DIY investing – a cautionary guide for the brave

Disclaimer
The information in this article contains general advice and is provided by Hood Sweeney Securities Pty Ltd [AFSL 220897, ABN 40 081 455 165]. That advice has been prepared without taking your personal objectives, financial situation or needs into account. Before acting on this general advice, you should consider the appropriateness of it having regard to your personal objectives, financial situation and needs. Please refer to our FSG (available at www.hoodsweeney.com.au/assets/general-assets/Hood-Sweeney-Securities-Financial-Services-Guide.pdf) for contact information and information about remuneration and associations with product issuers.

The idea of running your own investment portfolio, or self-directed investing, can be alluring, promising ultimate control over your money and potential rewards. But moving from a novice to a skilled investor takes more knowledge and discipline than many anticipate. This realisation is a common trigger point for clients seeking professional investment guidance. Considering the tax implications of investing and strategic objectives adds another layer of complexity.

For anyone thinking about DIY investing, here’s a simplified guide to the some of the challenges. A warning, it’s only for the brave.

Understanding Market Dynamics

Effective investing involves more than basic financial knowledge; it requires a deep understanding of market dynamics and cycles. Howard Marks, one of the most successful investors of our time, highlights the need for informed decision-making and emotional resilience to navigate market fluctuations. A truly cohesive investment approach aligns investment strategies with personal goals, such as retirement or major life events. Imagine retiring in 2008, right before the Global Financial Crisis, without having two to three years’ worth of liquidity as a safeguard, forcing you to sell investments at a loss during a market downturn. This could lead into a lengthy discussion about sequencing risk, the impact of drawdowns and forgone future returns on the spent capital, but let’s not go there now.

The Importance of Diverse Skills

Successful investing requires analytical acumen and emotional discipline. Investors need to skilfully analyse financial statements, market data, and trends. Equally crucial is the patience to wait for optimal investment opportunities and to manage impulsive reactions to market fluctuations. For instance, many investors are tempted to buy when prices are rising rather than when they are low, driven by the fear of missing out (FOMO). This all-too-common impulse can lead to detrimental decision making and under performance.

Risk Management and Capital Allocation

Managing risk and capital allocation is challenging. DIY investors may struggle with over- or under-exposure due to a lack of diversification or fear. Effective risk management involves balancing asset allocation, understanding risk tolerance, and incorporating tax considerations. Professional advisers spend much of their time delving into clients’ objectives and factoring them into portfolio design. Consider the increasingly common ‘bank of Mum and Dad’ helping children get a foothold in the housing market, how is such a consideration built into one’s portfolio?

Psychological Strain

Investing can be emotionally taxing, especially when managing decisions alone. The stress of financial uncertainty and the need to align investments with strategic goals can lead to decision fatigue. Professional advisers offer crucial support, helping to manage the psychological challenges of investing. As clients regularly point out, the investment world is full of uncertainty. How will we maintain income when interest rates fall, how does inflation impact portfolio design or the very current question around the impact of a new US president, whoever it may be.

Before you DIY

Before diving into full-time, self-directed investing, consider the complexities involved, including strategic objectives and tax matters. While managing your own investments sounds appealing, professional advisers exist to provide valuable guidance.

The critical combination of balancing investment management with strategic advice, is why Senior Financial Planner l Strategy & Investments, Craig Scroop (Representative of Hood Sweeney Securities AFS Licence #220897), said he values working at a firm that places equal importance on both. Hood Sweeney Securities has a dedicated internal investment team drawing on the knowledge of external specialist consultants who work alongside strategic advisers and support staff. The team is designed to consider the objectives and ambitions of our clients and support their bottom line.

If you’d like to talk more about any of the points raised, please get in touch Craig Scroop or one of the other Representative Financial Planners at Hood Sweeney Securities. Ring 1300 764 200 or email Craig at Craig.Scroop@HoodSweeney.com.au.