Don’t laugh, but here’s why you’re a better investor than the experts…

Even if you’ve never invested before, the chances are you could be very good at it. Don’t believe me? That may be even greater proof that you would excel.

Investing can seem like an intimidating business, encrusted as it is with jargon, and bloated with experts and professionals making a fortune from it. 

But there is no reason to be put off: a nimble, beginner investor even has some advantages over the professionals.

Here are five reasons why you may be better than the experts.

Starting from scratch: Even if you’ve never invested before, the chances are you could be very good at it

1. Sitting tight can work very well

Sometimes the best investment strategy is to sit tight and see what happens. After all, it’s very hard to predict how markets will fluctuate in the short term and investing is for the long term.

Doing nothing and not reacting to market movements can be much easier if you’re not overly confident – a lack of conviction that you know which way markets will go next or how to respond can lead to inertia.

As our confidence grows, it gets harder not to meddle. We start to think that we know better than others and so start to change our portfolios based on our predictions – misguided or not. 

And making quick changes will be unlikely to produce a good outcome on balance.

Jessica Exton, behavioural scientist at financial services group ING, says: ‘We naturally tend to be over-confident in our abilities, which can result in making frequent changes to our investment strategy. 

‘It has also been found to encourage us to take on higher levels of investment risk, if we believe we can predict what will happen in the market more accurately than others.

‘Both these tendencies can lead to lower investment performance in the long run. Overconfidence has also been found to increase with investing experience and education. 

‘This suggests that those without a lot of experience in the stock market may be less likely to frequently change their strategy and avoid over-reacting to short-term market fluctuations.’

Sometimes the best investment strategy is to sit tight and see what happens, Rachel says

Sometimes the best investment strategy is to sit tight and see what happens, Rachel says

A study by professors Brad Barber and Terrance Odean at the University of California laid bare the cost of overconfidence leading to overtrading. 

James Norton, senior investment planner at financial giant Vanguard, explains: ‘Over a six-year period, Barber and Odean carried out detailed research on more than 78,000 US brokerage accounts, analysing over three million trades. 

‘Specifically, they wanted to understand how investment returns differed for the 20 per cent of investors who traded the most compared to the 20 per cent who traded the least.

‘The results were shocking. The confident, frequent traders achieved returns of 11.4 per cent a year compared to 18.5 per cent for the less active traders. 

‘To put this into perspective, £1,000 invested at the beginning of the period would have grown to more than £2,700 after six years for the active traders, compared to more than £4,000 for the infrequent traders.

‘Interestingly, the professors also found that women traded less frequently than men and consequently had better returns.’

2. Why keeping it simple will help

Fund managers need to attract investors’ money and generate fees with theories, investment names and performance figures that make them stand apart. But many will not do any better than cheap, passive funds that are not actively managed. 

Norton says: ‘As an individual investor, you have the licence to keep it simple. A fund manager needs to get assets for their fund or they don’t have a job. It’s human nature that we tend to like things – especially in investing – that sound more complicated and think they will be better.

‘There have been trends for particular words to appear in the names of funds: ‘alpha’, ‘plus’, ‘special’. They make you feel like you’ve found a good fund.

‘Though index or passive funds don’t have jazzy names, they tend to beat most actively managed funds. You can have a globally diversified portfolio of stocks and bonds in two passive funds – and for around 0.2 per cent a year.’

3. You are investing for the long term

Individuals invest for long-term goals – retirement, a deposit for a home, or to gain financial independence. With long-term horizons of at least five years and often decades, we can afford to ride out the highs and the lows.

A spell of losses is not the end of the world when you have sufficient time for your portfolio to recover.

While most fund managers say they, too, invest for the long-term, in reality many are going to come under pressure if they have periods of poor performance.

Thinking practically, a fund won’t attract new investment and may see investors withdraw funds if it stops making money for them.

A fund manager may have a benchmark or target that they are tasked with outperforming; they may be under pressure to attract new funds by coming up with an interesting-sounding proposition; or to show good performance every quarter which can curb their ability to think long term. 

This pressure may force professionals to make portfolio changes or attempt to improve short-term performance, missing out on the opportunity to invest in a way that will harvest rewards longer term.

After all, some firms take time to grow and start producing good profits. Investors in these sometimes need to play the long game.

Lee Wild, head of equity strategy at wealth platform Interactive Investor, says: ‘As an individual, if your investments return say 5 per cent above inflation, you may be happy. If you’re a professional, this does not look like such a good outcome if your benchmark has returned an excess of 6 per cent.’

If you invest in a stocks and shares Isa, there is no tax to pay on any gains that you make while you're investing

If you invest in a stocks and shares Isa, there is no tax to pay on any gains that you make while you’re investing

4. No need to worry about tax

As a beginner investor, it’s unlikely you’ll have to worry about filing tax returns, keeping track of capital gains and messing around with endless paperwork.

If you invest in a stocks and shares Isa, there is no tax to pay on any gains that you make while you’re investing or when you come to spend them.

You can invest up to £20,000 each year in a stocks and shares Isa and don’t have to fill in a tax return or alert Revenue & Customs.

Later, should you start to breach this amount, there may be tax implications and reliefs to be aware of, which makes things trickier. But your Isa allowance alone could make you into an Isa millionaire in just 17 years, assuming returns of 5 per cent a year.

5. You’ll be more open minded

Diving into the theories and technicalities of investing can be useful, and of course it’s good to understand what you are investing in. But there is an argument that this could lead to more narrow thinking if you’re not careful.

James Anderson, manager of Scottish Mortgage, the country’s largest investment trust, believes investors need to hear a variety of views, and yet this is often not what professionals do. 

Investing professionals tend to study for the same qualifications, learning the same theories and reading the same materials – leading to an over-dependence on certain ideas.

For Anderson, it’s the Chartered Financial Analyst course that especially distorts views, with its attachment to value investing – buying shares in firms that look cheap.

He says: ‘We don’t take the view that individual investors are worse investors than institutional ones.

‘I find by and large that individual investors are both open to more different investment approaches and also are more long term than the bulk of our institutional clients.’

So, there’s no need to be intimidated – put your lack of confidence to good use – and show the professionals how investing is done.

Rachel Rickard Straus is editor of the magazine Moneywise

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