DIY Investor Magazine
/
March 2014
22
SIX OF THE BEST
You’ve established you attitude to risk, set your
financial objectives and done your research; you live
by the British Army’s ‘Rule of the Seven Ps’ (worth a
Google) – what could possibly go wrong? Steve Haysom
looks at some of the things the DIY investor needs to
consider
FORGETTING ASSET ALLOCATION
The key to successfully managing an investment
portfolio is deciding on an appropriate asset allocation
strategy to suit your objectives and risk profile;
Asset allocation is nothing more intimidating that the
mix between equities, bonds, property, alternatives
and cash in your investment portfolio as well as how
its spread between different countries, industries and
between large, small and medium sized companies.
Studies have shown that asset allocation is a bigger
driver of differences in returns between portfolios,
than the individual funds or shares selected.
Model portfolios are becoming increasingly
widespread and several sites deliver the opportunity
for investors to share or mimic asset allocated
portfolios.
FAILING TO UNDERSTAND RISK
In the investment world, the more risk you take, the
greater the potential gains – obviously these gains are
not guaranteed or it wouldn’t be risky.
Generally speaking, the longer your time horizon the
more risk you can potentially take because you have
more time to ride out any short-term volatility – if
you have the stomach for it.
There are many ways to quantify risk, and a useful
measure is to understand the volatility of a portfolio,
which is the extent to which it could fluctuate in
value, in a range of circumstances based on historical
data.
BACK TO THE FUTURE
An inexperienced investor may be tempted to assume
that DIY investing is as straightforward as choosing the
best performing funds or those with the lowest costs.
However, past performance is no guarantee of future
prospects. Selecting an investment purely based upon
historical data has been described as akin to driving
a car at high speed while only staring in the rear view
mirror.
Good quality, objective research is invaluable in helping
you make informed decisions about the future potential
for a particular asset. There are plenty of sources of
unbiased information available online and of increasing
importance are social media and affinity groups.
DEVIATING FROM THE PLAN
The newbie DIY investor should take time to understand
their attitude to risk, set their financial objectives
and start to construct a portfolio of investments that
reflects their individual circumstances and requirements
- and then stick to it.
The vast amount of information and content, not to
mention marketing collateral that confronts us every
day means that the inexperienced investor runs the risk
of “self-mis-selling” i.e. buying investment products
that are not suitable for their goals, time horizon and
circumstances because of what is topical or heavily
tipped or promoted. Successful investing is founded
upon a well thought out strategy with decisions made in
the context of how they fit with the overall portfolio; ad
hoc investments can lead to unnecessary levels of risk
and a deviation from its core objectives.
POTENTIAL PITFALLS THAT CAN WHACK
THE UNWARY DIY INVESTOR
AN INEXPERIENCED INVESTOR MAY BE
TEMPTED TO ASSUME THAT DIY INVESTING
IS AS STRAIGHTFORWARD AS CHOOSING
THE BEST PERFORMING FUNDS
