Video: The dangers of DIY investing
Posted by Robin Powell on November 15, 2017
Warren Buffett told a brilliant story in his 2006 letter to Berkshire Hathaway shareholders, which every investor should read.
The story concerns the Gotrocks family, which owns all of corporate America, and receives the full value of the profits earned by those companies. Then a group of people, which Buffett calls the Helpers, offer to assist some family members to outsmart the others, “for a fee, of course”. So, while the total profit earned by the Gotrocks family doesn’t change, they don’t get it all, having to pay some to the Helpers.
The profit of the companies owned by the Gotrocks family doesn’t increase, but with more and more Helpers, charging more and more fees, the Gotrocks actually end up worse off.
Buffett’s right. There are far too many Helpers in the investing industry. By removing multiple layers of “help”, which you can do simply by switching to low-cost index funds, you’ll end up keeping a much larger share of your investment returns for yourself. But does that mean that all Helpers are a waste of money? No, it doesn’t.
It’s perfectly possible to do everything yourself, and many do. The simplest way is to invest mainly in a global index fund, but also, to reduce your risk, in a cash or bond fund.
But just because sensible investing is simple, that doesn’t mean it’s easy, and for that reason, the vast majority of people, in my view, are better off using an adviser. No, that doesn’t necessarily mean an adviser you see face-to-face; there’s now a wide rage of online services offering different levels of guidance and advice. But if you try to manage without any third-party help at all, there is a significant risk of something going wrong.
In this video, I discuss some of the drawbacks with DIY investing with Simon Miller from Scalable Capital. Please do share it if you find it useful.
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