Millions of investors that build their own portfolios suffer from seven bad habits, according to research by independent savings and investment advice website BoringMoney.co.uk and Quilter, which can lead them to miss out on 11.3% of potential gains a year.
The research surveying over 7000 UK adults and over 200 investors revealed seven habits that can reduce their return or increase their risks, sometimes both. The typical unadvised investor takes a huge amount of investment risk and gets very little back.
Nine in ten (91%) UK adults aged 18 or over (46.5 million people) have not received professional financial advice in the last 12 months, according to a report from consultancy firms Ignition House and Critical Research to inform the Financial Advice Market Review. Of these, two-fifths (39%), or 18.2 million people, have £10,000 or more in savings and/ or investments and, therefore, might have a need for advice.
The seven habits that can reduce investment return or increase risk are:
1. Holding too few shares, or being ‘undiversified’
2. A bias towards the UK, ignoring the opportunities in overseas markets
3. Lack of asset allocation, using only shares when other assets could help
4. Overtrading, fiddling around the margins of their portfolios
5. Panic selling, ditching all their holdings at the first sign of trouble
6. Not rebalancing, losing out on the proven ‘Rebalancing Bonus’ returns
7. Lack of pound cost averaging – Pound cost averaging is a technique where you make investments on a regular basis and therefore average the price you pay for the total investment over time
Rick Eling, investment director at Quilter comments, “Buying shares has never been easier; anybody can do it online. But just buying shares isn’t the whole story. To invest well you need to understand risk, diversification, timescales and your own objectives. Too many solo investors seem to think that good investment is about picking a wonder stock and getting rich overnight. It’s far less glamorous than that!
“Our research shows that people tend to stick to what they know buying a small number of UK shares from brand name companies. They often assume that a big, solid brand is a sign of a safe, solid investment, but that’s dangerous. You only need to remember names like Marconi, AIG and Carillion to know why.
“The majority of DIY investors could see more substantial returns with lower risks if they invested in the way usually recommended by professional advisers: a diversified, risk-based multi-asset portfolio.
Holly Mackay, CEO of BoringMoney.co.uk comments, “Even the most seasoned DIY investors can make mistakes and let emotions get in the way of smart decisions. The key advantage of using an adviser is in having someone who is detached and can keep good investing habits at the centre of decision-making processes.”