Client Case Study: When You Give Up Being A DIY Investor

Providend

Adam and his wife, Sabrina, have spent the past 13 years of their lives in successful individual careers as a Technology Engineer in an American MNC and as an Account Manager, respectively.

Both realize that their money has built up over the years and do not wish to take the traditional route of wealth-building that their parents took. However, being careful with their money, they tried to sift through the vast amount of information to find what is the right way to invest.

When tasked to invest his family’s wealth, Adam believed that a certain criterion was important to building wealth in a fundamentally sound manner.

Eventually, they identified that a sound way to build wealth would be to channel their money from work and what they have into Exchange-Traded Funds (ETFs) that track certain regional indexes.

Through his research, he understands the concept of having exposure to a portfolio of equities around the world. He also understands the importance of keeping their transactional costs low because costs would compound over time.

That is how they started venturing out of safe fixed deposits and lower risk instruments and into higher risk and potentially higher return financial assets.

If you were to ask us to name a fundamentally sound way to invest in a do-it-yourself manner, we would tell you what Sabrina and Adam did was sound.

We could even give you the blueprint on how to do it here:

  1. Identify a brokerage or fund platform that has low transaction charges or low platform fees
  2. Put the lump-sum you wish to invest, into a low-cost, broadly diversified unit trust or exchange-traded fund. You can create a low-cost, broadly diversified portfolio with 1 to 4 funds depending on your preference and sophistication
  3. Contribute a portion of your cash flow from work into the fund
  4. On an annual or half-yearly basis, do a rebalancing if you hold more than 1 fund
  5. In terms of investment setup, that is it
  6. You should continue to get educated in this way of investing- focusing on a continuous education on market returns, on volatility and how the markets performed at various pivotal junctures
  7. With such an approach, you can then live a good life, because the investments are rather passive in nature. By not taking a too active approach to wealth building, this frees up your mind to do your best work in your career. The better you do in your career, the greater the excess cash flows you will get from work to be channelled back into your wealth portfolio

Given Adam and Sabrina’s initial investible wealth of $600,000, a 30% savings rate which allows them to put away an initial amount of $100,000 a year, a higher than average salary growth of 7% a year, and a projected portfolio compounded return of 5% a year, Sabrina and Adam could grow their wealth to $9,674,623 in 18 years’ time when they are 50 years old.

Adam and Sabrina would have come across materials like the above in their research and they would have implemented something similar.

However, eventually, a couple like Adam and Sabrina decided to approach us.

Here are some of the challenges that they faced.

They Could Not Devote Adequate Time In Continuous Self-Education

One of the appealing things about this passive form of DIY investing is that Adam does not need to devote so much effort to keep looking for investing ideas to deploy their excess cash.

However, we should note that low effort does not mean any effort.

A large part of successful investing requires you to become a better investor. A better investor can better capture the returns.

Becoming a better investor does not mean being equipped to know all sorts of investment strategies or products. A better investor is one who deeply knows to do well with a low-cost, diversified portfolio, what is most important and what makes the most impact.

Some came to us because they just followed the high-level steps to set up their DIY portfolio. However, no-one told them there is still a need to deepen their knowledge.

When you do not deepen knowledge in the necessary area, you may face further challenges.

They Lack of Conviction

It is prudent as a novice investor to slowly ease into an investment or a strategy. You ensure that you do not subject a large proportion of your money into something that you may be wrong about.

We all have that worry at the back of our mind that we do not know what we do not know. And so, this approach to investing at the start is right.

However, what we observe is that because many do not deepen their knowledge through continuous education, they fail to build up enough confidence to deploy large sums of their money.

For instance, out of $600,000, they may put only $40,000 in one investment and when someone shares with them another investment opportunity that sounds rather sound, they would put in another $20,000 to give it a try.

As time passes their wealth becomes very distributed with some investments performing well and some do not.

Deeper conviction allows you to channel the majority of your $600,000 into the financial assets that provide the greatest return per unit risk, according to your risk tolerance.

They Do Not Know What They Don’t Know

The plan for DIY investing may sound simple initially.

However, an important thing to bear in mind is that you would need to live with your money being invested in markets.

To you, the markets seem to move based on the following:

  1. Changes to various economic news, some big, some small
  2. Changes to geopolitical actions
  3. Changes to results and news from the financial markets

Do you know what to do with all the news, information that comes your way? Are you supposed to ignore them? How do you assess that maybe some of this news is actually crucial enough?

A better investor is one who can sieve through all this information and only listen to that financial and economic news that matters and have the most impact.

If you have deepened your knowledge, you would eventually figure out some of these things you initially do not know.

Knowing something allows you to live and be less stressed about your investment sometimes.

Sometimes doing nothing is difficult if you do not know that the right approach is to do nothing.

Client Case Study DIY Investor chart 1

If your three-year experience of the markets look something like this, you would easily talk yourself out of this investment and stop putting money into it.

Client Case Study DIY Investor chart 2

If we extend the timeline for 2 to 3 more years, you may realize that what you had was actually a decent wealth-building vehicle on your hands.

However, there are a lot of opportunity costs involved because you do not have someone close, trusted, and competent to discuss this with.

At this high juncture, you might entertain the idea of not putting money in because prices have gone up a lot. You might even entertain the idea of selling off the investment.

What is the right decision here? What is the right framework to go about evaluating the right decision to make?

These will be some of the frustrations that might come up.

They Could Not Agree On The Right Approach To Take

What we also observe is that a couple may eventually disagree with the investment approach of their spouse.

A more prevalent example is that a couple could not agree on the right approach to take with so many investment strategies and products out there. They need a third party to provide a competent and objective view on the appropriate way for them to build their wealth.

They Realize Wealth Management Is More Than Investing

Eventually, some of you may conclude that wealth management is bigger than just investing.

You would have to resolve between your short-term financial needs with your longer-term financial goals.

What would be a more optimized way to tackle goals with different time durations. How do you balance trade-offs?

A couple like Adam and Sabrina would eventually understand that their financial needs and life aspiration have changed a fair bit since they started going out together 8 years ago.

If their life situation has changed from the past, most likely their situation would change in the future.

When your life changes, your financial allocation would objectively need to be re-allocated accordingly.

Conclusion

We work with people like Sabrina and Adam who have enough humility to admit they might need some help in wealth management.

We approach a situation like Sabrina and Adam’s with a blank piece of canvas so that we can sketch out the important things to them:

  1. What are the values that they identify with?
  2. What are their personal goals?
  3. What do they do (or want to do) for their children?
  4. If their parents are around, would their parents want Adam and Sabrina to provide for them?
  5. Help make sense of their current resources and their current cash flow

At Providend, we take your life goals and translate them to financial goals so that we can give you a realistic picture on whether all your goals and aspirations can be fitted in. If not, we will also provide you with what is possible and what is not.

The wealth management plan would include your existing DIY investments or any other investments that you currently have. To the best of our ability, we would fit your existing investments into your overall wealth management plan.

We would, however, enlighten you on why some of the financial instruments you may own are unsound and may not fit anywhere in your plan.

We take time to work with you to plan this out.

The process takes time because we are trying to create a sound financial setup so that you can live the life you want.


We do not charge a fee at the first consultation meeting. If you would like an honest second opinion on your current investment portfolio, financial and/or retirement plan, make an appointment with us today.

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