With online investing now becoming normality, self-investing, or DIY investing as it has become known, is all the rage. Anyone can do it, but of course, not everyone can do it successfully and reap the rewards. A quick search online reveals that less than 10% of short-term traders actually make any money, while if you’re smart and invest wisely, even the average investor doesn’t make money. In 2018, the S&P 500 retreated 4.38%, while the average investor lost 9.42%.
Why? The average investor thought they were a better investor than they actually were and tried to outsmart the markets by frequently buying and selling in an attempt to make superior gains. To really make money on the stock-market, you need to buy well, and more importantly, take advice from a professional financial adviser.
My Opinion
My view is that you can and should self-invest in the early years. The price of using a financial adviser does not make sense. That said, if you’re at the end of your career and have grown your pension pot, it makes sense to take advice from an adviser.
In most professionals opinion, you need years of experience to make good returns consistently. Yes, you can do it by yourself, but how much money will it take for you to lose, before you finally accept that you must hand over the reins to a professional? Below are eight reasons why professionals do not think you should be investing in the stock-market without expert help.
Platform Charges
The biggest problem with retail platforms that allow the likes of you and me to invest in the stockmarket is their cost. They all charge a fee to enter and exit a trade (Update- Revolute Entering the market with free trading, however, it’s limited).
As an example, Hargreaves Lansdown, the UK’s largest online trading platform, charges up to £11.95 per order or £23.90 per buy and sell order. In the UK, you’ve also got stamp duty when you’re buying totaling 0.5% on the transaction.
What does this all mean? It means for a retail investor, there is a minimum trade size where it makes sense to activate a trade. As an example, my friend David bought £250 worth of BP Shares last week. He got in at a great price and was convinced the trade was a great move. The problem, it cost him £11.95 to buy, plus another 0.5% in Stamp Duty, and will cost him £11.95 to sell if he chooses later in the week.
In percentage terms, he needs to return nearly 10%, to cover the charges of the trade, let alone make any money. In real terms, retail investors need to deal a minimum of £10,000 per trade, allow percentage cost to be around 0.25%, however for a lot of investors, £10,000 trade is not an option in the early part of their investing career.
What Are the Applicable Taxes
When it comes to investing, you not only have to concern yourself with whether your investment is producing a return, you must also consider any applicable charges to your plan along with any taxation implications.
If your shares are help in an ISA or PEP, or your buying certain types of Unit Trusts or Premium Bonds and Qualifying Corporate Bonds, then tax will not need to be paid. For everything else, there will be a tax liability on any profit you make once you exceed your Annual Exempt Amount of £12,300 per year.
Impulsive Behaviour
It can be said that there are two categories of investors: Those who pull out their money as soon as they begin seeing the slightest downward flutter in the markets and those who invest as soon as they see the markets rising.
Either way, both are kinds of impulsive investing that rarely work. For a start, if a particular market is showing significant volatility, anyone who does not understand the nature of the investment market, and its history, is best advised to wait until it has settled down.
It is said that the best strategy for DIY investing is to invest your money for the long term, avoiding any knee jerk reactions associated with short term investing. If you are concerned about your investment choices at any given stage, you should seek out the advice of an Independent Financial Adviser. Yes, this advice will come at a price, but in the long term, their advice will prove itself to be invaluable.
Most People Don’t Have the Time
To be successful at anything, you need to spend hours working on it and commit to it. For the majority of us, we don’t have the time to do this. Even in retirement, you will most likely have commitments in your life that will hinder you from dedicating as much time as your anticipated to your investments.
Professional traders spend the vast majority of their day reading on and looking at charts. If you imagine your average professional trader works twelve-to-fourteen hours a day, they will spend 80% of their day reading and looking at charts.
Trading Strategies
Before you start investing in the stockmarket, you need to go in with a plan. You need to have your trading strategy ironed out and therefore know when to buy and more importantly when to sell.
The problem, there are thousands of different strategies covering every angle of the stockmarket. For the average investor, this can be overwhelming. The typical question we receive through the email is where to start? My response is to either read my How To Start Investing or go and speak to a financial advisor.
1% A Week
When I first got interested in the stockmarket, my flatmate and I used to talk about 1% a week as being a reasonable target to achieve. In those days, when I was young, dumb and full of energy, I used to believe this was possible, however, it’s not, and realistically, nothing even close to this figure is achievable over the long term.
1% a week is 52% a year. It’s possible to get this rate of return for the odd year or two throughout your investing career, but it’s not possible over a thirty-year period, which is likely what you’re be needing to save for your retirement.
The professionals cannot do it or even get close. Twelve funds have averaged between 12 and 14.5% each over thirty years. In these cases, a team of professionals, some of the smartest people you’ll ever meet, spend hours researching and building investing strategies. If they cannot do it, you have no chance.
What more likely to happen, you’ll lose your money. You’ll see a stock that has had a decent run-up over the last few years and try to replicate this with other stocks. I bought Amazon.com fifteen years ago, the business model was fantastic, and the returns have been great. I’ve also tried to replicate this success with Alibaba in China – it hasn’t gone so well.
Diversified Portfolio
After you’ve lost a good percentage of your portfolio and realised, you’re not going to be making 1% a week or anything close to it. The next stage is to diversify your portfolio by buying different asset classes in a range of different markets.
You buy small, mid and large-cap equities, in a range of different markets across the world. In addition, you need to buy some property funds, commodities and possibly even some crypto-currencies. The question remains, are you going to make any money?
Size Matters
As a retail investor, you’re bottom of the pecking order and this matters in the world of making money. Traders at big banks have access to information and trading tools that the average retail investor is just never going to get close to.
FOMO – The fear of missing out
Retail investors suffer with FOMO all the time. It leads to investors buying high, and selling low. If a company shares increase by 50% over the course of a year the following generally happens. Banks and Hedge Funds do the initial research and see potential in the company. They will often take a position at an early stage and a low price. The word gets out that the company is ripe for investment and other institutional investors start buying.
As the price starts to increase, retail investor such as you and me start to learn about the company and the experience investors take positions as the price starts to increase. Inexperienced investors tend hold off initally purchasing shares due to the price increase – “It’s gone up 20%, I’ll wait for the next pull back”, is a statement I often hear from from retail investors, but due to the momentum, the price keeps increasing. By this point the stock has increased substantially and now your average retail investor feel that don’t want to miss any further gain and buys the stock.
The problem, the gains have been made and the shares you’re buying are the shares the institutional investors that got in early, are now selling.
Final Thoughts
The eight points above are simply points that you need to be aware of before you start investing. As long as your realistic, making money on the stock-market is very possible. I’m not a trader and neither are you, we’re not going to be making money day-trading our pension pot, but buying good companies and holding for the future, you’ll make money.
Thanks, David – interesting blog. As an actuary and independent financial planner I agree with much of what you’ve written, although I have to say that even 12% to 14.5% over thirty years would be pretty spectacular! A more realistic rate of return (on average over the long term) is probably closer to 5% p.a for an equity fund – this of course also depends on the risk profile of your investments…and luck. Which is why it’s so important to start early and benefit from the compounding over time. It’s ‘time in the market’, as they say, not ‘timing the market’ that’s important.