Why do-it-yourself (DIY) investors often need to seek advice

Investing is more accessible than it has ever been. You don’t need a financial adviser to start investing because these days you can do it yourself.

Yet steadily more do-it-yourself (DIY) investors have been approaching me for assistance.

And that is not to say the DIY investors have come to me for help because they have been unsuccessful. Some have been wildly successful.  But they have reached an impasse and are unsure what to do next.

The technology bug

An investor with a keen interest in technology once came to me. They had built their portfolio out of globally listed technology shares, which had been incredibly successful, to a point where it now dwarfed their South African investments.

The problem was their overall portfolio was overexposed to a handful of offshore shares, the technology sector and to the US Dollar. The jurisdiction in which they had invested also posed issues regarding recognition of wills and their estate.

The investor recognised that there were issues that needed to be resolved, but with the incredible success of their portfolio they were hesitant to make changes to a winning formula and to trigger capital gains tax (CGT).

To correct this, I recommended that we diversify the portfolio across other sectors and markets and invest it in a friendlier jurisdiction that recognised South African wills and avoided estate duty issues. To manage the CGT implications, we made these changes over a few tax years.

The hodgepodge investor

Another DIY share portfolio investor once came to me. He had diligently built his portfolio over years but had not been earning meaningful investment returns from it.

Further investigation showed that there was no focus to the portfolio. No direction: no defining investment style or portfolio management. It was simply a hodgepodge of “Hot tips” and “Best buys” taken from the media over the years. The results had therefore been very middling.

To correct this, I recommended the assistance of an experienced share portfolio manager. They trimmed down the number of shares. A clear strategy and style of management was used for the first time. Thankfully due to the previously middling results, the CGT implications were not onerous.

The deep value loser

There was also an investor who had chosen deep value as their investment style. They bought several unpopular and seemingly undervalued shares that they planned to hold until the share prices eventually bounced back.

Unfortunately, they had picked companies with major structural issues that worsened and the share prices retreated even further.

The capital losses they had experienced were unfortunate. I approached an experienced share portfolio manager for an independent opinion on each of the shares in their portfolio. The manager confirmed my concerns about major structural issues of each of the companies and recommended moving out of them as soon as possible to limit the likely future losses.

The investor took the losses, but this also presented an opportunity for us to use these losses to make other structural changes to their overall portfolio without creating any tax implications. An investment cloud with a silver lining.

Bad asset allocation

A recurring theme in DIY investors’ portfolios is inappropriate asset allocation. Either having too low or too high of an allocation to growth assets (equity and listed property) relative to the goal they are providing for.

Sitting on a lot of cash and bonds may feel very safe, but if it is for a long-term investment mandate it ultimately sacrifices good gains and surrenders you to inflation because you do not have sufficient equity exposure.

Time horizons count

A 100 percent-equity investment for a goal less than three years away presents a high risk of short-term capital loss. It is better to match your asset allocation to your investment time horizon. A multi-asset fund with a low equity exposure (up to 40 percent in equities) is more appropriate.

If you are providing for something less than a year away, it should be in an interest-bearing cash account like a money market, savings account or call account.

If you have a two-year investment horizon, a multi asset Income fund (with bond exposure, perhaps a little bit of offshore exposure and little to no equity exposure) is most appropriate.

If you have five years in which to invest, a multi asset high equity fund (with up to 75 percent in equities) is typically appropriate.

Only when your time horizon is 10 years or more, should you be looking at 75 percent to 100 percent in equities.

Tax matters

Another mistake I see from DIY investors is in their choice of investment vehicles or the ones they neglect to invest in.

Everyone should have an investment in a Tax-Free Savings Account, it’s an absolute slam dunk, yet you don’t see them often enough.

Some investors think that the contribution levels are too low to be impactful. After I show them how much of a difference the tax-free nature of the product can have in the long term, they quickly start one.

Retirement annuities and endowments are also generally disliked and underutilised. They used to be completely inflexible and expensive. This is fortunately no longer the case. Tax leakage over the course of years can be a major drain on your long-term returns and future outcomes. Using these tax efficient investments can really help.

Blinds spots

We all have blind spots. Gaps in our knowledge and biases. You don’t know what you don’t know and failing to spot your own biases can hold you back. By getting high quality advice and putting solid strategies in place you will be able to address these blind spots, which will lead to much better long-term outcomes.