The worrying dangers of DIY investing: How working with a financial expert could benefit your divorcing clients

DIY investing is filled with potential dangers, especially for your divorcing clients who may be more vulnerable. Find out how a financial expert can help.

Advances in technology and years of economic uncertainty in the UK have led to a significant increase in the number of “DIY” investors.

According to Forbes (16 March 2023), in the 12 months following the first coronavirus-enforced lockdown in March 2020, a staggering 950,000 investment accounts were opened by investors choosing to go it alone.

What’s more, as market confidence begins to grow after an extensive period of uncertainty, research published by This is Money (22 August 2024), suggests that a third of DIY investors are planning to make higher-risk investments in the next three months.

Yet, forging ahead without seeking professional financial advice could open the door to various common investment mistakes – which your divorcing clients may be especially vulnerable to making.

Read on to discover why. Then, learn about three worrying DIY investing dangers and how working with a financial expert could help your divorcing clients avoid these pitfalls.

Your divorcing clients may be more vulnerable to certain DIY investment dangers

Anyone could make costly investment mistakes if they lack sufficient knowledge and support.

However, your divorcing clients could be more exposed to the dangers of DIY investing due to several factors, including:

• A potentially higher risk of making investment decisions based on emotions rather than logic
• Limited understanding of investing if their ex-spouse previously managed a shared portfolio
• A tendency to make rushed decisions due to financial concerns surrounding their divorce
• Difficulty setting clear goals due to a lack of confidence and certainty about their future.

Going through a divorce can be a stressful and bewildering time for some people. So, your divorcing clients may benefit from the reassurance and guidance of a financial expert who can help them align their investment strategy with their new situation and aspirations.

3 investment dangers to avoid

DIY investors may be more exposed to certain investment dangers, including the following.

1. Not balancing risk effectively

Some of your divorcing clients may feel apprehensive about the potential risk involved in investing as they adjust to their new financial situation.

Indeed, balancing risk in a portfolio is a crucial part of investing. The level of risk your clients adopt is often linked to the level of return they’ll receive. Being too risk-averse could limit potential returns. On the other hand, taking on excessive risk could result in damaging losses.

Unfortunately, DIY investors may find it harder to gauge both their own tolerance for risk and the level of risk involved in different types of investments. As a result, investing without seeking financial advice could hamper your clients’ progress towards their long-term goals.

The key to balancing risk effectively is to set clearly defined goals and build an investment strategy around them. In other words, your clients need only take on a level of risk in line with the return they need to achieve their objectives.

2. Failing to diversify

DIY investors may be tempted to stick with what they know by focusing their investments on a familiar asset class, sector, or geographical region.

However, by putting all their eggs in one basket, your clients may expose their portfolios to a higher level of risk.

Imagine that your clients only invest in pharmaceutical funds. If that sector experiences a downfall, the value of their entire portfolio could fall.

Instead, investing in a range of assets could allow your clients to protect their portfolios during periods of volatility. If one investment drops in value, another may perform well to counteract the loss.

As an example, data published by JP Morgan (1 October 2024), shows that, in 2020, the UK FTSE All-Share index fell by 9.8%. So, had your clients invested all their money in the UK stock market, they’d have likely seen the value of their portfolio fall.

In contrast, had your clients diversified their portfolio by investing across different geographical regions, their losses in the UK might have been offset by gains elsewhere. Indeed, shares in the US S&P 500 index rose by 18.4% in the same year, while shares in the Asia ex-Japan index rose by more than 25%.

3. Paying unnecessary taxes

If your clients invest without seeking financial advice, they could end up paying more tax than they need to on their returns.

Indeed, it might be difficult to stay abreast of all the relevant tax rules as a DIY investor.

For example, in April 2024, the Dividend Allowance was reduced to just £500. So, your clients may be more likely to pay tax on their dividends than in previous years.

Additionally, your clients could face a Capital Gains Tax bill if they dispose of certain investments.

Such tax liabilities could quickly erode any returns generated.

Fortunately, a financial expert can help your clients plan the most tax-efficient way to manage their investment portfolio. This could help them generate the wealth they need to ensure their financial security after divorce.

The benefits of working with a financial expert to build an investment portfolio following divorce

DIY investing can be a lonely and uncertain journey. Without the objectivity and knowledge that a financial expert can offer, your divorcing clients may not have a well-thought-out strategy that helps them progress towards their goals. What’s more, they might be paying unnecessary taxes that could eat into their returns.

As a financial expert who specialises in supporting divorcing clients, I can work with your clients to help them build a strong investment portfolio by:

• Acting as an objective sounding board and reducing reliance on emotional decision-making
• Helping them identify clear investment goals that align with their broader financial plan
• Creating an investment strategy that facilitates progress towards their goals
• Supporting them to move beyond their comfort zone and diversify their investments
• Advising them on how to keep their investments as tax-efficient as possible.

So, working with me could allow your clients to avoid some of the most worrying DIY investing dangers, and enable them to build a portfolio that supports their financial security during their divorce and beyond.

Get in touch

If you have divorcing clients who could benefit from working with a financial expert when building their investment portfolio, they can find me at lottie@truefinancialdesign.co.uk or by calling 07824 554288.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

The Financial Conduct Authority does not regulate tax planning.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. 

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.