In today’s data and solution driven world, we’ve become used to Google helping us answer almost every question imaginable, and the best thing is that it usually takes no longer than a couple of minutes. Between Google and social media, we’ve become used to instant and relatively accurate answers (certain search results do yield dodgy answers though). The overwhelming effect has been positive towards all facets of mankind, as quick answers can be obtained on literally anything - there’s no denying this.
So, the question is: Has it been positive for the average investor and the subsequent push towards DIY investing? The short answer is yes, but with a caveat.
DIY investing effectively means that you are the master of your own finances. The main steps involve:
- Setting realistic and unbiased investment goals;
- Quantifying short, medium and long-term goals;
- Identifying and selecting investments, which requires research;
- In many cases, choosing a product or investment vehicle;
- Tax efficient investment allocations; and
- Sticking to your financial strategy
So, let’s imagine you classify yourself as a competent DIY investor and you’re able to perform the above diligently - do you put in the time and effort to realistically look yourself in the mirror and declare that the above steps have been attended to and that you are consistently reviewing them? People argue that it can be done, and yes, technically I tend to agree with them. However, the percentage of people able to do it, without incurring financial harm, remains very low. The worst part is they don’t even realise it.
Keeping your emotions intact and remaining objective
We’ve established that DIY investing is possible and that it will become easier and more convenient as time progresses. Things do become interesting, however, when looking at studies being done on a relatively new field - behavioural economics. Amos Nadler, an assistant professor of Finance at Western University, recently noted that scientific experiments yielded results that challenge our current assumptions about successful investing. Whereas classical economics relies on market participants who behave rationally and are guided by self-interest, which in turn creates optimal returns/outcomes, his and numerous other studies, suggest that our biology and psychology has a pronounced effect on our decision-making skills. In simple terms - when fear and greed come into the decision-making aura, rational decision-making flies out the window. This is not good news for the DIY investor.
The value of an advisor
Is it possible to quantify the behavioural aspect of investing? According to Vanguard, one of the largest asset managers in the world, it is. They recently undertook a study where they concluded that the potential value an advisor can add to clients’ returns are 3% and that half of this is attributable to behavioural coaching. What is most interesting though is that the returns aren’t added uniformly, it is normally spread out over large "chunks". Over time, the market will experience cyclical swings, irrational exuberance, and intolerable drawdowns. During these testing times, an advisor worth his/her salt needs to remind clients what investing is all about. Some examples incl. i) staying the course i.e. reminding them of the long-term goal and ii) educating and helping them overcome certain biases to keep them from buying high and selling low.
The value of an advisor, therefore, is two-fold:
- Creation and management of a fully implementable, tax efficient, investment plan; and
- Use of their expertise to keep clients from making irrational and emotionally driven decisions.
The knowledgeable DIY investor may be able to bypass number one, but only a small percentage will have the experience to be able to navigate number two without any form of unnecessary financial and emotional harm.
It is, therefore, safe to say that advisors do play a much larger role than the current market narrative suggests.
Steinman de Bruyn, CFA®
Steinman joined Sharenet in 2018 as a director of the Sharenet Johannesburg branch. Prior to this, he was a director at Capilis Asset Managers, an asset management company he co-founded in 2015.
Steinman holds a B.Eng (Industrial Engineering) degree from the University of Pretoria which he obtained in 2010 and is a registered CFA® charter holder. Steinman has more than 5 years’ experience in the investment management industry.