The dangers of DIY investing and the value of seeking financial advice

Category: Financial Advice&News

In recent months, there has been a surge of people getting involved in investing, typically with little financial experience. While there are many good reasons to invest, doing so without being able to make informed decisions can have serious consequences.

If you’re interested in growing your wealth through investing and want to know more, read on to find out the dangers of DIY investing and the value of seeking financial advice.

Amateur investors are at higher risk of buying into bubbles and losing money

Investing can be a great way to grow your wealth, especially at a time when low interest rates make saving an unattractive prospect.

That said, there are some pitfalls which amateur investors can fall into if they’re not careful. One of the biggest potential problems is the risk of buying into bubbles due to social media hype.

A good example of this was the investment bubble involving US retailer GameStop in February 2021. The trading phenomenon, which was fuelled by hype from social media platforms such as Reddit, caused the trading price of the retailer to soar.

GameStop’s share price surged from $17 at the start of the year to $483 at the height of the bubble, as thousands of amateur investors piled on.

However, many were left nursing significant losses when the hype faded. According to the  Telegraph, the stock price fell by 34% in a single day as more and more people tried to sell.

While GameStop’s initial explosion in share price may have seemed like a tempting investment, if you bought in too late, you may have found the value of your investment had fallen by as much as 90%.

DIY investors can be prone to knee-jerk reactions

Another major issue for DIY investors is the risk of being easily influenced by negative news and headlines that they may read, which can cause them to make knee-jerk reactions.

This is entirely understandable – it can be easy to be influenced by your emotions in the face of potentially losing a large portion of your wealth.

However, these reactions may harm your long-term financial wellbeing, as rash decisions can often be bad ones.

The reason for this is the psychological theory of “loss aversion”, which essentially states that people feel the pain of loss twice as strongly as the pleasure of gain. That’s why you may be tempted to sell when your investments struggle, to protect yourself from the stress of making a loss.

Loss aversion can also manifest in other ways too, such as:

  • Choosing to invest in assets which have lower risk, but also can earn lower returns
  • Selling shares as soon as they make a profit, rather than being patient and waiting for further gains
  • Holding onto investments which are below the price you paid simply so you don’t make a loss.

Another way that it can be beneficial to work with an adviser is that they can give you more confidence and reassurance that you’re making the right decision with your investments.

Working with an adviser can help you to grow your wealth more effectively

If you want to grow your wealth in the long term, seeking professional advice can have a number of benefits.

The first and most important benefit to working with a financial adviser is that you will be able to make informed decisions. Not only will this help you to grow your wealth more effectively, but it will also give you a greater sense of confidence and peace of mind.

According to a report by Royal London, people who worked with an adviser had greater feelings of confidence in their finances, greater understanding of financial concepts, and less concerns regarding their financial future.

At a time of economic disruption, having a greater degree of confidence in your financial prospects can be invaluable.

One of the main benefits of working with an adviser is that they can minimise the risk to your wealth through diversifying it across different economic sectors, asset classes, and even geographic regions. This helps to protect your wealth from shocks, such as the one at the start of 2020 caused by the initial lockdown.

Furthermore, an adviser can act as a sounding board, giving you useful advice and feedback, which can help you to avoid any potential risks, such as making a highly risky investment. They can also help you by regularly reviewing your progress towards your financial goals to ensure that you’re still on track to meet them.

Furthermore, a 2019 study by Quilter, published in the Telegraph, found that attempting to invest without seeking professional advice can mean that you miss out on as much as 11.3% of potential gains per year.

If you want to grow your wealth effectively through investing, working with an adviser has a variety of useful benefits. While DIY investing can be a tempting idea, professional advice can help you to build a far more robust portfolio than you may have done yourself.

Get in touch

If you want to invest your wealth but want to be able to make informed decisions while doing so, get in touch. Email us at office@verve-financial.com or call 0330 320 5048.

Please note

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

 

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