Behavioural finance has an increasingly central part in conversations about investment risk, since managing emotional responses plays a key role in maximising returns.
As the name suggests, execution-only investing means that an investment firm merely executes your investment decisions and does not offer any advice as to their appropriateness for your circumstances. Execution-only can be a low-cost way to get into investing, however some investors find that they fall prey to a number of common behavioural biases which undermine their investment discipline and lead to sub-par returns. Many also find that they simply lack the time to manage their portfolios properly.
One of the reasons why DIY investing is growing in popularity is the huge amounts of investment information available online. However, the very volume of information out there can make it hard to filter out the noise. As your investments grow in size and start looking more serious you are likely to want professional guidance over asset allocation and more robust diversification – although you should never disregard these elements of investing, no matter how small you are starting as a DIY-er.
Execution-only investment houses will typically provide a dealing account which you can trade by phone or online, and increasingly via tablet and smartphone apps. Many execution-only providers will also let you invest in stocks and equities under a tax wrapper like an ISA or SIPP.
Ensuring you use all the tax reliefs available to you and making use of tax wrappers to shelter your savings are key elements of any wealth management strategy.
Today’s investment platforms offer a wide array of investments, from direct equities to collective vehicles like unit trusts and Open-Ended Investment Companies. It is essential that you understand the risk/return profile of any investment you are considering, and this might require specific sector or market knowledge (the firm should provide research to help you make decisions). You must also weigh up how an investment works with the rest of your portfolio in terms of your risk exposure and the amount of correlation between the asset classes you hold. You don’t want all of your assets to be ones which are likely to fall in value at the same time.
Depending on your investor status (the level of experience you have and your net worth being key considerations) you may also be able to access more exotic types of investments like spread-betting and Credit Default Swaps via some investment platforms. The risks with such investments can be huge, however, and they should not really be entered into before taking professional advice – if at all.
The way that execution-only investment providers usually work is that the securities are owned by the investor, but are held electronically in the firm’s name. This is to speed up transactions (for which you will be charged individually usually) and means you don’t have to deal with any paperwork. (You may be able to hold investments in your own name with some execution-only platforms if you become a member of the clearing system in your own right).
Something which DIY investors often forget is just how big a drag on performance transaction fees can be. Many investors fall prey to “churning” their portfolios, meaning that they buy and sell investments too often, and have any returns eaten up by transaction fees. The expertise and objectivity a professional investment manager brings to the table will obviously help you avoid this; it is also likely that outperformance will more than make up for the cost of advice over the long term.
It is also the case that DIY investors tend to be prey to a number of psychological and behavioural biases when it comes investing. Attempting to time the market is one area where many investors fall down, as so many factors are at play. People also tend to sell when assets have plummeted and buy at the top – which is precisely the opposite of what they should be doing of course. Behaving rationally as an investor can be harder than it might first seem.
Being aware of common investment mistakes may help you avoid expensive errors. You can read more about common investment pitfalls here.
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