But they are often a lot worse at investing than they tell themselves and others. That comes out in the wash when there is a sudden unexpected downturn that throws them.
The flip side is that a little invested regularly in well-diversified boring investments that can weather storms will make the most difference in the long run.
“We all seek the nirvana of high return and low risk,” said Nick Hakes, chief executive of Financial Advice New Zealand. “And of course that doesn’t exist.”
Higher return investments come with corresponding risk that not everyone can handle.
Even worse is when someone doesn’t recognise the risk or understand their own risk tolerance and how they will react in a financial crisis.
Those are not the only problems, said Hakes. “There’s all this industry research that proves the highest amount of inflows [into investments] are usually at the peak of the market. And the most outflows [happen] at the bottom of the market.”
He said clients often feel activity in their investments drives value. The opposite is often true.
One thing investors looking for a quick buck often don’t consider is that managed funds employ experienced fund managers and the best software working behind the scenes to scour the world for the best investments to fit the strategy of the fund.
By sitting still in a fund, investors aren’t necessarily doing nothing.
Quantitative analysis of investor behaviour by financial services market research company Dalbar demonstrates that investors who buy and sell regularly, even just switching in and out of fund investments, make less than those who choose a good, diversified fund and sit still on their boring investment.
Likewise, Morningstar research in 2022 found that over the last 10 years, investors earned about 1.7% less per year compared with reported total returns on their funds due to the timing of their buys and sells.
“We see this in stock markets every single day, and we see it in fund flows,” said Hakes.
“People’s own behaviour can be the greatest contributor to wealth [or otherwise],” he added.
“The decision-making by [DIY] investors goes against the whole fundamental of buy low, sell high, diversify, dollar cost average, invest for the long-term, [and] invest for the cycle.”
Diversification means having a mix of different investments, such as local and international shares, bonds, property, and maybe even some crypto - but weighted according to risk.
A portfolio that lets you sleep at night and avoid panic-selling during a downturn is a bonus.
Dollar-cost averaging involves investing a little regularly whether the markets are high or low, which helps achieve the best overall return.
A financial plan, preferably prepared by an independent expert, is the glue that ties it all together. “It’s steadfast, it’s slow, it’s boring.”
Sticking to the plan is the best way to build wealth over the long term, said Hakes. And an adviser can help clients do that.
Behavioural biases that afflict most new investors can be destructive to wealth creation.
There is quite a cocktail of biases that explain why new, and especially young, investors tend to pursue risky investments.
These include overconfidence bias, where people overestimate their ability to predict market trends.
This confidence can be fuelled by early wins or by seeing others succeed. Optimism bias - where investors don’t believe the worst-case scenario can happen to them - also plays a role, along with FOMO (fear of missing out).
FOMO is amplified by social media and online hype. Influencers share get-rich-quick narratives and endorse investments, adding a sense of legitimacy, but often for their own enrichment. Trading apps contribute to the problem, making it very easy to become an armchair investor.
The idea for this article came from a blog written by 25-year-old Tim Rodriguez, a staff member at fund management company Kernel.
Tim started dabbling with share investing after leaving university, like generations before him and many to come.
But he realised when he did the maths that he’d be much better off investing in funds, which hold a wide range of investments, helping them weather market ups and downs.
It’s what Rodriguez calls the “high growth and chill” approach to investing.
He has set up automatic payments into his core investments, with 80-90% of his portfolio in low-cost index funds.
The other 10-20% goes into “satellites”, more speculative investments. That’s a great way to ensure long-term wealth while still leaving room for some DIY investing.
