Why DIY (Do It Yourself) may not always be beneficial for your wealth!

Ramesh (age 58) is a self-employed NRI based in Sri Lanka and has multiple businesses in South East Asia. Thanks to his street smart attitude and hard work, Ramesh has been successful in amassing a large amount of wealth, enough to support his 3 children for their lifetime. 

Owing to his continuous success in business, Ramesh was growing more confident than ever, to believe that he can handle all decisions related to business, personal finance and asset allocation – by himself, without any 2nd opinion or guidance.

However, since the end of 2016, Ramesh’s fortunes started changing as some of his financial decisions went wrong and eroded approx. 20% of his wealth. Better late than never, Ramesh has now started believing that his DIY financial planning ‘may’ have cost him dearly.

Is Ramesh’s belief true? Did he really lose because of poor financial decisions OR was it just due to unfavourable market performance? Let’s find out:

Over the past 2-3 years, Ramesh made the following decisions on his own:

1: Traded NDFs (FX position): Lost significant capital because he never understood the product and its risks.

2: Fixed Income: Lost opportunities to make higher returns by inefficiently allocating funds to lower yield products (with the same level of credit security).

3: Insurance: Bought ULIPs as equity investments (high fees, mortality charges and underperforming equity markets) instead of segregating insurance and investments.

When probed further, it was shocking to note that Ramesh never had a predefined financial plan in life, no long and short term financial goals, no risk profiling, asset allocation plan etc. Ramesh has a financial advisor, whom he never consulted just because Ramesh believed that a 35 year old cannot advise him. The worst part is, Ramesh also gives personal finance advice to his friends, employees and relatives.

Do all of us have a Ramesh in us?  

Should you always invest on your own or seek guidance from an expert? There are various pros and cons to doing either of the two. I would like to throw some light on the cons of DIY in this article.

Firstly, I have always believed (and still do) that an individual himself is his best financial planner – simply because ‘Nobody knows your life better than you.’

Before you decide to go DIY, ask yourself if you want to hire yourself as the advisor or do you need to hire someone else? What is the value of your time compared to the monetary cost of using an advisor? Do you enjoy the process of investment research and financial planning or do you dread doing it to the point of neglecting your finances?

Before Investing for Yourself, Always Be Honest with Yourself: The greatest asset in personal finance is humility; because the ability to realize you don't know everything is a trait that precedes all other virtues. In my personal experience, ego and emotions are the two most common ingredients that go into every bad financial plan.   

Therefore, due to common constraints like time, expertise, experience etc., it may prove beneficial to take advice from someone whom you can trust with your financial interests.

Taking professional advice can help you in the following ways: 

1: Selecting the right advisor(s): This is the most difficult part. How do you differentiate between a sales person and an advisor? No, it’s not about commissions. Remember, there are no free lunches. If you expect someone to work hard for you, appreciate the value of an advisor and the fact that good advice doesn’t come for free. A good advisor will always sell his strengths (honesty, experience, track record and your financial interest) – not the products. He will always be open to discussions on 3rd party products, to facilitate your decision making process, even if it doesn’t belong to his product portfolio.    

2: Validate your stakes: Even while your financial decisions may be efficient, it is always prudent to testify them. An endorsement of your strategy will only ensure that you can remain at ease. Even if it costs you a small fee, it would be wise to do so than incurring capital losses by choosing not to seek a critical opinion.  

3: Create a sound financial plan: with a predefined asset allocation, based on your risk profile, financial goals and taxation norms. Assist you differentiate between the products suitable and non-suitable for you.

4: Regulate: your emotions of investing/ disinvesting based on market movements and maintain consistency in asset allocation, thus reducing significant risks.

5: Review: your goals and investments periodically based on your life stages, devoid of emotions and biases. While an advisor manages many individuals like you, his experiences of dealing with different situations should only help you benefit from others’ mistakes.

6: To err is human: As humans, even advisors admit of not knowing everything, but they surely have the desired access to resources which can help you find the required solutions.  

7: Risk Aversion: Your risk taking ability changes with your age, financial behaviour and amount of wealth at stake. While DIY may not hurt retail investors as much, it may prove costly to HNIs.

(The author is a SEBI Registered Investment advisor and works as VP – NRI Wealth at a leading Indian Bank. The above article is written in his individual capacity and meant for general education purpose only. The same may not be construed as an official opinion of his employer).