Why DIY investing could get you into trouble
Have you been bitten by the DIY bug?
Sales in DIY materials have increased by 21.6% over the summer according to Kingfisher, the owner of B&Q and Screwfix, as a result the lockdown (and the great weather).
Perhaps even in ‘normal times’ you like nothing better than bringing home a few pots of Dulux, and informing your other half that you’re repainting the living room?
Whatever your approach to home improvements we’re all for it; what can possibly go wrong? Slightly wonky shelves or a hole in the wall? Lime green walls that are more Kermit the Frog than relaxing Forest Green?
All these can easily be put right, no harm done.
But unfortunately, the same can’t be said for DIY investing
When we see clients making important financial decisions without qualified advice, the ‘D’ in ‘DIY’ often stands for ‘Destroy’! These are the three main mistakes we’ve seen DIY investors make:
1. Picking funds
Many people invest their money thinking that it’s all about picking the best funds, and that as long as they choose the ‘best performing’ funds they’ll be ok.
But even if picking funds was all there was to it, this isn’t as easy as it always seems.
Quite often the ‘best performing funds’ one year will fade into mediocrity a year later or even become the worst performing the year after.
2. Losing tax relief
Many people make the mistake of saving into several ISA accounts instead of a pension, but where else can you save for later life where the taxman gives you £20 for every £80 you save? We’ve seen people who’ve opened 25 ISAs to save for retirement but who’ve lost 40% of tax relief on that money!
3. Paying too much tax
If you are 55 or over, since April 6th 2015, you’ve had the freedom to access or ‘draw down’ slices of your pension savings, to reinvest or spend as you wish.
Great.
But along with these pension freedoms there are a new set of tax tripwires that make it easy to make a mistake. In fact, so much tax has been paid unnecessarily by consumers drawing money out of their pension without expert advice that some experts speculated the whole thinking was to boost tax revenues for HMRC!
Just one example: drawdown is treated as income, which means that in any given year you could push yourself up into the higher tax bracket and end up paying 40% on some of your money. Ouch!
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Beyond these three main mistakes, there are a whole lot of other factors to consider when you think about DIY investing:
Fees
DIY investing fees are often hidden and difficult to decipher. Often they’re higher than you’d pay if you spoke to a real life financial planner, who will charge a competitive rate for creating a truly bespoke financial plan aligned with your risk appetite and financial goals.
Risk
Knowing that your investments could go down as well as up isn’t the same as knowing how much risk you’re prepared to take, whereas a financial planner will create a risk profile based on a series of detailed questions and apply it across your investment strategy.
The bigger picture
What do you want the money to achieve? Saving to reach a set figure doesn’t take into account what you want to do with that money afterwards. A financial planner will find out what you want from life and create an investment strategy that will help you achieve it.
Plugging missing gaps
Death and illness aren’t nice things to think about, which is why they’re often overlooked. But they’re an important part of a well-rounded financial plan because they’re a way of securing your family’s financial future if anything were to happen to you. A good financial planner will ensure there aren’t any gaps in your plan.
Going it alone
When the market gets tough – as we’ve seen with the Coronavirus pandemic – things can start to get hairy. Where would you turn to for reassurance and advice if you investing alone?
You need someone to turn to talk you through things and help you to feel comfortable.
The best financial planners do just that – they plan a strategy for their clients’ behalf so their money works for them – whether that’s providing a happy and healthy retirement, being able to travel the world, start a business, or all three.
And they’ll work with you throughout the long term to make sure your plan is always up-to-date.
Oscar Wilde once said that experience is the most cruel of teachers, because you get the exam first, and the lesson after.
We have studied all the lessons; we have the expertise you need, and we have the advice that will keep you right. Don’t let your DIY efforts turn into a disaster!
Contact us if you’d like to chat.