5 secrets of a successful DIY investor (that the City doesn’t want you to know)

11 min Read Published: 20 Mar 2015

diy investing tipsIn this article I am going to teach you some of the secrets of a successful DIY investor including the tools and techniques used by investment professionals, which they'd rather you didn't know.

Successfully investing your own money is not about getting rich quick and you should always avoid any scheme or company that promises huge returns. Remember, if something seems too good to be true it probably is.

I regularly provide commentary for the national press (including the likes of The Daily Mail, The Telegraph or The Times) and provide investment tips and advice for DIY investors.

In doing so I draw upon my career in analysing investments, building investment portfolios for clients and talking to fund managers (the people who essentially run your pension funds or investments). I can honestly say that there has never been a better time to join the growing band of DIY investors (armchair investors) and run your own investments or pensions.

It may surprise you (and worry the financial firms who overcharge people to manage their investments) that around a third of investors now run their own money without employing the services of a financial adviser.

The reason why people are now waking up to the possibilities of DIY investing is because it is feasible to successfully run your own money with very little time or effort, despite what you are lead to believe. In fact, the effort needed to become a better investor can be distilled down to just a few minutes a month, and what is more it is relatively easy to outperform most of the investment professionals who want to charge you a fortune yet don't even beat the market.

There has been a sea of change in the last decade that has empowered DIY investors. Firstly competition from fund providers and platforms (the companies through which you buy investment funds) has driven down the costs of going it alone. In addition, technology now makes it possible to get instant valuations of your portfolio and make changes within seconds, something we could only dream about just a few years ago. There is now more information available than ever to empower DIY investors thanks to the internet which is shining a light on the poor deal that investors have had up until now. Fund managers are finding it more difficult to hide their poor performance. Yet despite the advances DIY investors can feel overwhelmed by this new world of opportunity.

That is why I've pulled together 5 secrets of successful DIY investing which are aimed at both the complete novice as well as experienced investors.

The 5 secrets of a successful DIY investor

1. Understand risk

Whether you are new to investing or not you need to understand investment risk and your own risk profile (i.e how much risk you are comfortable taking). I strongly suggest that you read this brief investment guide* (it's one of the best I've come across) which takes you through understanding investing and your own risk profile. Best of all it's completely FREE.

2. Be tax savvy

Successful investors keep as much of their profits for themselves as possible. Profits on investments are liable to capital gains tax (which is as much as 28%). However by investing via a pension or a Stocks and Shares ISA (often called an investment ISA) will mean that your profits are tax-free. Whether you choose a pension or an investment ISA will likely depend on whether you need access to your funds or not. With a pension you can't access your money until you are 55 whereas you can withdraw cash from a Stocks and Shares ISA at any time.

3. Keep costs down

When you invest there are a range of charges that are taken out of your investments including the fund management charge (charged by the fund) and the platform fees. A fund platform is the company which enables you to buy the funds of your choice. Think of it like a supermarket which sells funds. Some fund supermarkets are more expensive than others. Which is the best fund platform through which to buy your investments will vary from person to person depending on the size of their portfolio and the service they are after. Have a read of my article The best stocks and shares investment ISA (& the cheapest fund platform). Just to put the effect of charges into context, if you invested £100,000 and reduced the overall annual charges you paid by just 0.5% you would be £20,000 better off after just 20 years.

4.  Don't invest based on headlines or mantras

It may seem counterintuitive for an investment commentator to advise you to not follow everything you read in the investment press. Often commentators try and rationalise every fluctuation in investment markets and then draw predictions about where best to invest your money. Yet sometimes you can't explain everything that happens in investment markets, so attempting to formulate conclusions on how assets will move in future is ill-advised.

Yet, even if it seems justified to draw conclusions, the market (which is just a bunch of irrational investors after all) may suddenly switch its interpretation of events meaning that your predictions/conclusions are now completely wrong. Take, for example, the relationship between the dollar and the US stock market. In recent years when equities fell (perhaps over economic fears) the dollar rallied because it was seen as a safe haven by the market. That relationship seemed set in stone. But in recent months the market's view has suddenly shifted and it now thinks that too strong a dollar could actually be bad news for exporters and long term economic prospects meaning that market participants tend to sell the US stock market when the dollar rallies. This change in mindset has meant that a previous investment mantra has now been turned on its head and it's cost some traders a lot of money.

5. Stick to a simple proven investment strategy

The most successful investors have an investment process and stick to it through thick and thin. Warren Buffett, the most successful investor ever (and now a billionaire) is a good example of this. Choosing an investment strategy and sticking to it stops you making emotional investment decisions that can end up costing you money. When markets are rallying it's sometimes tempting to jump in because you are afraid of missing out. That's how stock market bubbles form. Then when they pop lots of people are left nursing heavy losses. Similarly, when markets wobble investors can panic and sell their investments at a loss, just before the market picks up again.

But what strategy should you choose when running your own money?

To answer this question I analysed the performance of thousands of professional fund managers. I talked to many of them and looked at the tools and strategies the most successful managers use, as well as the mistakes the worst performing managers made. I wanted to see what is it that makes one fund manager successful yet another one underperform?

I also researched some of the best academic papers that have been published on the topic, some of which have analysed investment markets going back as far as 100 years. From my research I discovered:

  • The one thing keeping investment professionals up at night
  • The most important skill in fund management
  • Why fund managers underperform & the 1st advantage DIY investors have over them
  • The second advantage DIY investors have over professional fund managers
  • The best (and most simple) tool that helps the best investors outperform the market
  • The most important investment lesson you will ever learn
  • The investment process fund managers want to keep to themselves

Through my research I also finally answered the question of whether passive or active investing is best. Plus I used it to ascertain the best way to build an investment portfolio.

It's only by sharing research such as this that we can empower armchair investors to have the confidence to run their own money. That is why I've summarised the conclusions of my research, and the answers to the above, into a FREE short series of emails.

It's FREE for a limited time only and each of the concise emails will take you just 2 minutes to read a day over a coffee. I use the conclusions to run my own money with just a few minutes effort a month.

As I mentioned it is completely FREE and you can take the lesson contained within the emails to help you run your own money. Plus, you will also receive a FREE ebook '39 simple ways to pay less tax'. Good luck.

(image by stockimages - freedigitalphotos.net)