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DIY investors: 10 common mistakes to avoid

Paloma Kubiak
Written By:
Paloma Kubiak

For those without the help and experience of an adviser, here are 10 common DIY investor mistakes to avoid.

At the end of last year, it was estimated that the ranks of the UK’s army of Do-it-Yourself investors – those making their own investment decisions without an adviser – had swelled to nine million accounts, representing assets of £378bn*.

While many are confident and enthusiastic about the world of shares, funds and investment companies, others are less so and need a little help.

For a few, the experience of DIY investing can become akin to a home improvement botch job.

Below are 10 common mistakes made by DIY investors:

1) Not setting goals

There are plenty of studies that suggest people who invest with goals in mind get better results. Whether it is investing to pay off a mortgage, finance a child’s university education or fund retirement, goal-based investing helps focus the mind on a timescale and the appropriate amount of risk.

Yet there are also plenty of DIY investors who don’t determine the goals they are seeking to achieve and therefore set themselves off on a journey without a clear end destination. This can mean diving into the markets and simply hoping for the best, without the discipline of an objective that will help you think about your time frame.

2) Not having an asset allocation plan

Diversification – not putting all your eggs in one basket – is an important principle for successful investors. It helps reduce risk and widens access to different opportunities. Different types of assets such as bonds, listed equities, unquoted companies, infrastructure, gold, property, and cash will respond differently to the changing financial and economic environment. Creating a blend of these – a process known as asset allocation – is important to get an appropriate balance between riskier and less volatile investments.

Numerous academic studies have shown the asset allocation is a bigger driver of differences in returns between investment portfolios, than the individual funds or shares selected*. Professional investors, like pension and insurance funds, university endowment funds and wealth managers, therefore spend a lot of time thinking about asset allocation and adapting it depending on the market environment.

However, many DIY investors give no real thought to asset allocation, and this can unwittingly expose them to considerable risk.

3) Not understanding risk

Taking too much risk is a common problem among DIY investors, but so too is not taking enough risk. Less confident investors can be excessively cautious, meaning they might hold too much cash or bonds and over time are unlikely to achieve their goals.

We live in a world where an emphasis on ‘health and safety’ means that the word ‘risk’ is perceived as danger and therefore a ‘bad thing’.

Yet when it comes to investing, risk is neither a friend nor foe.

In the investment world there is a relationship between risk and reward that needs to be assessed and managed. Without taking any risk, it is near impossible to generate a real return once inflation is factored in. Therefore, what matters is to take an appropriate amount of risk rather than avoid it altogether.

Time is an important factor here as the more time you expect to be invested, the more scope you have to take a greater amount of risk, because there will be time to recover from setbacks on the way.

Conversely, if your time horizon as to when you expect to need to access your cash is shorter, a more cautious approach is wise. Therefore goal-based investing leads to better outcomes, because it helps focus the mind on the level of return aimed for over a period and therefore the appropriate level of risk to take.

Over the long-term, among the major asset classes, equities have generated the highest returns, but equity markets can also be highly volatile, meaning prices can be erratic over shorter-time periods. In building an investment portfolio, the longer your time horizon should mean greater willingness to hold more in equities. Less volatile asset classes, such as bonds, absolute return funds and cash can be used to temper short-term volatility.

Volatility isn’t the only form of risk, however. Exposure to illiquid assets, which can be difficult to sell in a hurry, such as shares in very small companies, unquoted companies or physical property, may not be volatile but represent a different form of risk.

4) Making ad hoc decisions

A successful investor will think carefully about the right asset allocation before deciding which investments to buy. When it comes to decisions on where to invest new money, they’ll review where their existing portfolio is invested and identify any gaps to be filled.

But a lot of DIY investors regard their annual ISA or pension choices as free-standing, ad hoc decisions based on whatever investments are riding high in the performance rankings or by following ‘expert’ tips.

These ad hoc investment purchases gradually add up to create “museums of former hot tips” rather than a well-planned portfolio.

Before investing any additional money, it is always wise to look at where your current investments are spread, as this can help identify the right areas to channel new monies.

5) Placing too much focus on past performance, not the future

Would you go on a car journey staring solely in the rear-view mirror and barely look at the road ahead? That would be unwise. Unfortunately, it is the way some DIY investors go about selecting their investments i.e., solely based on past performance, without considering the prospects.

If life were as simple as picking last year’s top performer and being guaranteed this would continue, we could all live happily on a beach sipping cocktails.

Unfortunately, investing is a little more complicated.

Investment styles and sectors come in and out of favour depending on the economic environment, whether interest rates or inflation are rising or falling and many other factors. So, choosing an investment must be a mixture of considerations, not just how well a particular fund has performed in the past, but also how well it is positioned for the future.

Funds can become victims of their own success, ballooning in size so they may no longer be able be managed in the same way as they were in the past. Or they have delivered previous success by investing heavily in areas that then fall out of favour, as we have seen during the first few months of 2022 with the slide in technology stocks.

6) Mis-selling…. to yourself

No one wants to find out they’ve been poorly advised when it comes to financial decisions. If you have taken regulated advice that turns out to be inappropriate, you may have some come back.

Yet a risk facing DIY investors who don’t take advice is that they mis-sell to themselves, buying wholly inappropriate funds or shares for their circumstances. This can mean buying investments that leave them too heavily exposed to niche or high sectors, such as biotechnology or robotics funds, frontier market equities or micro-cap shares etc. It is very easy to get excited about specialist areas and sometimes the long-term opportunities may well be convincing – but the level of risk-taking just too high for the investor.

7) Letting emotion cloud judgment

Over the short-term, markets can be heavily swayed by sentiment. As human beings it is very easy to allow decision making to be driven by our emotions. Legendary investor Warren Buffett famously observed that investors “should be fearful when others are greedy, and greedy when others are fearful”.

When markets are booming and optimism abounds, investors can often get swept up and take on more risk than they should. But when markets take a turn for the worst, there is also a tendency to follow the herd and panic, even though in reality it usually makes a lot more sense to invest when markets are down than when prices are at record highs.

When your retirement savings are on the line, it is difficult to overcome the pull of emotions and stay calm during times of volatility and uncertainty and feel confident about investment decisions. One way to overcome this is to invest regularly and consistently, so you keep on going through the ups and downs.

8) Not rebalancing

While many DIY investors will carefully plan a portfolio at the outset and think carefully about the investments they select, once invested it is vital to monitor a portfolio on an ongoing basis and make sure it is periodically rebalanced.

Different markets and asset classes don’t all move neatly in tandem, over time carefully selected weighting to each will inevitably drift and this may mean a moderate risk investment portfolio gradually becomes exposed to too much risk. That is why, having identified the right asset allocation approach for their time horizon and goals, an investor should periodically rebalance their portfolio.

This should be done at least once a year.

In practice this will mean taking profits on those areas that have done particularly well since the last rebalance and topping up other areas that may be better value.

9) Not having a sell discipline

Alongside rebalancing a portfolio, you should review your individual fund or shareholdings to see if they still deserve a place in your portfolio. Many DIY investors’ tendency to shop around each year for new ideas, can mean that over time their portfolios end up comprising of a sprawling and vast number of funds or shares which investment terms is referred to as having a ‘long-tail’.

Too many holdings are hard to keep an eye on and may, paradoxically lead to over-diversification. People can sometimes be reluctant to switch out of investments that did well in the past but have since gone off the boil, perhaps hoping they will eventually come good again.

A sensible discipline is to set yourself a limit on the number of funds or trusts you hold. For me, it is a maximum of 20, which is more than enough to achieve plenty of diversification. By having such a limit, when you are tempted to invest in something new, it forces you to reassess what you already hold and consider whether any of your existing holdings deserve to make way for your new idea. When your portfolio is sufficiently diversified across high conviction funds or trusts, then future additional investments should be used to top those up.

10) Falling in love with your favourite fund or manager

When a particular fund or investment trust has done well for you, it is very easy to keep throwing more money at them. Yet the consequences of becoming too heavily exposed to a single approach or manager are risky if their fortunes change, their style goes out of favour, or their fund becomes too large. As a broad measure, avoid having more than 15% of a portfolio in a single fund or trust.

The investment management industry has historically been through periods where ‘star managers’ have garnered huge personal followings. However, what matters most is that a manager has a clearly stated approach that can be monitored and assessed.

If they start to deviate from it, this might be early sign of trouble to come.

If you are going to invest in actively managed funds or trusts, it is important to keep a beady eye on who is in the driving seat. Managers switch jobs from time to time and of course retire, which is always a time to reassess the case for holding on. When a new manager is appointed, is important to assess whether they have a personal track record managing a similar investment, their level of experience and whether the approach on the fund or trust might change.

A final point on an easier way to invest…

The good news is that today’s DIY investors have plenty of options if the thought of building, monitoring, and managing their own portfolio does not appeal or their interest in doing so has waned over time.

In particular, ‘ready-made portfolios’ are an option offered by some platforms, including Bestinvest. These are designed to target a risk profile and provide access to a diversified range of underlying investments selected for the investors, which are then periodically rebalanced.

Jason Hollands is managing director of online investment platform and coaching service, Bestinvest

Boring Money Online Investing Report, February 2022.
Determinants of Portfolio Performance (1986 and 1991, Brinson, Hood and Beebower) which found 90% of variations in US pension fund performance were down to asset allocation.