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Does D.I.Y investing work - Warren
Buffet
South African consumers are
increasingly deciding to take their finances into their own hands and starting
to manage their own investment portfolios.
Do it yourself (DIY), by its nature, is
often appealing as it represents an opportunity to minimise costs, but before
considering DIY investing, consumers need to consider whether they have the
knowledge and ability to perform the required tasks competently the first time
round.
This is according to Martin Poole,
Institutional Asset Consultant at acsis, who says that many DIY investment
tasks appear deceptively simple but then prove much more difficult in practise.
"The reality, and I quote Warren
Buffet, is that 'investing is simple but it is not easy'.
In order to implement a financial plan
effectively, you need a good understanding of financial concepts, the stock
market and other assets, the pitfalls of their behaviour, taxation rules and
estate planning, to name just a few.
"Even though the desire to do DIY
investing may be undiminished, greater wealth generally translates into more
complex arrangements and the need for expert guidance increases."
He adds that there are various pros and
cons of DIY investing.
"The pros for DIY investing
include, among others, a sense of satisfaction, higher control over initial
costs and the understanding of tools and how they work."
"The cons include greater time
consumption, having to maintain and operate tools and the risk that consumers
could make bad investment choices and ultimately have to call experts to assist
them."
Poole offers the following pointers for
consumers considering DIY investing:
Running a shared portfolio in your
spare time may not be sufficient to cater for all the aspects of a
comprehensive plan, such as what will happen in the event of your death or how
you will be paying for your children's education.
The focus of DIY financial plans tends
to be on what the individual knows, which is most often investments.
Other areas, such as estate planning,
tax planning and retirement are often neglected.
It is important that a financial plan
covers all of an individual's needs, as well as the financial risks they may
face.
Electing to implement and manage
certain parts of a financial plan yourself should be based on your knowledge
and personal interest in a particular function, such as a portfolio of shares
or a handful of properties.
In the event that you choose a DIY
approach for your investments, the allure of buying what you know increases the
concentration risk and as a result particular attention must be paid to
diversification, particularly at the outset.
Probably the most pertinent pitfall for
DIY investors is the potential for procrastination, especially on aspects of
the financial plan that may not be of personal interest to the individual.
Certain elements may get lots of
attention, while other parts of the plan may continually be shelved until
another day.
Another behavioural pitfall is to
switch strategies when the market dips due to panic, which can result in losing
much more money had the DIY investor waited to see what the markets were doing.
Incessantly switching strategies can
also result with a mix of investments with no regards for the overall portfolio
construction.
Although the DIY option seems like the
lowest cost option, it may not always be. When evaluating the full cost of
different alternatives it is vital to consider the direct costs as well as any
opportunity costs.
The main saving by doing it yourself is
that you don't pay an adviser. This needs to be weighed up against the value
that an adviser may add as he may save you from incurring far greater costs.
A good adviser will help you do the
parts that are of interest to you and manage the less interesting matters on
your behalf.
Once you have a clear framework in
place you need to remember that this is not a once-off exercise.
It is important to be disciplined about
your DIY project and to critically evaluate your own performance.
Even the best laid financial plans can
be undone if they are not maintained and if they do not adapt to suit your
changing circumstances and the changing financial environment.
It is therefore imperative to review
your financial plans on at least an annual basis to keep them up to date.
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