An article in Forbes suggests that DIY investing is on the rise. As more apps and “finfluencers” appear on social media, you may have clients who are already investing their money without speaking to a financial planner.
If they are, care should be taken. There are several common mistakes that DIY investors make, which have the potential to cost them dearly and could be detrimental to their financial situation and standard of living.
Read on to discover three common mistakes by DIY investors, especially when the stock market is as uncertain as it has been in 2022. Furthermore, find out why these investment errors could carry serious financial consequences for your clients and how a financial planner can help them avoid them.
1. Putting off investing during a stock market downturn
Many DIY investors feel happier buying stocks and shares when the market is soaring and confidence is high. They are also more likely to shy away from investing during downturns. In reality, though, doing so might be the shrewder financial move.
This is because a depressed stock market could provide your client with the opportunity to pick up shares or fund units at a reduced price, which may then provide greater long-term growth potential. To demonstrate this, consider the following example.
If your client pays £2 for an investment unit when the stock market is robust, a £10,000 investment will buy them 5,000 units. If the value of the unit rises to £2.50, their investment will rise to £12,500, providing a healthy profit of £2,500, or 25%.
If your client had bought the units when the market was dropping in value however, they may have paid £1 per unit, meaning they would have purchased 10,000 units with their £10,000. When the price then reached £2.50, your client’s investment would be worth £25,000, providing a profit of £15,000 – or 250%!
As a financial planner understands that investing in a volatile stock market could be a smarter strategy, they will confirm whether it’s the right thing for your client to do. If it is, they may be able to enjoy significantly higher gains on their investment in the long term.
2. Making a knee-jerk reaction when the market drops
One of the most common mistakes DIY investors make, and potentially the costliest, is panicking when the market takes a downturn. This can result in them making a knee-jerk reaction to sell their investments in a bid to limit potential further losses.
Often, though, this simply locks in the losses that have been made. It also deprives the money of any chance to recover when the market bounces back. To demonstrate this, consider the following graph that shows the MSCI index between 1 March 2020 and 31 December 2021.
The index tracks the performance of a basket of companies in 23 developed nations.
As you can see, while the index rose significantly during the period there were several significant downturns along the way. This includes a substantial drop in value when the Covid pandemic first gripped the world in March 2020.
If your client had sold their shares during this, or any of the other downturns, they would have missed out on the subsequent growth. This means they would not have recovered their losses and missed out on the growth that would have followed.
A financial planner can give your client greater peace of mind during a downturn and act as a sounding board to help them avoid emotional decisions that hinder their progress towards their financial goals.
Please remember, past performance is no guarantee of future performance.
3. Taking too much investment risk (or not enough)
Research carried out by the Financial Conduct Authority might make for sobering reading if you have clients who are DIY investors.
It reveals that a more diverse and younger group of investors were using investment apps, despite 59% saying that a significant loss would have a fundamental impact on their current and future lifestyle.
While the research concentrated on under-40s, many DIY investors could be exposing themselves to possible losses from high-risk investments that could have a detrimental effect on their finances and standard of living.
That said, while having too much risk can be bad for your wealth when investing, so can not taking enough risk. This is because growth potential typically comes from the higher-risk assets in an investment, such as stocks and shares.
If your client decides to play it too safe, this could also negatively affect their wealth as the investment may not provide enough growth potential to meet their financial goals.
A financial planner will help your client understand the level of risk that’s right for them. This means your client’s money will be exposed to as much growth potential as possible, while maintaining an exposure to risk that’s appropriate for their circumstances.
Get in touch
As you can see, working with a financial planner could help clients who are DIY investors make better decisions.
This is backed up by research carried out by the International Longevity Centre (ILC), an independent think-tank. It found that those who received financial advice between 2001 and 2006 were more than £47,000 better off on average by 2014/16 than those who took no advice.
If you or your client would like to discuss how we could help them achieve their goals, please contact us on firstname.lastname@example.org or call 01904 655 330.
As an award-winning financial advice company that was a 2022 VouchedFor Top Rated firm, you will have peace of mind that your clients will receive excellent advice and the highest quality service.
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.