Investing, Life

Managing your own investment portfolio: 8 things to consider

If you want to manage your Stockspot portfolio on your own, or try your hand at DIY trading – read this first.

With markets rallying and so much information on the internet, many people feel they can manage their own investments. If you’re thinking about managing your Stockspot portfolio on your own, or getting on the DIY trading train, here’s what you should know first.

1. Separate strategies can keep your money safe

As with every market boom, the temptations of DIY trading and getting rich quick is hard to resist. But what’s really important is to differentiate your long-term, goal-based investing from a DIY portfolio.

If the pull of DIY is strong, it’s wise to use two strategies: a safe strategy like Stockspot as your core portfolio, and a DIY portfolio on the side. 

To mitigate risk, a DIY portfolio could start as 10% of your portfolio. Taking too much risk at first can undo years of hard work. Remember, less than 1% of speculators consistently beat the returns from a low-cost market tracking ETF.

If you do this, you’ll have one investing strategy that is devoid of emotion and reactivity. This helps preserve wealth over the long term, whilst keeping costs (eg. brokerage) low.

Watch the video below to see whether buying low-cost ETFs is enough. Then keep reading for more tips.

2. Remember to rebalance your assets

One of the biggest hurdles people face when managing their own portfolio is rebalancing. This is something Stockspot manages for clients

Rebalancing involves selling investments that have grown faster than others in your portfolio and buying more of the investments that have fallen behind. It’s one of the most important factors in successful long-term investing and is a key reason Stockspot outperformed 98-100% of similar funds.

Rebalancing is hard to get right as a DIY investor and can be laborious, expensive (brokerage again!) – not to mention emotionally taxing. 

Remember, if you’re rebalancing too often, you could be locking in capital gains, bringing forward when you have to pay tax, and missing out on asset classes that naturally drift up and down over time. 

A lot of self-directed investors make the mistake of not rebalancing enough – or at all – foregoing opportunities to accrue investments and bring their portfolios back in line with target weights. 

3. Make sure you’re the owner of your investments

The proliferation of new low-cost share trading apps has left investors with a plethora of choice. 

When choosing the right platform for you, it’s important to understand who actually owns your investments. Many low-cost trading apps use a custodian model, which lowers costs but also the security of your investments. That’s because your money is pooled with other investors’, and you’re not the ultimate beneficial owner of your assets. 

Your investments are held in custody and you’re relying on a counter-party to seperate your investments from others. If the custodian collapses, your assets are not held legally and beneficially in your name, which may leave you chasing your money (as seen with Opus Prime, Storm Financial and MF Global during the GFC).

On the other hand, owning your investments directly means that you have legal and beneficial ownership of the investments. You’ll get a Holder Identification Number (HIN) and your investments will be registered at the ASX with you as the legal owner. 

If your brokerage platform goes belly up, you can access your holdings with ease and transfer them somewhere else. (And yes, at Stockspot, you have direct ownership over your ETFs). 

4. Most shares underperform the index

It’s important to understand that most shares underperform the index over time. This is why it’s important to have a long-term index strategy as part of your overall portfolio. Typically, only a few stocks pull up the average market returns, with most stocks underperforming. 

Craig J. Lazzara at S&P produced a whitepaper that shows the cumulative returns of all the stocks in the S&P 500 over a 20 year period, ending in 2019. 

This whitepaper shows that only 26% of companies outperformed the average return of the S&P 500 over this 20 year period. Odds are against stock pickers, and the best way to avoid underperforming the market is to have the majority of your investments in broadly diversified index funds

Again, if you want to select your own stocks, set up a DIY portfolio in tandem to your Stockspot account (which invests in broadly diversified index funds). 

5. Beware your biases

Ask someone if they’re a good driver and they’ll invariably say ‘yes’.

The same inflated confidence is common amongst DIY investors, and is known as the ‘Dunning-Kruger Effect’.

It’s easy to get confident with a few good investments, but even professionals don’t get it right, with 80% of trained investors doing worse than the market. Avoiding costly mistakes isn’t about how much you know, it’s understanding where your knowledge starts and stops.

Another common psychological bias is anchoring bias, which is the tendency to rely too heavily on pre-existing information, or the first piece of information we learn when making decisions. That’s why you can end up focusing on historical prices rather than considering today’s fair value. To safeguard yourself from anchoring bias, don’t just focus on one piece of data. Do your research and take advantage of objective resources.

Then there’s familiarity bias which leads to people investing in only what they know. Most Australians, for example, will tend towards Australian investments rather than diversifying across a range of markets and assets. One way to tackle familiarity bias is to spread your assets across different industries and companies. 

Investing is a psychological game, and it takes sharp self-awareness to play well.

6. Distinguish smart investing from smart marketing

If you’re going to invest in ETFs on your own, you’ll need to make your choice from over 200 ETFs on the market in Australia. The selection process can be overwhelming, and it’s easy to be swayed by emotive marketing from ETF issuers or just general market hype. 

An example is thematic ETFs, which have been recently seen a spike in investor interest, growing by 400% over the last year (find all the details in our latest ETF Report). A lot of thematic ETFs are relatively new, and their marketing teams have played off trends like technology and clean energy.

What’s important to understand is that these themes are just that – themes. They’ll come in and out of fashion, with performance peaking over a shorter period.

This isn’t to say thematic or new ETFs don’t have a place in your portfolio. But, if you’re going to manage your investments on your own, you’ll need to make sure you’re always ahead of marketing tactics or industry trends. 

7. The way people learn the most about investing is to lose money

Warren Buffett lost around $23 billion in the global financial crisis and is now worth over $100 billion. 

It’s a sad truth that the best investing lessons come from losing money – but often the people that lose a lot of money have plenty of cash spread across diverse assets. Other times it’s people like you and me who experience serious trauma when our life savings go down the drain due to a few bad investments.

So many investors chase performance, holding on to stocks that little bit too long. Not knowing when to cut your losses is a common investing mistake, and one that has to be made over and over before you have a better understanding of when you should sell. Unfortunately, until the lightbulb goes off, we don’t realise that we’re making the same mistake over and over. 

That’s why, if you’re moving away from a Stockspot portfolio, build a portfolio that will provide some leeway for making mistakes. To do this, make sure roughly 10% of your money is in risky investments. 

8. The best investing is the investing you don’t worry about 

Managing a long term investment portfolio takes time and dedication. It can provide you with a rush and a sense of fulfilment when things are going well – but when markets fall, the stress can be unimaginable, and there are people who have never recovered. 

With so many things that need to be juggled: work, family, kids, education and self-development, investing is the one thing that should be on auto-pilot. There are many platforms and online forums that will tell you otherwise, but it pays to think about the old adage, that the best investing is the investing you don’t worry about.

  • Hannah Hooper

    Hannah has had extensive experience in the financial services industry, working in both retail and institutional broking. She holds a Bachelor of Business (Finance) from the University of Technology Sydney (UTS). She has completed her Diploma of Stockbroking and is accredited in Tier 1 Derivatives (General Advice).

Hannah has had extensive experience in the financial services industry, working in both retail and institutional broking. She holds a Bachelor of Business (Finance) from the University of Technology Sydney (UTS). She has completed her Diploma of Stockbroking and is accredited in Tier 1 Derivatives (General Advice).

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