The dangers of DIY investing and why working with an expert can add real value

young woman holding a smartphone looking at investment performance

If you’re an investor, it’s fair to say that 2022 has been a bumpy ride. Over recent months the continued emergence from the Covid pandemic, the war in Ukraine, and political uncertainty at home and overseas have all contributed to volatile stock markets.

Indeed, from the start of January 2022 to the end of October, all major stock indices fell in value, as the table below shows.

Source: JP Morgan

In times of economic turmoil, it can be easy to make emotional investing decisions that can significantly affect your long-term future. Mistakes can also be costly and often irreversible, which is why it’s so important to work with an expert when times are tough. Read on to find out why.

Interest rates are rising, but your spending power may still fall

In response to soaring inflation, the Bank of England (BoE) has raised interest rates eight times since December 2021, from 0.1% to the present level of 3%.

The idea is that higher interest rates dampen demand for goods and services by encouraging people to save, thus bringing down the inflation rate.

While this means that borrowing costs are rising for millions, it can be a positive move for savers as it means the interest you receive on your cash savings will rise.

Indeed, iNews reports that returns on the average one-year fixed bond – a savings account where you have to tie up your money for a year – reached a 10-year high in early October.

As of 7 November, Moneyfacts reports that it is possible to earn 2.5% interest on an easy access savings account – more than double the top rate a year ago.

As interest rates rise, UK investors are turning to cash savings rather than equities. Data from Refinitiv reported by iNews shows investors pulled £115 million out of UK equities between 23 and 28 September 2022, while also withdrawing £453 million from US stocks and £6.5 million from US, UK and EU bonds.

Moving some of your wealth into cash savings can be a useful step for some clients. For example, if you’re planning to retire in the next few years, having a cash buffer in order that you don’t have to encash pension fund units in a depressed market can help to sustain your pension fund for longer.

However, retreating to cash in uncertain times might be the wrong move for many DIY investors.

Even if you access a good rate of 3% to 4% on your savings by tying them up in a bond, with inflation standing in double figures you’re still devaluing your money in real terms. Simply put, the value of your cash savings is unlikely to have the same spending power in a year’s time as it does today.

A shocking example shows the dangers of investing your pension without advice

Over time, research has found that clients who seek financial advice see better outcomes than “DIY investors” who don’t. Here’s a great recent example of why this might be the case.

Often, pension savers are encouraged to move their investment out of equities and into bonds as they approach retirement. This strategy is supposed to “lock-in” gains made from the stock market.

However, recent analysis by the Evening Standard found that many people retiring this year who took this approach will instead find that the share gains have been decimated rather than protected.

The research found that the 10 worst funds have halved in value since Christmas 2021, meaning investors will have lost around half the value of their pension fund in under a year.

These funds are those that invest most strongly in gilts, usually regarded as the lowest risk investment and a sure way for funds to meet retirement liabilities. They include funds run by big names such as Aviva, Legal & General and BlackRock.

The issue here is that, if you are investing your pension without advice, you could be in the wrong funds. If you had decided on a low-risk “gilt” fund like one of these – perhaps because you read a newspaper article suggesting you should move to a lower-risk fund as you near retirement – you could have lost around 50% of your pension wealth this year alone.

Compare that to the relatively meagre 5% fall in the FTSE All-Share index this year.

Working with an expert can add value and help you to avoid costly mistakes

When we work with clients, we’re rarely simply interested in “how big a return can we generate”. In initial and ongoing discussions with clients we’ll ask questions like:

  • What are you investing for?
  • Do your investments match your aims?
  • Are they aligned to your goals?
  • What is your tolerance for risk?
  • Are you investing in the most tax-efficient way?

If you’re a DIY investor, it’s likely you won’t have a financial plan and so your investments may not align with your goals. You may be paying higher charges than you need to, with these fees eating into the size of your fund. And you could be taking too much (or too little) risk.

Working with a financial planner helps you to remain objective and keep your plans on course. As well as taking the emotion out of decisions, forming a trusted long-term relationship with a financial planner also gives you the peace of mind that a qualified professional is taking on many of your financial stresses.

As well as the ongoing support and coaching that a financial planner can provide versus, research has also shown that there is a tangible and financial value to working with an expert.

In a study, Vanguard found that, while the exact amount may vary depending on client circumstances and implementation, an adviser can potentially add around 3% in net returns.

A separate long-term piece of research by the International Longevity Centre (ILC), reinforces the financial value of advice. Their report found that:

  • People who received financial advice between 2001 and 2006 were more than £47,000 better off, on average, by 2014/16 than those who took no advice
  • Pension pots were 50% higher, on average, for those who saw an adviser regularly compared to those who only took one-off advice at the start.

So, if you’re considering going it alone, talk to us first and understand the many benefits of working with an expert.

To find out more, please get in touch. Email or call us on 01454 416653.

Please note

The value of your investment 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.

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

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