The risks of DIY Investing v advised investing.


Article by Phil

DIY investing has become a widespread phenomenon with daily trades on the stock market peaking at 2million a day back last March up from the normal figures of just over 800,000, so why the rise in trading? There are probably a few reasons. Boredom might be one of the main ones. Why not play the markets during lockdown rather than a video game? Good question. We already know that most new investors on trading platforms are the under 30’s. And of course, the development of smartphone trading apps has also helped to facilitate the ease in which trading can be done from the comfort of your home, or anywhere in fact.

So, what’s the problem with doing it yourself?

Well, analysis and research seem to be clear that the outcome will be losing money. Especially the longer you do it. Detailed studies from Brazil and Korea have both shown that the losses from trading increase the longer you spend doing it. The findings from the Korea study showed that only 1% made a profit over a sustained period, which means that 99% lost their money or at least part of it.

The recent Game Stop share trading frenzy in the US is a good example of the risks. It amply demonstrated what a roller coaster ride the equity market can be. Especially trades in single company shares. The Game Stop shares were trading at $3.94 back in January 2020 and peaked in January 2021 at $347 an incredible gain. Now the price is down at $50. So, if you’d bought $1,000 worth of shares at the bottom they’d have been worth $89,664 at their height (if you’d managed to cash out then). But conversely, if you’d bought $1,000 of shares at the height they’d now be worth $144 and falling and there’s the rub.

In stark comparison of course are the long-term studies which show that those using advisers to manage their investments do at least 20% better on average than those who don’t. Depends on your portfolio size, but on a £300,000 pension pots that would make you £60,00 better off (on average of course).

Better performance is only one aspect though. What you also get with regulated advice is protection and peace of mind. Investments through regulated Financial Advice firms carry the protection of both the Financial Services Compensation Scheme and the Financial Ombudsman Service. Neither of those safety nets are available to you when you go it alone.

But there’s no doubt that the adviser client relationship has changed during the pandemic, with a switch to online. So how has the switch to online (or more accurately the move away from face-to-face meetings) been received over lockdown?

Research by Embark Group has found that whilst advisers themselves think that they have managed the transition away from client meetings very well, clients are not quite as happy, although overall clients are more than happy on average.

The results found that overall, 72% of clients were satisfied with communication over the pandemic period. 64% of clients were satisfied with online meetings (Zoom, Facetime and the like), 61% were satisfied with a text from their adviser (seems unusual to us) and only 59% were satisfied with a letter. Still more than half, but it does show how much clients value the human touch.

In terms of what clients valued most about their adviser’s service, 85% valued ad hoc advice the most. That is the ability to speak to an adviser about a specific concern and receive advice or guidance (on the basis that they are established clients). That makes sense. 84% said they valued regular updates, either by e mail or letter. 81% the value of health checks or regular reviews (an integral part of the holistic advice process) and 78% valued face to face meetings.

Typically, in the context of the research this has been seized on as evidence that face to face isn’t the most important component of the adviser/client relationship. But think about it the other way around. That means that only 22% (or one in five clients) didn’t value the face-to-face client relationship. Our view is that face to face is still the most vital component of the relationship and we have gone out of our way to ensure that our Office has remained open and our services accessible in person during the pandemic. Our feedback is that this has been important to our clients, including new enquiries. Online channels have been great, but four out of five clients still value face to face advice.

When it comes to confidence, clients with advisers are definitely feeling safest.

Pre pandemic 70% of unadvised clients were confident in their own ability to manage their investments successfully. This has now dropped by 10% down to 60%. In contrast over a quarter of advised clients felt more confident that their long-term investment plans would be met over the same period. Even when markets were at their most volatile back in March – April last year, the research found that 65% of advised clients remained confident about their finances. That’s a great indictment given that was the biggest drop in markets for over 10 years. One of the key benefits of being advised is the ability to seek reassurance from your adviser about the situation. The most important thing to do back then was to sit tight and not to panic.

The number of DIY investors, however, continues to grow and this is causing the FCA concern. Recent research conducted by Britain Thinks on behalf of the FCA showed that younger DIY investors do not view risk in the traditional way and the FCA are concerned that this might lad to consumer harm. It seems that younger investors are more interested in the “thrill” of investment gains and don’t consider the downside, with over 40% not thinking that there is a risk of losing money! This is driving behaviour in online advertising for high investment returns (often offshore and unregulated).

The FCA claims to be working to reduce these risks and cites the ban on illiquid Mini Bonds as an example of its response. (Some might argue that this was in response to serious losses after the horse had bolted.) But also, the FCA introduced ban on the sale of crypto-based derivatives back in 2020.

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