Let me start by saying that I do not know any investor with serious money (upwards of $ 1 million) who works on a DIY(do it yourself) basis. Just none. And the number of people I know in this set should be in excess of 100. That is not insignificant. I am not saying that they do not exist, but I have not yet met them.
With a 9-year bull run, people think that they can manage their own portfolios, beat the market, and achieve their financial goals. I do know that there is a huge gap between what people say and what they achieve. Yesterday I was talking to an IAS officer about his portfolio – and he realised some of his mistakes chasing returns. Sometimes it is necessary to talk about risk and sometimes about return expectations. Research can suggest a lot of things that a retail investor should do, but not all investors can invest rationally.
In the real world, an investor’s financial situation, attitude towards risk taking, and beliefs about the future direction of financial markets are always changing. The same investor who invested rationally at the age of 30, may turn irrational at the age of 40. Sudden shifts in their job, health, or children’s behaviour – are all factors that can tempt them to make poorly timed investment decisions that are based solely on emotions, not logic. One wrong or bad move can wipe out years of hard work.
People who have never managed other people’s money have no business saying “I can do it, so can you”. Sure, it is tempting, but not everybody should attempt DIY. I know of some DIY advocates who have consistently under-performed the market, but hey beating the market is not what they set out to do. They set out to do something else. So if your goal is to beat the market or just meet your financial requirements see if you can do it yourself!
So when I asked a few HNIs what their investor does for them…there was some nice learning:
Trust and Communication: People with a ‘don’t trust anybody’ kind of a mental frame cannot seek help. However, when a person is financially successful, he/ she understands how an advisor can communicate well to avoid the behaviour gap. I don’t see how an app can ever control this behaviour gap. I have been able to talk to clients and cool them down.
I have been able to keep people in equities far beyond what ‘theory’ says they should be in equities. I have been able to make clients more oriented towards happiness and relaxation than worry about the extra 1% return in a scheme. I have been able to talk to big investors about being in funds / schemes with lesser standard deviation. I have moved money from a mutual fund to a fixed deposit when the client’s tax structure changed. No, an app cannot do that. That is clear.
Ability to separate the grain from the chaff and the ability to see the news items in context of his goals. It is but natural to watch television or read some articles in the pink papers and get excited. It is necessary to keep calm and realise that everyone who writes may not have experience, knowledge, training or education in finance, human behaviour, or law, and yes personal finance is now the most expensive hobby.
Having an automated or well thought of process and not just some ad hoc guess work.