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Improved market access, endless investing content & a growing pool of financial influencers, have changed the way millennials understand and interact with money.
Martin Scorsese’s Academy Award-nominated Wolf of Wall Street shone a light on the out of control, unregulated, stock market environment of the 1990s.
It is of course easy to watch that film and look back wondering how unsuspecting retail investors were left so exposed to Wall Street’s stockbrokers. For millennials, who watched this film, it represented a time gone by. But have things really changed? Are retail investors protected more than they once were?
The age of stockbrokers cold calling clients is, for the most part, over. However, in the modern-day, there is a new threat that is exposing retail investors, that is, the sudden rise in execution-only, trading apps.
Trading apps are advertised as easy ways to grow your wealth. They frequently include high performing stocks such as Amazon, SunPower & Google in their advertising, all of which have experienced incredible growth over recent years.
In terms of advice during a volatile period, their adverts claim recommend investors should frequently monitor holdings.
This approach pushes investors towards stocks that have often already seen major upside & leads them to believe they can experience the same success. The message that past performance is not indicative of future success is often in tiny small print.
Below we look at the main issues which are plaguing DIY investors and how they can protect themselves.
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 to ensure your emotions do not cloud your judgement.
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.
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.
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 rationale for investing in something. Many DIY investors do not know how to undertake due diligence or how to identify factors that 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.
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.