(5 minute read – Five D’s)
Hi there accounting fans! As part of World Investor Week, we are going to talk about the Five D’s of DIY investing!
It’s so easy to start investing today. Just jump online and there are heaps of platforms you can use to start buying up financial assets! But with this greater ease of access comes a lot of pitfalls that DIY investors can make. The Financial Markets Authority has come out with a list known as the Five Ds that all DIY Investors need to know.
Over here at The Comic Accountant, we are supporting them promote the Five D’s with this super simple overview guide:
1st of the Five D’s: Do your Due Diligence
Due Diligence (or ‘DD’ as we know it in investor parlance) is the practice of knowing what you are investing money in. Due diligence is an important first step in any investment. It doesn’t matter if you are investing $1,000 or $1,000,000 – you always need to know that what you’re investing in makes sense.
Investment banks and managed funds spend thousands of dollars on Due Diligence so that they don’t put their money into dud investments. Hence, as a DIY investor, the least you can do is to spend a few hours on Due Diligence on your own investments.
Often the easiest place to start is to educate yourself on the asset that you are investing in.
If you are investing in a managed fund – read more about what assets the fund invests in. Find out what their average yearly return is. Have a look at their performance over time.
If you are looking at buying individual stocks – understand what sort of industry the company is in and what is their operating environment. Take a look at their historical financial report and their share performance.
If you are buying properties, view the property. Then do some research on what property prices are like in the area.
Always, always be doing your own research. And remember to ask around! Never invest in anything you don’t understand!
2nd of the Five D’s: Drip Feed your investments
Drip feeding your investments means to have a set amount (say $100 a week) going into your managed funds. This strategy is typically more applicable to managed funds or index funds than it is for individual shares.
Click here for a refresher on index funds
The idea is that by drip feeding your investments, you take advantage of the times when the market prices are low, and still make some headway when market prices are high. Drip feeding your investments is preferable to investing a lump sum on the market just before a market downturn and losing your funds overnight.
3rd of the Five D’s: Diversify
Diversification is the mantra of all Finance Academics everywhere (myself included).
Diversification helps reduce the overall risk profile of your investment.
Let’s say for example: Yoo has $5,000 to invest. She puts $1,000 in a high return investment fund, $2,000 in a medium return fund and $2,000 in a term deposit. Over 12 months, her high return investment dropped to $800, her medium fund grew to $2,100 and her term deposit grew to $2,050. In total she made a net loss of $50 (-$200+$100+$50). If she had put all her $5,000 into a high return investment, she would have lost a lot more.
Of course, if she had put all her investment in the high return fund and it went up, she would have stood to gain a lot more.
Diversifying is really easy – you generally want to diversify across different risk and asset classes. If you don’t have time to think about all the different assets you can invest in, consider investing in a diversified exchange traded fund (ETF) or index fund. It’s really easy!
4th of the Five D’s: Don’t Freak out if Markets go down
So here’s the thing about investing in shares (or other more volatile financial assets out there). They ARE going to go down at some point. And at some point after you make your initial investment, you will likely ‘lose’ money.
I say ‘lose’ here because it actually isn’t a total loss. In fact this is what is known as a ‘paper loss’ meaning that unless you decide to cash out your shares at a price below which you bought them – you haven’t lost any money. Over time, share markets have shown that overall gains will outweigh any sudden dips that your investment goes through in the early stages.
If you are a value based investor and have put money into a good performing company, chances are that in 10 years time, the company will still be around and you the shares you have invested in will be worth a lot more.
So don’t freak out when you see those red arrows. Don’t panic sell. You’re not a day trader – as a casual DIY investor, you’re in this for the long term.
Always think about your financial goals and the timeline you have set yourself to achieve them.
5th of the Five D’s: In Doubt? Talk to a Financial Adviser
You’ve done your research, drip fed your investments, diversified as much as you can and you’ve kept your cool in the face of market dips.
But you still have doubts. Best to talk to an expert then!
The Financial Market Authority regulates Financial Advice in this country so people can’t go around calling themselves ‘Financial Advisors’. This is to protect the general public from getting bad advice and getting scammed.
A good Financial Advisor can recommend or provide opinions on financial products. They can also help design financial plans which work for you based on your financial goals!
You can talk to your accountant about financial advice – but they won’t be able to provide the same level of detailed guidance that a fully qualified Financial Advisor would be able to. Most accountants (like me) would recommend that you speak to a personal financial planner, mortgage broker or insurance broker if you have more specific queries about those areas.
That’s all the Five D’s done!
So if you are looking to become a DIY investor, get your D(ucks) in order and learn the five D’s!