and analyse your investments will certainly help with this.
2. Driving while staring in the rear view mirror
Choosing funds that top a performance league table or have the lowest costs may seem like an easy way of building a successful portfolio. Unfortunately, the past is no guarantee of the future, so selecting a fund on backward-looking data alone is like trying to drive a car by only staring in the rear-view mirror. Having access to quality research rather than relentless marketing will help you make informed decisions and should be an important consideration when choosing who to invest with.
3. Ignoring investment trusts
Some platforms only provide access to a limited range of funds, or their research only covers commission paying funds. Investment trusts are often superior to open-ended funds, so don't ignore them. However, it is important to understand the differences between the types of product you are investing into before making a purchase - whether a trust is trading at a discount or premium to its net asset value for example.
4. Forgetting asset allocation
The key to successfully managing your investments is deciding on an appropriate asset allocation to suit your objectives and risk profile. This is the mix between the types of investments you hold such as equities and bonds, how your investments are spread between different geographical areas, and the size of the companies you are accessing. Numerous academic studies have shown that asset allocation is a bigger driving force in portfolio returns than the individual funds or shares you select, yet most platforms provide little information on asset allocation, instead plugging specific products. Without an asset allocation strategy and an ability to review it properly, you may end up with a portfolio with poor risk/return characteristics.
5. Failing to understand risk
In the investment world, the more risk you take, the greater the potential gains - although this isn't guaranteed or it wouldn't be risky. The longer your time horizon the more risk you can potentially take, because you have more time to ride out any short-term volatility. However, there are many ways to quantify risk, so how risky an asset is can be difficult to ascertain. One useful measure is to understand the volatility of a portfolio, which is the extent to which it could fluctuate in value. While this has limitations because it is based on the past, it is a very good starting point.
6. Not rebalancing
Once you have constructed a well balanced portfolio with risk appetite, allocation and personal goals in mind, the work is unfortunately not over. Monitoring how your portfolio changes over time and periodically reviewing and rebalancing it is required to make the most of your investments. This is because the performance of funds and asset classes will vary, meaning that the original asset allocation will drift, potentially resulting in the portfolio changing risk profile and no longer meeting your original objectives. You should check whether asset allocation analysis is provided to you by your provider so that you can monitor your positions. It makes sense to rebalance at least once a year.
7. Lack of monitoring: who's managing your money?
If you are going to invest in actively managed funds, it is vital to look behind the performance of the fund and instead consider the personal career track record of the current fund manager. Once invested, you need to be aware of any potential changes that could impact future performance, such as a change in key personnel or excessive growth in fund size. On-going monitoring is essential and the extent to which your broker provides you with help in the form of research and alerts is another key consideration when choosing who to invest with.
Abandoning advice isn't going to be suitable for everyone and you should think carefully before giving up on it. In our experience, the vast majority of people are still looking for a helping hand in the form of research ideas and the tools to help them better plan and monitor their portfolios. In this respect the various platforms available are not all the same, so it is important to look at the services and tools on offer when choosing an execution-only broker as well as the costs involved in investing with them.
A tool to help you analyse your existing investments
To help you analyse your portfolio, Bestinvest offers a Free Investment Report Service & Tool (FIRST) which will analyse your investments on a non-advised basis. The service covers more than 11,000 underlying investments and will generate analysis on your portfolio’s exposure to risk, asset allocation, the holdings and costs. You can either complete an assessment online at www.bestinvest.co.uk/first or ask Bestinvest to provide a paper based report by calling 020 7189 2454.
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