DIY investing in Australia has taken off thanks largely to low-cost brokerage platforms, easy access to market info and an increasing DIY culture of wealth management. On the surface, managing your investments yourself seems like a no-brainer way to save on advisory fees. As it turns out, that’s not the whole story. Long-term performance data suggests that the cost of DIY investing can stretch way beyond the visible costs.
The Behaviour Gap: Just How Much Does DIY Cost?
The highest hidden cost of self-managed investing is probably the decisions you make when you’re under pressure or feeling emotional. Plenty of studies have shown that investors tend to buy at the top of the market and sell at the bottom. That’s obviously not the best way to make money. There’s a study by DALBAR about investor behaviour that found that in 2024 the average equity investor did pretty badly compared to the S&P 500. The difference was over 8 percentage points. It’s not just that one year. This has been going on for decades. This has some pretty big implications for Australians investing in the stock market. Say you’ve got a portfolio worth $250,000 growing at an 8% rate each year. You’d end up with around $1.17 million after 20 years. If you make some silly decisions and bring your annual returns down to 6%, you’d only have around $802,000 at the end of it. That’s a difference of over $360,000, all because you let your emotions get the better of you.
Asset Allocation is Where the Real Magic Happens
DIY investors often get really hung up on picking individual shares. The research says that’s not where the real money is made. Vanguard Australia reckons that about 90% of the variation in returns on a balanced portfolio comes from the way the money is allocated, not from picking the right stocks. This is a bit of a blow to all those investors who think the key to success is just picking a few winning stocks.
When You Should Really Be Paying Attention to the Net Value of Your Advice?
A lot of the debate around financial advice seems to centre on the cost of the advice. The long-term view paints a lot more of a picture. The Vanguard research shows that you can expect to get about an extra 3% per year through the discipline of having good advice, if that is via better decisions on investments, getting the most out of your money through tax advice, or just being a bit more disciplined in how you go about things. It’s not just the odd little bit here and there either. An example of this is a 400k portfolio that is earning 7% per year. That would end up being around 1.55 million after 20 years. If you can get an extra 3% per year you can end up with about 2.69 million. Now the actual results will vary, but that shows you how a little improvement here and there can really make a big difference over time. Importantly, most of this gain comes not from picking winners in the market, but from good, solid financial planning provided by a financial advisor Melbourne.
Tax Efficiency Can Push Savings Ahead of Fee Avoidance
When thinking about investment returns, it’s not all about how well things perform. Also think about what happens to the money after tax. Loads of DIY investors really have no idea how complicated the tax situation is here in Australia, including how capital gains tax works, what you can do with your superannuation, franking credits, and how to pick the right structures. Even small improvements to taxes can really start to add up. An example of this is reducing your tax drag by 1% on a 500k portfolio. Over 25 years that can save you more than AUD 330k, assuming an 8% annual return. This is exactly what the professionals are at, working out how to make the most of your investments by arranging things so you pay the least amount of tax, and coming up with strategies to draw on your super so that you get the best out of it. It’s not always a tidy sum at the end of the year. The benefits do grow and grow as your portfolio gets bigger.
Keeping Your Finances Safe from Permanent Setback
Loads of DIY investors think that risk management means avoiding any losses in the market at all costs. The truth is though, effective risk management is all about making sure you don’t make some irreversible financial mistake. The ASIC has done some research and found that nearly one in ten investors has lost money that they just cannot afford to lose. That just goes to show the ongoing problems people have in understanding how much risk they are taking on.
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