Do you really need an Investment Manager?

As an investment manager, I’m often asked to explain why someone should pay for professional help with their investments rather than managing them alone.

The quick response is that we are talking about some of the most important decisions a person can make, which affect the financial security of not only you but also future generations of your family. You’d consult an expert about any serious issue with your home, your car, or your health, so why not your finances?

Before committing to go it alone, take note of the following pitfalls that many DIY investors succumb to.

Home bias

The investment universe is colossal, and DIY investors tend to focus on areas they know best. While it’s important that anyone investing understands what they are investing in, sticking to your own areas of expertise may mean that you overlook vast parts of the stock market landscape.

You may have a home bias to the UK, for example, and miss out on the returns that non-UK markets can deliver. Having a professional to widen your investment options in an informed way can have an impact on the returns you can enjoy.

Over-confidence

DIY investors are prone to moving in and out of cash as they overestimate their ability to ‘time the market’, i.e. to sell before a price drop and buy back in at a lower cost.

Professionals know the dangers of not being fully invested. Over the past 30 years, being out of the market on just the best 10 days would reduce your return by 50%, if you were invested in the S&P 500 index. If you missed out on the best 30 days, it would be 83%! [1]

Following the herd

One of the most common mistakes we see is folk acting on ‘hot tips’ from friends or internet forums. Excitement, FOMO (fear of missing out), or sheer greed can drive un-researched buying behaviour, often in shares where the price is already at a lofty level and the gains have been made. Professionals have seen countless trends come and go and are less easily swayed.

Anchor bias

Many amateur investors are prone to sticking with a theme or stock based on a piece of information they give too much value to. For example, once an investment falls from its peak, DIY investors are often disinclined to sell, because the peak value feels more real to them. As professionals, we are taught to constantly re-evaluate the premise on which we have made a judgement.   

Similarly, many DIY investors have a set view on how to invest based on limited information. They may stick to buying low-cost tracking funds over actively managed funds, investment trusts over OEICs, ‘growth’ stocks over ‘value’ stocks – or vice versa. To many professionals, there is a place for all such styles, and this allows them to flex their positions based on the market conditions that lie ahead.

Concentration bias

A DIY investor may not realise that their portfolio is over-exposed to certain areas, which can be the result of a preference for a certain sector or industry they feel they understand. It can also come from ‘running winners’, where a well-performing investment expands over time to become a dominant part of the portfolio.

If the favoured sector or stock fails or hits troubled times, this lack of diversification can have a devasting effect on the portfolio’s value. By spreading your portfolio across different markets, sectors, and asset classes, an expert could reduce the damage.

Emotional reactions

Not many of us make our best decisions when we are emotional, and that applies to investment decisions too. Selling on the back of a short-term price movement or buying more of a rising stock to make even more money are mistakes frequently made due to emotion, rather than a calm analysis of the situation.

Professional investors are better placed to manage the many emotions a stock market investor will go through and can help you avoid rash, painful decisions.

Being tax efficient

Reducing tax is a key way to add value to your portfolio over the long term. Most DIY investors have an ISA, but not all know how to use their capital gains tax allowance and dividend allowance each year, or any capital losses created in previous years. Professional investors should help you understand and take advantage of the tax allowances available to you. This might include holding investments in your spouse’s name.

The choice is yours

Investment professionals are only human, and I’d be the first to acknowledge that even we don’t get things right all the time. However, we have dedicated a considerable part of our lives to mastering our art. With time, patience, motivation, and resources, DIY investors can do the same, and I wish them every success in their endeavours!

For everyone else, investing with the guidance and support of a well-resourced professional will help to harness the potential of the investment market and carefully negotiate the pitfalls detailed above in the process.

References:

[1] Source: Timing the Market Is Impossible (hartfordfunds.com)

To contact or read more about Rob Jones, visit his bio here.