Thanks to the rise of fintech and online investment platforms, it’s never been easier for anyone to invest in stocks and shares online, but this is a double-edged sword.
While trading and investment platforms have lowered the barriers of entry into the world of wealth building and management and made it easier for anyone of any background to invest, the easy accessibility of these platforms can encourage a laissez-faire approach to investing, with minimal critical assessment or planning required.
This “invest-as-you-go” mentality has led to the emergence of DIY investing as a subset within the investment industry, and the consequences have been mixed. Some DIY investors have found success creating and managing their own investment portfolios, but they’re more the exception than the rule, and they can potentially set an unrealistic precedent for the general outlook on DIY investing.
In South Africa, DIY investing surged in popularity, especially over the last 24 months. Increased time at home coupled with worry about the future and a desire to rush into wealth building, propelled a lot of anxiety-stricken South Africans into the DIY sphere. EasyEquities, one of South Africa’s largest investment platforms, reported a jaw-dropping 161% increase in retail investment accounts from 2020 to 2021.
But while DIY investing isn’t necessarily a bad thing, many investors go in blind without a strategy or game plan and end up losing money or making poor investment decisions based on gut feeling or trying to time the market.
As DIY investing continues to grow in popularity in South Africa and around the world, we as IFAs need to ensure we arm our clients with the facts they need to help them make smart, informed investment decisions.
Why is DIY Investing Potentially Risky?
Here’s where we’ll address the elephant in the room when it comes to DIY investing: most people are doing it based on emotion, not on reason. One of the biggest pitfalls a DIY investor can make is making uninformed investment decisions.
People flock to online investment apps hoping that they’ll be able to fast track their wealth building and make money on the market as quickly as possible. This mentality causes investors to make impulsive decisions or copy the investment choices of other investors.
Another risk of DIY investing is investing in a disconnected, poorly diversified investment portfolio that lacks a larger objective, is not formed by any planning or strategy and may not suit the investor’s long-term wealth-building goals.
Inexperienced investors may be swayed by whatever is trending and buy shares or stocks that don’t align with their circumstances, goals or investment period.
Investors can also fail to take their unique risk tolerance into account when DIY investing, improperly weigh up the risk versus reward and be unaware of market volatility, causing them to panic sell if their investment’s value dips.
Unless clients have significant experience in managing and overseeing an investment, we should be warning, if not discouraging, clients about the realities of investing without assistance.
What to Say To Your Clients If They Want To Begin DIY Investing
If you have clients who have been bitten by the “DIY bug” for whatever reason and want to begin investing in online trading or on investment platforms, you can ask them a few key questions to assess their underlying intentions for wanting to pursue the do-it-yourself route:
- What are you looking to invest in?
The easiest way to discern whether your clients are serious about DIY investing or just hopping on the hype train is to directly ask them what they’re interested in investing in. Are they looking to purchase stocks, shares or get into cryptocurrency trading?
If they’re unable to give you a direct answer, chances are they might have overheard someone talking about what they’ve earned through DIY investing, or seen adverts, and haven’t given it serious thought. Advise them against any DIY investing until they’ve done careful research about what investments are available and what interests them.
- How does this investment tie into your long-term wealth-building strategy?
Ideally, DIY investing should form part of a client’s larger wealth planning and management strategy. Ask your client what their overarching goal is for the DIY investment they want to make and how much they’re looking to invest.
If they’re not looking for large returns and their goals are more short-term, it should be fine, but if they’re planning to invest a significant amount of money into DIY investing with long-term goals, encourage them to think carefully about it and how it may impact their future net savings and plans. It’s possible that your client may be thinking too much about the reward and not enough about the risk.
- What is the investment’s risk level and have you considered your risk appetite?
On that note, it’s a good idea to bring up the discussion of risk with your client regarding DIY investing. The last thing you want your client to do is to jump into investing without properly considering its risk as well as the client’s appetite for risk.
If a client is risk-averse and unknowingly takes on a risky investment, they may panic sell at the first sight of slight volatility and end up making a loss. Ask them about how much risk they’re comfortable taking on and if it aligns with the DIY investment that they’re eyeing.
Even if our clients persist in DIY investing against any advice we might make, we, as advisers, still have a responsibility to guide them and help them to avoid making costly or irresponsible decisions with their money, regardless of whether or not it impacts us.
If you have a client, or clients, who are coming to you for advice on DIY investing, it’s essential to make sure they’re fully aware of the risks they’re choosing to take, and the potential consequences.