Nearly 50% of investors in the sub 40 year age group get their investing information and ideas from social media influencers and research.
– CNBC, Mad about Markets poll.
As financial literacy gains traction, a growing number of investors today are interested in gaining a better understanding of their investment journey. They prefer selecting their investments and managing their own portfolios. This investment route is better known today as Do It Yourself (DIY) investing.
Managing your own investments puts you in charge of your financial future. But are you sure you are best equipped to handle your assets solely? Self-directed investors are urged to monitor the markets and their holdings regularly. It involves:
- Actively tracking markets.
- The underlying investments in funds.
- Ensuring your portfolio stays within the boundaries of your risk appetite and investments goals.
For such a style of investing, investors need to be well-versed with the cyclical financial markets, the array of investment products, and ample time to spend periodically on your investments to keep your portfolio on track. DIY investing most certainly has its benefits:
- It is a need-based investing route free from product distributor biases
- It is low-cost since no fund managers or advisors are involved
- An ample of Robo-advisory platforms are available to choose from
But do you as an investor have the expertise or time to learn the markets and analyze underlying investments?
While we understand the advantages of DIY investing, here are a few downsides to it:
Behavior Management: The truth is that we aren’t always as rational as we believe we are when it comes to money and investing. Take, for instance, the 2008 Lehman crisis, or why go far? What were your sentiments in the latest market downturn during the early 2020 market dip due to the pandemic? Did you invest when the markets fell or held on to your assets, or cut your losses? Can you manage your behavior and biases while investing?
Investment Knowledge: As dynamic as the market is, so are the various financial assets and the investment landscape. For a novice investor choosing from the array of financial products alone can be overwhelming, let alone deep-diving into the underlying assets and tracking their business progress. Bad investment decisions arise from a lack of investment knowledge, which is similar to allowing FOMO to kick in and investing when markets are high or selling on dips.
Relying on Past Performance: While historical data and past performance of a business or asset are critical to gauge its future, it is not the only criteria to fall back on. Just because equity had a depressing decade and offered similar returns to an FD investment during that comparable period, this does not equate that equity as an asset class will always be an underperformer. The financial markets are cyclical, and every asset class has its highs and lows during these cycles. Investors need to be aware of the market cycle and a forecast of what the future holds for that asset class or underlying asset.
So, where do you fit in as an investor?
Following a well-thought-out investing strategy will help you avoid many of these typical investing blunders. An intelligent investor will find a balance between a DIY investing route and a goal-based investing route. This balance can be defined depending on the investor’s knowledge, time, and investment goals.
Research proves that Goal-based investing can offer 3 to 4% more gains as compared to a DIY route.
Finding a balance between both?
In investing, you cannot have a one size fits all mantra. It is all about a tailored approach to match each investor’s goals, risk appetite, and time horizon. Hence, suitability plays a vital role while investing. A simple example is that for an investor, the risks appetite in a bull market will be far different compared to the same portfolio in a bear market. If within a single portfolio, this difference exists, imagine how critical it is to understand your goals and align your investments accordingly.
Goal-based investing is a strategy that helps investors shift their focus from maximizing profits to achieving their specific financial goals. A healthy balance between a DIY approach and goal-based investing can maximize your gains but be aware of your risk appetite and time horizon.