The pros and cons of DIY online investment
Take control of your money with online investments – but make sure you do your homework first
FOR most people, our default position on investments and saving is to choose a provider (a wearisome process in itself), set up a direct debit, and forget about it in the hope that virtue alone will be its own reward. Our lives are far too crammed already to worry about the vicissitudes of the markets and, if we tried to manage the pot ourselves, we’d probably screw it up anyway.
But something’s changed. Cynicism about the rapaciousness of the financial services industry is nothing new. But, of late, scales have been falling from eyes like slates off rooves. The arrival of end-of-year statements, often bearing nasty shocks, has jolted many people out of their lethargy. A widespread sense of having been ripped off, combined with the fear of a penurious old age, are two big factors galvanising the growing appetite for DIY investing.
There’s a whiff of iconoclasm in the air, too – an urge to sweep away the mystique, the mumbo-jumbo and the grasping intermediaries. You might compare the movement to the same kind of gripes that fuelled the 16th-century Protestant revolt against the Catholic Church: a drive for simple language, for clear windows rather than opaque stained glass, and for taking control of our own destinies rather than being marched like sheep into the shearing shed.
As ever, the internet has been an enabler. A plethora of online investment platforms has made it much easier to strike out on your own – and it’s happening across age and gender divides. One of the chief liberations is that you can make your mistakes (and there are bound to be some) in privacy. Vince Stanzione, the veteran spread-better, thinks this explains the growth of women using spread-betting sites. “The big factor leading to more women trading is the internet and the fact that you can trade without having to speak to an arrogant male dealer – and trust me the majority still are.”
The current vogue for developed, or old world, markets over emerging ones has also helped drive DIY momentum. You might not understand the modus operandi of an industrial shrimp farmer in Kuala Lumpur, but you sure as hell understand Poundland’s trading model. Indeed, the current flotation bonanza has seen a stream of familiar names hitting the markets: this week alone saw announcements from Poundland, Pets At Home, and King, the London-based maker of the ubiquitous Candy Crush saga game. There are many more in the pipeline. Moreover, for the first time in a generation, the City is actively courting ordinary retail investors – sweeping aside the previously accepted wisdom that they were too much hassle to deal with. Floats like the Royal Mail have helped show there is real demand out there.
Of course, taking the plunge isn’t easy: it takes some nerve to liberate your pot and put it under self-management. Even after you’ve considered which investment platform to choose (Thisismoney.co.uk has produced a useful guide) there’s a mind-boggling array of funds, and funds of funds to sift through.
What’s more, as Terry Smith of Fundsmith points out, investors can be their own worst enemies. “The vast majority of us are terrible at so-called market timing,” often buying into a fund at its peak valuation, and then suffering a loss of nerve and selling out in the troughs. Another major short-coming is a tendency to trade too much. “All dealing activity has a cost, much of which is hidden,” he says. Incidentally, Stanzione argues that, on that score at least, women have plenty to teach men: they’re more likely to do their homework thoroughly before committing, are less prone to fads and more “happy to let winning trades run longer”. The male urge “to fiddle” often causes them “to take profits too soon”.
One certainty is that there’s no shortage of useful information out there. Indeed, the best advice for new DIYers is to read as widely as you can around the subject. John Kay’s book The Long and the Short of It is rated by many as a good guide to self-investment; and John Lee’s How to Make a Million – Slowly has many useful pointers. You can also learn a great deal from reading classics like Jesse Livermore’s Reminiscences of a stock Operator, which will give you a great feeling of how markets work, as well as an entertaining view of Wall Street in the Jazz Age (although – spoiler alert – it didn’t work out too well for Jesse).
If you’re still nervous, don’t gamble your entire pot on your prowess. Take out a sum you reckon you can afford to lose and start with that. You’ll soon know if you have the temperament, time and confidence to continue. Or make a resolution to go DIY with this year’s Isa allowance.
In a thoughtful piece on the subject in The Daily Telegraph, Andrew Oxlade quotes Einstein. “Compound interest is the eighth wonder of the world,” he says. “He who understands it earns it; he who doesn’t pays it.” The same is true of investment returns. Inspiration enough to shrug off your February doubts and glooms and take the brave call. Learn to do it yourself.
Creative Commons image by SEOPlanter