With the explosion of fintech products and digital investment platforms coming to market over the past decade, it’s not surprising that more people are choosing to DIY their investment portfolios.
Managing your own investment portfolio is easier and more doable than ever before, so long as you stick to the basics, writes Sygnia Investment Analysts, Viwe Gqiba and Zama Mdletshe.
With the explosion of fintech products and digital investment platforms coming to market over the past decade, it’s not surprising that more people are choosing to DIY their investment portfolios.
This global trend has been driven by digital-savvy millennials now in their 30s and 40s, who want direct control over their own investments – although studies show many boomers are also catching on to the self-investment trend.
While financial empowerment is definitely a good thing, there can be a downside. Investors may get overwhelmed by all the options and struggle to make smart choices, while others may be overzealous, believing they can play the market like a pro. Both can lead to big losses.
The trick to smart self-investing is to always keep it simple – just stick to these basic dos and don’ts.
DO
Invest in index funds
Index funds (also known as passively managed funds) provide a wider and more balanced exposure to the market and are therefore lower risk.
Statistically, in the long term, index funds outperform actively managed funds, with Morningstar reporting late last year that only 25% of all active funds in Europe beat their passive counterparts over a 10-year period. Among the large market capitalisation funds, the stats were even worse: only 11% of actively managed funds outperformed their passive fund counterparts.
Importantly, passive funds have lower fees than actively managed funds – and low fees make all the difference. An extra 1 or 2% in fees every year may not seem significant, but high fees can radically reduce your return on investments over time.
Diversify your portfolio
The old adage of not putting all your eggs in one basket is a fundamental in investment, and there are many ways to place eggs in multiple baskets.
One way to diversify is to invest in different asset classes (equities, bonds, cash). The easiest is to invest in low-cost balanced funds, which have exposure to multiple asset classes, but you can also invest geographically by, for example, investing directly offshore via low-fee exchange traded funds (ETFs). Another option is to invest in specific market sectors via index funds that only track companies in that sector (companies in health innovation or tech, for example).
Rebalance your portfolio
In the same way that you take your car in for an annual service, you should “look under the hood” of your investment portfolio once a year: look at which assets performed as expected and which didn’t, and then adjust the weighting of your assets to the level of risk you are comfortable with.
This is particularly important if you’ve customised your investment portfolio by, for example, adding specific ETFs or investing in different market sectors.
If you’ve diversified your portfolio by investing in a low-cost balanced fund with exposure to multiple asset classes, rebalancing will happen within the fund itself, and you won’t have to worry about it.
DON’T
Pay high fees
High fees are like a relentless Pac-Man chomping away at your returns. A report by South Africa’s Treasury a few years back found that an investor paying 2.5% instead of 0.5% in fees would lose up to 60% of their retirement savings over a 40-year period.
Fees over 1% should be a definite red flag for any investor; to maximise returns on your investment, select funds with fees of 0.5% or less.
Pick your own stocks
The idea of picking your own stocks and hitting the jackpot is very romantic, but remember that for every jackpot winner there are millions gambling futilely on a big pay-out. It is better to invest in low-fee index funds with wide exposure, which deliver reliable returns over the long term.
Sell stocks during market dips
Markets rise over time, but not in a straight line. Any investment journey is made up of many ups and downs, and it is critical to remain calm and unemotional in times of volatility. Remember that losses on paper only become locked in if you panic and sell. Assuming you have an appropriately constructed portfolio, a rule of thumb is that you should only sell when you have reached your investment goal. Otherwise, sit tight and let the power of compound interest help you on your journey.