When you build and manage your investment portfolio yourself, this is often called DIY (do-it-yourself) investing. In this article, we explore the pros and cons of DIY investing and how to get the most out of your strategy.

South Africans are experiencing financial pressure but still want to invest for the future, including for retirement. Many feel it costs less to manage their own investments than to work with a financial adviser or portfolio manager – but does this cost-saving reap rewards?

Self-managed investing tends to be cheaper, with several online platforms charging as little as 0.25% to 0.4% brokerage fee, and no or negligible platform fees. In addition, these platforms provide access to a wide range of products as well as information and support.

“They highlight convenience, control, and cost-effectiveness,” notes Duma Mxenge, business development manager at Satrix.

However, it’s not uncommon for DIY investors to seek financial advice – they just prefer to “go it alone” and manage their investment portfolios themselves.

Know the risks of DIY investing

DIY investing can be risky for several reasons, including a lack of professional expertise, emotional biases, limited resources and data, and a failure to appreciate tax and regulatory complexities.

Martin de Kock, investment planning expert and director at Ascor Group, says an investor’s own behaviour can pose significant risk.

“People often react emotionally to market conditions, giving in to fear or greed when an investment’s value decreases or increases, or they try to ‘time the market’ – that is, try to predict future market movements and buy or sell accordingly,” he says.

Mxenge says emotional decision-making and a lack of financial acumen can lead to poor decisions. He suggests DIY investors educate themselves using reputable resources (not Tik-Tok videos) and turn to robo-advisers for automated guidance.

However, they can also seek advice from financial advisers where necessary – it’s a misconception that DIY investors act without advice.

Knowledge is key

A lack of knowledge is the biggest risk for DIY investors, says Anton Schutte, financial planning and development manager at Exponential Financial Services.

He says it is easy to chase last year’s best-performing funds or fail to invest in the most suitable product for your needs and circumstances.

“A successful DIY investor must devote a lot of time to learning about financial products, tax, asset classes, costs, and underlying funds,” he says.

He explains that investors typically pursue one or a combination of the following investment objectives, which may not be realistic:

• Capital growth: seeking investment growth that exceeds inflation rates
• Income: wanting regular (often monthly) income from investments
• Capital preservation: aiming to safeguard investments against market downturns, especially after experiencing capital growth

Other hazards include not aligning your investments with your goals and risk appetite, and not setting an appropriate investment horizon.

Investors may also make the mistake of contributing low amounts (although starting small is better than not starting at all), neglecting the effect of compound interest, and not diversifying their portfolios adequately.

Mxenge says investors can avoid these errors by making consistent contributions, exploring a variety of asset classes, and sticking to a disciplined, long-term strategy despite market “noise”.

Costs and savings

Financial advice costs money – but if it’s money well spent, who’s counting? Well, it depends on how much the advice costs.

Schutte says investment costs depend on the product, but advisers typically charge 0.5% to 1% upfront, and 0.5% to 1% annually on an ongoing basis. “These costs reduce your returns, so DIY investing can certainly be a saving,” he remarks.

According to De Kock, the three main investing fees are:

Fund manager fee: Charged for managing the investment fund, deducted from the investment but not reflected on the monthly investment statement.

Platform fee: Charged by the investment platform (e.g., Glacier, Stanlib, Allan Gray) and calculated on a sliding scale according to investment size. It is disclosed on the investment statement.

Adviser fee: A financial planner/adviser negotiates this with the investor to manage the investment. It is disclosed on a statement, and the platform pays the adviser after deducting the investment fee. This fee can be for initial implementation, an ongoing percentage of capital, or a mix of the two. Managing a DIY portfolio saves on this fee.

Asset management fees cover the costs of managing a professional investment portfolio and directly affect your net return, remarks Mxenge.

He cautions investors to carefully evaluate fees because high fees can significantly diminish returns over time.

“For example, a 2% annual fee on a R100,000 investment with a 4% annual return could lead to over R30,000 lost returns over 20 years.”

Do your homework

Unless you’ve done thorough research and have confidence in your ability, Schutte recommends consulting a financial adviser for bigger-picture insights, as well as guidance on vital considerations that include:

• Risk appetite: Assessing your risk tolerance and considering investments with varying risk levels.
• Asset classes: Understanding different asset classes (ie, shares, cash, property, bonds, and specific funds) and potential returns.
• Tax implications: Knowing the tax implications of chosen products.
• Investment goals: Defining your investment objectives, such as capital growth, income, and preservation.
• Investment term: Determining the duration of the investment.
• Liquidity needs: Considering if you need quick access to funds.
• Product selection: Choosing suitable investment products.
• Fee structure: Understanding initial and ongoing fees, including administration, investment management, and adviser’s fees (adviser’s fees are typically negotiable).

A registered, independent adviser can protect clients against their own emotions, which is a significant benefit. Knowledge is one thing, but when it comes to our own money, we find it difficult to be objective.

“In investment terms, emotional decisions are called a behavioural tax, which erodes investment returns,” Schutte explains.

Manage the risks

De Kock suggests taking these steps to understand the risks of DIY investing:

• Consider negotiating a once-off, upfront fee with a financial adviser to design a tax-efficient investment portfolio.
• You can agree to pay the adviser every two or three years to review your investment portfolio, make recommendations to improve it, or consider rebalancing.
• Implement a properly designed retirement and estate plan before retirement because some investments, such as a guaranteed life annuity, cannot be reversed once implemented.
• Aside from a tax-free savings account, tax affects all investments if not structured and managed correctly and can incur significant tax liabilities.

Although DIY investing can empower you, you need above-average financial literacy, discipline, rationality and informed decision-making to achieve your long-term financial goals.

“Focus on education, research, and leveraging resources to enhance your success as a DIY investor,” notes Mxenge.

Tips to kickstart your DIY investing journey

• Education is key – read, research, join discussion groups.
• Sign up for online investment courses and read investment firm publications.
• Don’t invest in one company – diversify and ensure a mix of equities, bonds, cash and property in your portfolio (there are many exchange-traded funds and unit trusts that cater for this).
• Know yourself and don’t make any sudden, emotional decisions.
• Evaluate fees and keep them low.
• If unsure, be guided by a registered, independent financial adviser or certified financial planner. Consult the Financial Sector Conduct Authority (FSCA) or the Financial Planning Institute of Southern Africa (FPI) to select a certified, regulated financial adviser or planner.

This article first appeared in City Press.