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Is DIY Investing Worth It In Today’s Market?

By David Pritchard

 

In recent times, more people are choosing to take their investment decisions into their own hands – primarily due to two reasons. Firstly, it’s significantly easier to do so now than it was 25 years ago, as the current market is teeming with platforms and stock brokers. Secondly, the cost of DIY investments has certainly decreased over the years, making it cheaper and more accessible for people who want to take control of their investment decisions.

But, is DIY investing really worth it?

If you’re considering going down this path this article will provide you with a clear understanding of the basics you need to consider, as well as the options available to help you safeguard your portfolio and mitigate risks.

Should you choose DIY investing?

With the current state of the market (increased availability of stock brokers and platforms, as well as decreased DIY investment costs), DIY investing is certainly an option worth considering – but only for people who have the experience, knowledge, confidence and the time to do it themselves.

Any investment decision made with a significant amount of money needs to be thoroughly researched and reviewed on a regular basis against key metrics beyond merely the potential for positive returns. It is crucial to consider the current economic trend, the trajectory of individual sectors, the wider market and – most importantly – where you should be investing your money. 

Direct equity vs managed funds

Having established these key factors, what kind of investor do you want to be? There are several ways to invest in the markets. You may decide to buy direct equities yourself or get a fund manager to manage funds for you (which could include UK fixed interest funds and international investment funds).

But, perhaps the biggest question here is: which is better?

Direct equities: benefits and risks

If you choose to purchase direct shares, you would typically do so through a platform that involves a stock broker. Essentially, this means that you’d be buying individual shares with the aim of earning an income or a gain, or both. 

One significant advantage of choosing to invest in direct shares is the vast array of options available to you across the UK index. There are thousands of shares to choose from, and their prices are usually published on a regular basis. As long as you stick to the main FTSE or share index, you can easily trade these shares each working day. 

However, as with any investment option buying direct equities yourself has its risks. One of the downsides is that you may not have access to the same level of information as professional fund managers who specialise in investing in those shares. 

Fund managers often have access to extensive research, market analysis, and company-specific information (obtained directly from members of the board), which then helps them form a decision. 

As an individual investor it may require more effort to gather and analyse such information, potentially increasing the risk of making uninformed investment choices. Not only that – but most DIY investors don’t actually have access to the depth of information that a fund manager has – even if they spend all day researching.

Direct equities also come with their fair share of risk. Just think about the companies in the UK that have gone bust over the last few decades like Woolworths, Northern Rock, Halifax, and others. When those companies went under, everyone who held direct shares in them lost all their money. Unlike depositors who were protected, the people with shares bore the brunt of the crash. 

The key takeaway from these historical examples is that if you hold direct equities or shares in any company, you run the risk of losing all your money if that company goes bust.

Managed funds: benefits

A fairly significant amount of people who choose to do DIY investing tend to go for managed funds. These are funds with professional fund managers who typically look after billions of pounds of client funds. 

The main advantage of this investment pathway is the risk mitigation it offers. When you hold investments through managed funds the fund typically holds between 40 and 250 individual stock holdings and shares. This diversified portfolio provides you with protection, lower volatility and a wider spread of investments. So, if one of the shares goes bust you don’t lose all your money. Instead, you only lose a small fraction of it. 

In addition to this, fund managers have access to vital market information that the average investor doesn’t. They know how well the fund is performing, what its prospects are and are able to provide informed opinions on whether you can actually make money from that fund over a medium to longer term. 

What are the risks associated with managed funds?

The major downside to investing in managed funds, however, is that it requires a significant amount of due diligence and research on your part. How long has the fund manager been in place? Are they in a position where they do well in bad markets as well as good markets?

There are over 3,000 different funds available in the UK to invest into. If you’re prepared to take the risk with one fund, you’ll need to compare its performance against its peer group and continually monitor it – all of which require a huge amount of work.

On top of this, managed funds – as you’d expect – require a management fee. Most fund managers may charge up to 0.75 per cent of the fund’s asset value, whereas you could trade stocks and shares for a much cheaper price. However, it’s still important to bear in mind that this pathway comes with the expertise and diversification of a fund manager.

What should you avoid?

One major pitfall I’ve seen DIY investors fall victim to over the past 25 years is the tendency to overlook regular due diligence. While initial research into selecting a good fund is important, everything has peaks and troughs. No fund consistently tops the performance charts year after year. Funds will have good years and (sometimes long) periods of underperformance. That’s why it’s vital to conduct ongoing due diligence on a quarterly basis to ensure that your chosen fund is still on track.

The bottom line

If you’re considering DIY investing, the first thing to do is decide whether you’d prefer to purchase direct stocks and shares, or managed funds. 

If you do choose the former, you’d need to prioritise diversification by investing in different sectors and asset classes. Typically, stockbrokers recommend holding between 20 and 30 different stocks to achieve a decent level of diversification. Additionally, it’s important to invest not only in the UK, but also in other global stock markets – which is particularly challenging to achieve with direct equities. 

On the other hand, with managed funds you can invest into things like fixed interest property, gilt funds, corporate bond funds, high yielding funds and alternative funds such as REITs, all of which can give you a further layer of diversification and reduction of risk.

At the end of the day, it is crucial to weigh these factors against your investment objectives and preferences before making a decision.

As always, independent financial advice remains the gold standard, as a good adviser will help you assess the risk you want to take and make informed investment decisions.

For more useful advice on DIY investing, visit the latest episode of our podcast, A Dab Of Investment

If you’d welcome our input, expertise and experience, please get in touch by emailing me at david@applewoodindependent.co.uk.

The views expressed in this article are those of the author and do not constitute financial advice. Applewood Independent Ltd is authorised and regulated by the Financial Conduct Authority. For financial advice designed for you and your specific circumstances, please contact the author using the contact details provided in this article or, alternatively, contact the Applewood Independent Ltd office on 01270 626555.

The value of your investment can go down as well as up, and you may not get back the full amount invested.

Past performance is not a guide to future performance.