Investment Advice: This Is When You Can Do Without It

With interest rates at rock bottom and inflation creeping up, many are turning increasingly to the stock market for higher returns.

The next decision is harder: whether to handle your own investments or have a professional take care of them for you.

On the one hand, you could become one of the many who presume they can manage on their own and either lose money or don’t realise how badly they are doing.

Conversely, you could be perfectly capable of investing for yourself – but spend years unnecessarily paying an adviser to do it for you.

Investor, know thyself

Your success is likely to depend on several factors, including your temperament, your knowledge (and if you don’t have any, your willingness to find it) and your time.

Knowing what a fund is, how to research and compare them, and how to buy them, are some basic pieces of knowledge required.

Perhaps surprisingly, not all professional advisers think their services are indispensable.

Jonothan McColgan, an adviser at Combined Financial Strategies, said: “The reality is that investing is a skill that can be learned. It would be arrogant of us to think otherwise. The main problem is time. Do you really have the time to do this properly?”

DIY investors also need a competent understanding of risk, a well-diversified portfolio and an ability to manage these factors.

A typical mistake would be for someone new to investing to buy units in several popular funds containing company names they recognise. By doing so they may be taking risk by concentrating too much money in too few shares.

On the behavioural side, the most important question is: how you would react if stock markets fell – say by 50pc?

Many investors claim they would not sell in such a scenario, but history has shown repeatedly that we do. First comes the panic and then, in the later phases of a slump, “despair”.

At this point, even though they will lose much of their money, investors still sell because all hope of a recovery is abandoned.

Similarly, how you react to a fund performing poorly over the short term is important.

Mr McColgan explained that no investment can do well all the time, but DIY investors need to distinguish between good funds doing badly because the economic cycle is against them, and those that are “just bad funds”.

Your reason for investing can be another red flag. If you have decided to start because an acquaintance has just doubled their money, think again. Long time-horizons and patience are required.

Understand the basics

However, investing doesn’t have to be complicated. Pete Matthew, managing director of Jacksons Wealth Management, said that in his view “the vast majority” of people don’t need “challenging portfolios made up of multiple holdings”.

Instead, he believes most investors would be well served by one or two good funds that invest across shares, property and bonds – known as “multi-asset” funds.

“If investors want to have fun with stocks or specialist sectors, that should be no more than 10pc of their portfolio,” he added.

A simple strategy such as this is something many financially savvy individuals are capable of learning.

Mr Matthew said: “I often handle clients’ tax and financial planning, but they go off and do their own investing. Some clients don’t need to pay me to babysit a portfolio for them.”

Philippa Gee, of Philippa Gee Wealth Management, agreed. She said she regularly turns down clients who want their investments managed if they already have the time and commitment to do it for themselves.

“They will usually have detailed lists of investments, use a good broker, understand charges and enjoy the research,” she said.

If you do not have a substantial amount to invest, the decision may be made for you. Below £50,000, many advisers won’t take you on, or the fees are too high to justify.

Our Telegraph 25 list of preferred funds is a good place to start your research

Our tables of the cheapest Isa and Sipp providers can help you find the best investment shop for your portfolio size.

Picking the right adviser

If you are considering the advised route, this is key.

Mr Matthew said: “There are an awful lot of advisers who justify their existence as investment managers when they are not – they won’t add value.”

He explained that a good adviser should always justify their costs, and conduct an annual review. If an adviser handling all of your financial affairs is using an investment strategy as their main justification, that is a potential red flag.

The benefits of advice won’t work out to an hourly rate, Mr Matthew said. An adviser could save a client £50,000 through tax planning one year, but not the next. Part of their role is helping clients make decisions too, which is harder to quantify.

Go to telegraph.co.uk/go/ifa for details on how you can check an adviser’s qualifications, and what to ask them.