Is DIY Investing A Prudent Strategy?

While the 'do it yourself' kind of investment process may help you avoid paying fees to financial advisers, there may come a time when you are unable to manage your portfolio, especially at the time of a financial crisis, as has been the case in recent times due to the ongoing pandemic. DSIJ takes a closer look at the pros and cons of this issue

There are many investors who feel that the ‘Do It Yourself’ (DIY) kind of process helps them to avoid the fees and charges of a financial adviser. Indeed, from the cost point of view, DIY seems to be a prudent strategy. However, is it just cost that you should focus on or should you also dive deep to understand the things that you get for that cost? And these days, thanks to robo advisors, DIY investing is catching fancy among many investors. Initially, this was adopted mostly by tech-savvy IT professionals but is now being followed by many. Yes, it does feel nice when you have total control over your investments. And though DIY investing is not a new phenomenon, it has gained a lot of traction recently.

DIY: Wise or Unwise?

It is indeed good if you can save money without compromising on your investment experience. Saving on fees that you need to pay to the adviser is one thing and better investment experience is another thing. In this article, we will try to find out whether or not DIY investing is a prudent way of investing for the layman. Honestly, managing your mutual fund investments is not rocket science. Adopting a few of the time-tested rules, understanding your financial goals, disciplined investing and having control over your emotions are some of the characteristics that a DIY investor should possess. However, for some or the other reason, most of them seem to mess up their investments. Though anyone can be a DIY investor, history shows that not everyone succeeds.

Further, with easily available information online, many people are getting increasingly inclined towards DIY investing. In fact, these days Google has turned out to be a financial planner for many. Many in this segment believe that each and every bit of information put forth by Google is the final word. But is it really? Only having information about various investment products is not enough and never will be. When things get out of hands, experience and the right perspective is required, which cannot be learned just by reading things or searching the web.

Trying to get online help or from other sources such as online forums, books, newspapers and also colleagues may not lead to the desired destination. Unfortunately, over a period, it may make your portfolio bloated with a lot of products. And even if one has invested with good intentions, such a portfolio becomes too large to manage proficiently. A portfolio with too many diverse products may not pose a problem till the time markets are doing well as the investments will largely perform as per expectations. But the real test is when the markets move down. This time around, when the markets tanked in March 2020, investors were seen to be moving out of mutual funds.

The picture says it all. As can be seen, the inflows in equity mutual funds drastically plunged in April, May, June and July, finally moving into the negative trajectory. It indicates that investors hit the panic button and refrained from holding investments in equity. However, it is to be noted that equity has shown recovery from the lows posted in the month of March.

Qualities of DIY Investor

1) Knowledge and Learning: As we all know, learning and knowledge is the stepping stone towards anything that that we do in life. Hence, even as a DIY investor you should acquire as much knowledge as is possible. Having knowledge helps understand how things work, how to analyse a particular investment product and how it fits into your financial planning. However, along with knowledge you also need to have the right experience to fully grasp the product and its usefulness in your portfolio.

2) Experience: Only knowledge is not enough. Experience is what counts to become a successful DIY investor. This is what many people moving towards DIY investing lack and it is because the main intention is to save the fees that would be payable to a financial adviser. But this in turn can cost investors a lot during any financial turmoil. Experience often helps to tide over such volatile situations.

3) Unbiased Investment Decisions: Another thing that a DIY investor lacks is taking an unbiased investment decision. As a human being, we are biased towards a lot of things while taking any decisions. Even while making investment decisions, having a rational mindset is very important. There are various biases that a DIY investor may carry such as currency bias, anchor bias, herd mentality, cognitive bias, star rating bias, etc. So, to be a DIY investor one needs to be free from all these biases and take rational investment decisions.

4) Time: Investment activity is not a one-time process and hence as a DIY investor you need to put in a lot of time and efforts in managing your investments. You should have a defined entry and exit strategy. Not just that, you also need to monitor your investments. Monitoring your portfolio often helps you to avoid holding mutual funds that have lost their sheen. For a lot of retail investors, it would be difficult to dedicate the required time towards managing their own investments. Therefore, for them it is difficult to be a DIY investor.

5) Financial Goals: When planning your investments, having a holistic approach by making investments that are backed by one’s financial goals should be the preferred approach. Nonetheless, many investors believe beating markets returns is their prime motto. This may or may not help you to achieve financial goals. Hence, you need to define your financial goals in terms of inflation-adjusted amount you need to achieve, the investment horizon, assessment of your risk appetite, etc. and then select investments that will suit your risk appetite and your financial goals.

Conclusion

The above discussion nowhere implies that we are against DIY investing. However, our experience shows that many people do require professional advice. This is because while managing investments many people simply overestimate their abilities. This is not noticed during the good times. It is during the bad times when an investor is forced to face the ugly truth. And it is very sad to see that people are often more likely to seek free financial advice which they use to drive their DIY investing journey. Such a way of investing can prove to be risky.

Lastly, there is a reason why even the high net-worth individuals (HNIs) and ultra-high net-worth individuals (UHNIs) seek financial advice. It is always better to concentrate on things that you do better and let your money be managed by someone who is good at managing finance.