Despite the well-documented advantage of taking financial planning advice, (‘The Value of Financial Advice’ report from the International Longevity Centre think-tank, published in July 2017 makes interesting reading – see our blog here) some choose to go it alone, as DIY investors. Those who do, in my view, tend to exhibit certain characteristics that may limit their long-term success, though fortunate timing may provide shorter term wins. Let me give you an example…
Many DIY investors have a strong bias towards UK equities (shares). The UK equities market is 7.2% of the global equities market. So, if you were to invest proportionately, then 7.2% of your holdings would be in UK shares. However, research cited by Vanguard Asset Management suggests that the average UK shareholding by DIY investors is as high as 26.3% (December 2014). And the situation is even more prevalent in USA, Canada, Japan and Australia with strong domestic investing the norm for DIY investors.
Why the bias towards domestic shares?
My theory has always been that there are a number of factors that contribute to the bias:
- People like what they know: They are typically more aware of domestic political and economic circumstances in their own country through the media so they feel able to monitor it closely.
- Proximity: They feel in greater control because they are a resident in the country and have a voice in a democratic society.
- Currency: Overseas investments are subject to fluctuations in exchange rates and whilst this needs to be considered in the context of the overall investment performance it can initially discourage some investors, as can perceived higher transaction costs.
- Corporate Governance: Many investors will feel that UK corporate governance (the rules that govern how companies are managed) are more robust than in other countries.
- Multinational companies: Some investors feel that by investing in UK based multinationals, they will have ticked the overseas investment box. However, as companies become more interlinked it is important to get a robust understanding of specifically where the investment is.
What’s the problem with a bias to UK shares?
There isn’t necessarily a problem. Until there’s a problem, that is. In financial planning, we seek to protect our clients from possible future political and economic events. The trouble is we don’t know what those events will be or indeed where they will be.
The solution?
The trusted solution is to diversify. Put simply – don’t put all your eggs in one basket. By diversifying and utilising various geographic options including North America, Asia and emerging markets, you potentially minimise your exposure should one of these be affected by an unexpected economic or political event. Holding a range or a basket of shares that includes foreign, domestic and emerging markets is an example of this. Of course, you also maximise opportunities for returns when these countries’ economies are performing well.
Work with a Financial Advisor. We are qualified experts in the field and can help you avoid the typical pitfalls that DIY investors can make. We’ll talk to you about your aspirations for the future and create a plan that is bespoke to you and where you want to go next in life. Please email me to arrange a meeting or phone call – click here. Thanks for reading!
John Davies
Partner
Clifton Nash
*Sources
Vanguard Asset Management
Morning Star, November 2014
The value of units can fall as well as rise, and you may not get back all of your original investment.