What DIY Investors Want To Know
There are 23 million do-it-yourself (DIY) investors in the UK and a common tool they use to monitor their investments is the portfolio report. These are often static paper or pdf reports, or webpages behind a user log-in, linked to via a monthly, quarterly or annual email or letter.
However with all the numbers and charts, these reports are presented in a manner that requires a lot of prior financial knowledge. We wanted to know if the portfolio reports actually provide enough information to help advise investors, support their research requirements and answer questions that a DIY investor may have.
Our analysis was based on publicly accessible portfolio tools and information from Morningstar, Financial Express (FE) Trustnet, Hargreaves Lansdown, Wealthfront, Personal Capital, Betterment, SigFig, Riskalyze, and Nutmeg. Although we are focused on the UK investor, we also looked at some US providers as they were still relevant. We were not solicited or remunerated for the selection of these providers. No investments were made on the platforms.
We evaluated the reports and dashboards to see which questions the providers were answering from an investor’s standpoint. We distilled our findings down into three questions:
- Am I on track for the future?
- What is the performance of my portfolio?
- What are my risks?
The next step in our research was to interview DIY investors. We validated our interviewees had the needs that were raised by the three key questions. However, we also found new questions that were not being addressed well by the reports. These new questions (below) are themed around the why and how a portfolio was performing and what would be the next steps based on that information:
- What should my future forecast be?
- Why is my portfolio performing this way?
- What should I do with my risk?
What should my future forecast be?
DIY investors want to ask “Am I on track for the future?”, but from the reports they are given, they found it challenging to find the right information to answer that question.
Creating the right forecast requires the system to know your goals. Most providers who included goal tracking only incorporated a single financial goal. However, investors will likely have more than one goal, with differing time spans:
I have a financial goal for a pension, a flat and to have extra income. It’s hard to quantify all of them as one goal. It’s complex.
How do you visualise multiple goals on the financial forecast? Thinking about the goals in parallel brings challenges in assessing the risk tolerance of each goal individually and all together in a holistic portfolio view. One way to approach the problem is to split each goal up into its own portfolio and track it separately. One of the challenges with separate portfolios is getting an aggregated overview while assessing the potential risk of including the same investment multiple times across the portfolios. Morningstar offers the ability to combine multiple portfolios but they don’t offer financial goal tracking. Betterment’s summary dashboard is a good example because it shows how each goal is performing as well as the aggregated view of the portfolio.
Capturing the right goals will also help the investor to make informed decisions about in which funds to put their money. The goals can help focus the search on the best combination of funds to achieve the goal targets.
Why is my portfolio performing this way?
Once a portfolio is established, most DIY investors confirm that they do not look at it until the portfolio report comes in. This may be monthly or quarterly, or even annually. The first thing most check in the report is if the portfolio has made or lost money in the previous period. In that moment, DIY investors “only have a gut reaction to the red or green figure; trying to understand the [performance] chart going up and down”. Across the platforms we assessed, the portfolio performance is usually shown in terms of a percentage yield return. Showing performance in terms of notional value in addition to a percentage would help quantify performance. We talk about money in our bank accounts in notional terms, why shouldn’t we talk about our gains and losses of our portfolio in the same way? FE Trustnet offers this functionality but the selection is hidden in a separate menu. SigFig offers a simpler implementation by displaying the toggle next to the chart itself.
(Source: FE Trustnet)
DIY investors would have even better context if the reports could explain the “why” of a portfolio’s performance. Highlighting major movers in a portfolio has been the typical method to explain portfolio performance. Portfolio reports have historically been paper-based and therefore information on the top holdings and top gainers and losers have been separated from the overall performance information.
This requires DIY investors to “connect the dots” between the different pieces of information to form an overall understanding. One way to improve this information is to plot the performance of the top holdings/gainers/losers against the overall portfolio. This kind of information can give a context of how much each area is contributing. News and analysis can also give insight to the “why” of the performance. News on specific holdings may not be feasible since it is not public information in real time and could be months old by the time it’s delivered. However, news and analysis of major events and trends on the benchmark and the portfolio’s sectors can be used to explain sections of time on the performance chart.
What should I do with my risk?
I believe that if you show people the problems and you show them the solutions they will be moved to act. – Bill Gates
Risk is a key factor in the performance of an investment portfolio, but how can risk be visualised? Risk is generally presented to the DIY investor in the form of a table filled with standard deviations, mean averages, and different volatility measures such as alpha, beta, and Sharpe ratio. A common question that came up in our interviews was, “What do I do with these risk numbers?” FE Trustnet tries to simplify this information into a singular value called the FE Risk Score. The FE Risk Score measures fund volatility against the FTSE 100. Scores over 100 means the fund is more volatile than the FTSE 100 and a score less than 100 means the fund is less volatile.
(Source: FE Trustnet)
This relative risk score raises questions like, “if I have a fund that has a risk score of 92 and another with 93, it is not clear why one is riskier and if any action is required?” Having the ability to apply “what if” scenarios on the portfolio and highlighting how the funds that may be affected could help address this issue. One way to visualise this is to use a “traffic light” system.
Risk is often related to returns on the portfolio. One way providers have visualised this relationship is through a sliding scale for risk and a potential return graph. We noticed that this presentation can hide the risk when only the positive return is shown without showing potential losses. This type of presentation can be dangerous because it encourages a DIY investor to get in a profit-chasing mindset without considering the associated negative risks. Riskalyze has a unique risk visualisation. Using prospect theory, Riskalyze represents the risk of a portfolio by displaying both the potential losses and gains together. This puts the decision about the expected return in a more realistic frame of mind for the investor. Riskalyze is aimed towards the advisor market but a similar presentation serves a purpose for the DIY investor.
In conclusion, existing portfolio reports leave the DIY investor with unanswered questions. Reports often confuse or worry DIY investors when providing too little or too confusing information with no recourse to explanation or self-education. Over-simplified graphs can produce too much confidence and falsely inflate risk comfort levels, whilst a lack of information is frustrating and leaves investors feeling in the dark. These reports were made by providers in the financial services industry, but providers must not forget the full spectrum of the audience of the report. Providers of reports should not passively hope or expect DIY investors to learn how to interpret reports over time but should seek to offer a sufficient service. Some providers are recognising gaps and trying to provide a service to fill them in (such as Fidelity’s People Like Me app) but according to our research, there is no provider who does everything well. Providers should be more aware of these gaps in their current offerings and take action now. If they wait, a newcomer or an existing competitor will take over market share by helping investors understand their investments in a simpler way.