The Danger of Financial DIY

Based on NASDALs latest annual report the average principal dentist Net Profits are £105,914 (March 2017) which based on a typical working week works out at £60 per hour. Dentists' time is valuable, so why would you waste it doing something that adds no value and in fact detracts value from your net worth; like managing your own investments? Let's pretend you had an equity portfolio of £100,000 which you manage yourself. Let’s also assume your portfolio outperforms a comparable index by 2% a year, every year. In the first year the market rises 10% and your portfolio rises 12% so you have added an additional £2,000 to your net worth.

If you devoted an hour a week to the tasks over a year, that means you made £40 an hour for each hour devoted to your portfolio, which is about £20 per hour less than you'd make as a dentist.

Implicit in these assumptions are three crucial factors.
  1. You always beat the market
  2. You do it on a net basis after dealing costs
  3. Your return is achieved at no higher risk than a tracker fund

If you only achieve 1% more than the market, the one hour a week drops to a net value of only £20 per hour. More worrying is the risk incurred. Higher returns, especially from smaller portfolios, are usually generated by taking more risk. In a down year that means your losses are likely to be worse than a tracker fund, and your hourly rate is likely to be negative. Even with the use of the internet and automatic dealing, an hour a week is not much time to research stocks, place the trades and update your records. An even bigger assumption is that an hour a week, or even two, is all that is needed to beat the market. Most professional managers work considerably more than the normal working week of 40 hours, and only half of those manage to beat the index in any one year and a lot less over multiple years. Another issue is that it's arguably not the best idea to hold all your assets in one asset class, UK equities. A portfolio of that size should at least have international exposure and some fixed income. As a DIY investor, would you be able to manage those securities as well in your allotted hour or two a week? On these numbers it looks as if most dentists have probably got better uses of their time than spending it hunched over their PC for a few hours a week!