While investing isn’t brain surgery, you do need some level of knowledge and experience to make consistently good decisions.
Because let’s face it, making more is more enjoyable than losing it.
To help you on your path to success as an investor, we’ve outlined some of the most common and expensive investment mistakes, and how to avoid them.
1. Allowing emotion in influence your decision:
When your stomach starts to churn because your portfolio has dropped by 20%, you may feel compelled to make changes.
All investors will at some point face setbacks, especially during a market crisis. But as we’ve seen from history, the market can eventually recover with time.
In these situations, its important to focus on the bigger picture – if you sell into the fear of the market dropping, you will miss out on its recovery.
If in doubt, consider reviewing your long-term goals. If you find that the reasoning behind your investment was sound, stick with it, as the market is likely to pick back up.
If you need proof of the wisdom of patience, look at 2020. COVID smacked markets around in February and March – but the markets spent the rest of the year recovering. To take just one example – as of 16th February 2021, the one-year return from the US Stockmarket (the S&P) – is over 16%.
2. Failing to diversify your portfolio:
Investing your money across multiple different asset classes (shares, property, bonds, cash) can help to lower your investment risk.
This strategy (known as diversification) works because different investment types perform well at different times so if one area of your portfolio falls, another may be rising. Having a variety of investments helps balance out your overall risk.
It also means you have a diversity of types of return. Instead of relying on all your investment performance to come in the form of cash returns, rents, dividends from shares or capital gains from property and shares, you can enjoy a mix of all of them.
This is especially important for retirees who may not have the same investment time frame as someone in their 30’s who’s more easily able to withstand short-term market volatility, shifting all your money into low-risk asses could be costly – your portfolio may be unable to outpace inflation. It’s therefore important to have some exposure to higher risk, higher returning assets, such as shares and property.
Just be carful not to over diversify as this too may affect the performance of your portfolio. Your diversification needs to be strategic – not scattergun. A financial advisor can help structure your diversification to match your own circumstances such as – performance goals, risk management, age, health etc.
3. Not setting long-term financial goals:
There’s a big difference between playing a game of roulette and investing – having a strategy in place is one of them.
Too many investors focus on the latest investment fad, rather than creating an investment portfolio that has the highest probability of achieving their long-term goals.
Understanding what your long-term financial goals are, will provide the direction on how to set up your investment portfolio. This includes the types of investments you choose to buy into, how long you need to generate those returns and how much risk you’re willing to take on.
You may want to speak to a financial advisor as they can review your investments to assess where you currently stand and determine if your investment portfolio needs adjusting to meet your goals.
4. Trying to time the market:
Timing the market is extremely difficult – even institutional investors often fail at.
Most successful investors give their assets a change to perform over the years, not days. They also adjust how their money is allocated quarterly or annually rather than in response to events – where reactions can be emotional rather than logical.
Continuously modifying your investments approach can not only reduce returns through more transaction fees, but it can also result in more risk. One of the reasons most investors underperform the market is a consequence of them buying when prices are rising and selling when prices are falling – intuitive but often the opposite of a good strategy.
So, you may be better off contributing consistently to your investment portfolio rather than truing to time your market moves.
5. Not focusing on your asset allocation:
Often the variation of return you’ll see in your portfolio is due to how your assets are allocated, rather than the individual performance of one company’s shares.
But most people focus their time and energy in trying to pick out individual companies to invest in, rather than looking at how their portfolio is set up.
As you become a more sophisticated investor, you may want to consider investing in lowly-correlated markets like gold, currencies, commodities and other asset classes hat do not perform in the same way at the same time, as opposed to adding more assets with a similar risk profile. You then need to determine what percentage of your portfolio should be allocated to those assets.
6. Failing to contribute regularly to your portfolio:
True investing relies on contributing regular amounts at regular intervals, in both rising and falling markets.
You can’t control what the market will do, but you can save money. Continually investing capital over time can have as much influence on building your wealth as the return from your investments. It will also help increase the probability of reaching your financial goals.
Mistakes are part of the investing process but knowing what they are, and how to avoid them, will help you on your road to success – and the more enjoyable lifestyle that comes with it.
Need more investment advice? Call FinCare on 02 9542 4655 or email email@example.com today!
The information provided in this article does not constitute specific advice. For further information, you should contact your professional adviser.