A new study from Aviva has found that almost half of motorists had botched a car repair, leading to an average cost of £803.
97% of people now attempt to fix their own car, compared with only 75% of people 10 years ago. While this is most likely an attempt to save money, in many cases, motorists achieve the opposite because poor repairs end up costing them dearly in the future.
So, taking the DIY approach isn’t always more effective in the long term and this can also be true of investing. Unfortunately, there are still lots of DIY investors who are unaware of the potential pitfalls they face.
These days, it is easier than ever to manage your own investments using apps and online platforms. Consequently, many people think that they are likely to see positive returns by researching and choosing their own investments through these platforms instead of working with a professional.
However, in much the same way that making a mistake with your car could lead to increased costs in the future, making poor investment decisions could damage your financial plan.
Read on to learn about five worrying dangers of DIY investing.
1. Failing to understand investments properly
While it is relatively easy to invest money using online platforms, you may not understand exactly how different types of investments work. Additionally, some of the documents that provide information are confusing if you are new to investing.
Statistics show that this is a common issue – indeed, a survey by Lloyds Bank found that 38% of people don’t invest because they are scared by complicated jargon. For example, 77% of people did not know what “asset class” meant and 29% of people did not know how inflation works.
As a result, you may put money into investments you don’t fully understand if you take the DIY approach. This can be especially problematic if you don’t have a clear idea of which kind of investments align with your own financial goals.
2. Not balancing risk effectively
Balancing risk is a crucial part of investing. The level of return you see is often linked to the amount of risk you adopt, so being too risk-averse could mean that you see less growth, making it harder to meet your future financial goals. Conversely, exposing your wealth to excessive risk can harm your financial plan.
Unfortunately, many DIY investors are unable to determine what level of risk is tolerable and aligns with their financial goals.
One of the key benefits of working with a professional is that they can discuss your goals and your attitude to risk, and then help you find investment options that are right for your own personal financial plan.
Additionally, your attitude to risk will likely change depending on what stage of life you are at. For example, people typically move more of their wealth into low-risk investment options as they get close to retirement.
Having a professional to help you adjust your strategy as your attitude to risk changes could make it more likely that your investments help you to achieve your long-term goals.
3. Paying more tax than you need to
According to Professional Paraplanner, an additional 1.8 million people are likely to pay Dividend Tax in the near future as the Dividend Allowance has been reduced to £1,000.
There are plans to reduce it again to £500 in April 2024, so you may be more likely to pay tax on any dividends you receive from your investments. Additionally, if you sell certain investments, you may pay Capital Gains Tax (CGT) too.
Fortunately, there are ways to potentially reduce the tax you pay, like investing through a Stocks and Shares ISA, for example.
However, if you are a DIY investor, you may not understand what tax you are likely to pay or how to invest tax-efficiently. As a result, you could pay more than you otherwise would have done if you took some professional advice.
4. Not diversifying your investments
Diversifying your investments by investing in different sectors, and spreading your wealth across different investment types or geographic areas can help to protect you against market fluctuations.
If one investment suddenly drops in value, others may perform well to counteract this loss.
DIY investors often fail to diversify well as they may put all their wealth into a single investment, or only invest in one sector or region.
Working with a professional can help you make sure that you diversify your investments properly and balance risk.
5. Letting emotions guide your decisions
It is easy to let your emotions guide your investment decisions. When markets fluctuate, for example, you may panic and sell your investments to avoid further losses. You might also get caught up in the excitement of the next big investment trend.
When you let emotions get in the way, you may make risky decisions that don’t align with your own financial goals. But when you give yourself room to think, and you return to your own financial plan, you can make more measured decisions.
One of the major benefits of working with a professional is that they can act as an impartial sounding board and explain the true level of risk you are exposed to. This makes it easier to avoid emotion-led decision-making.
Get in touch
If you want to develop an investment strategy that helps you achieve your goals, we are here to help.
Email email@example.com or contact your adviser on 020 3828 8100.
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.