Cheap, but costs add upDIY investing may well be the cheapest option – but it’s not always the most cost-effective way to attain a diversified portfolio to spread risk and protect your investments.
Behavioural biasesEven the most financially literate investor can fall prey to the many human biases that all people face.
There is a library of academic literature which examines why we can lose objectivity, and often make mental shortcuts that result in poor investment decisions. For example, you may be familiar with the old adage “losses loom larger than gains”. This means that many of us delay making a decision that could incur a feeling of loss, as we don’t want to conclude that we have made a poor decision. As a result, investors can be slow to sell a failing investment or reverse an ill-considered action. Herd behaviour is also extremely common. As humans we find safety in numbers, so it is not unusual to follow the herd – yet the crowd is not always right, nor wise. From the Dutch tulip bulb mania of the seventeenth century to the spectacular rise and fall of many cryptocurrencies, blindly copying the actions of the many can lead us into financial trouble. These thinking traps (which can include loss aversion, overconfidence, and familiarity bias) can have considerable effects on investor outcomes. For example, increased volatility may prompt the kind of behaviour that leads investors to miss out on the best periods for investment returns, which can be concentrated over short periods of time. For instance, missing only the 10 best trading days in the US S&P 500 index from 31 December 1986 to 25 September 2017 would have resulted in returns of 399 per cent, compared to 933 per cent by remaining invested throughout, according to Bloomberg and Netwealth calculations. All of these biases, however, can be overcome by a watchful, experienced and objective team with all the necessary experience needed to make informed decisions about where and how to invest.