2020 Financial Crisis: DIY Investors Are Most at Risk

Over the past decade we have seen two trends: The longest bull-market in history & the rise of DIY investors.

Following the 2008/09 global financial crisis, global financial markets have enjoyed the longest bull run in history. This bull run (continued period of market growth) began on March 9th 2009 and came to a sudden halt on February 24th as the Malaysian equities market dropped 20% from their peak.

In the same period as the bull-run we have seen a significant increase in the number of people attempting to manage their own finances with the aid of wealth management books, online seminars and financial influencers.

As a result of these two trends coinciding, many DIY investors have achieved positive gains on their portfolios as a result of unprecedented market performance. These results have – for many DIY investors – allowed them to believe their approach is robust, their knowledge is sufficient and their portfolio is crisis proof.

Whilst many DIY investors have achieved positive gains in the bull market, it is likely the current financial crisis will hit DIY investors hardest. This blog explores why.

1.Emotional Investment Behaviour

It is common for investors to become overly confident in bull markets, and panic when markets dip. This behaviour is one of the easiest ways to lose money.

As Warren Buffet said ‘“Be fearful when others are greedy and greedy when others are fearful.”

A financial advisor is in place ensure your emotions do not cloud your judgement.

2. Failing to diversify

DIY investors regularly hold their entire portfolio in one asset class, for example equities or fixed interest. No matter how well the stock market is performing, a well-diversified portfolio is key. Not only will diversification reduce the volatility of your portfolio, but it will also provide you with plenty of capital to buy stocks after a market correction or to withdraw funds if required for something in life.

Many DIY investors are unaware of the risk their portfolio carries and make investment decisions on past-performance.

A financial advisor can assist you in building a well-diversified risk-appropriate portfolio aimed at meeting your short, medium and long term financial goals.

3. Taking advice from clickbait articles or finance influencers

A financial influencer’s main goal is to generate traffic to their various social channels including their Instagram and YouTube. The higher their web traffic – the higher they can charge sponsors to advertise on their page. This business model can lead financial influencers to prioritise the creation of outlandish, clickbaity content. This content’s first priority therefore is to generate readership, rather than provide quality advice.

Financial advisors have a fiduciary responsibility to make every decision in the financial best interest of the client. The industries ongoing transformation from commission based advice towards performance-based-fees, further reinforces an advisor’s commitment to their clients best interest.

5. Buying investments based on familiarity

Falling slightly into the emotional investing category once again, many people make investment decisions based on familiarity. Many Indian investors like to buy Indian equities, many oil & gas employees like to buy crude stock and people generally like to invest in property in areas they know. Familiarity is not a sensible rational for investing in something. Many DIY investors do not know how to undertake due diligence or how to identify factors which make an investment an attractive proposition.

Financial advisors are in place to utilise the industries top fund managers and analysts who operate on the back of investment research rather than familiarity or emotion.

6. Ignoring tax obligations

Many investors are unaware of tax obligations associated with investment products. These obligations can include capital gains tax, income tax or inheritance tax. You may also be required to undertake complex calculations to correctly comply with self-assessment tax reporting in certain countries.

Different investment products are often taxed differently, without seeking professional advice you may inadvertently break the law and find yourself with a tax evasion fine, or worse.

Financial advisors are able to introduce you to products which are as tax efficient possible for your needs.

If you have questions after reading this blog, we’re happy to help. Click here to request a consultation.

About us

deVere Insights is a proud component of the deVere Group. Our company has always prided itself on leading the way in the sphere of wealth management. This website is in place to share information and expertise.

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