When done well, investing can rejuvenate your finances and give you a nice little kitty for your biggest #goals (squad, couple, body etc) as well as extra money for the more prosaic stuff in life – like your eventual retirement.
But there are some common investment mistakes that could cost you dearly, and the damage will only get worse over time unless they’re corrected.
Thankfully, there are little investment hacks to help you avoid these so-called “share-tastrophies”. They include making a plan; refining it over time and sticking to it; frequently reviewing investments; and taking a long-term view. We talk you through the booby traps so you can sidestep them.
It has been a turbulent decade for financial markets, with boom followed by the bust of the financial crisis and the shaky recovery ever since. Last year has seen a fresh outbreak of volatility, which was heightened by the UK’s vote to ‘Brexit’ the EU. However, a good investor should hardly have noticed. That’s because they’re in it for the long-term and aren’t influenced by short-term fluctuations in the financial markets, or mass shifts in sentiment.
By following a simple set of rules and avoiding the common pitfalls, anyone can become a more successful investor in this way.
So what are those pitfalls? Here are five common mistakes that investors make:
Trying to time the market – don’t pretend that you’re the Wolf of Wall Street!
Over the past 20 years, the US stock market has produced annualised returns averaging 8.19% – yet private investors achieved returns of only 4.67%. They tended to ‘buy high’ and ‘sell low’ instead of the other way round, and miss out on strong days in the market through not being invested.
When you have sums to invest, don’t try and second-guess the market by committing it all at the same time to the same assets. If the unexpected happens, you could be caught with all your eggs in one basket. Ignore short-term fluctuations, focus on the long-term, and make sure you’re spreading your portfolio. If your investments had tracked the MSCI World Index between 2005 and 2015 you would be up 60%. But if you had managed to miss the best 10 days in those 10 years, you would be down 5%.
Following the herd – don’t be a sheep!
A recent survey of investment professionals highlighted the herd instinct, or ‘groupthink’, as the biggest challenge, says Colin McLean, co-founder of SVM Asset Management. ‘That drive for conformity can make us slow to reappraise information, to think originally or even to take sufficient portfolio risk. Crowds can give false comfort.’
You should always understand why you are holding an investment, Mr McLean says. ‘How often do analysts tell us that a CEO is respected, the company is quality, and they have conviction in the share as a long-term core holding based on fundamental analysis? It sounds good, but investors need to dig deeper.’
Rob Morgan, analyst at Charles Stanley, warns: ‘Most nightmarish investments I have seen have stemmed from supposedly ‘hot’ sectors that subsequently failed to live up to the hype. A sector that proclaims to be “the next big thing” is probably as big a red flag as you can get that your investment will come back to haunt you.’
Getting spooked by headlines
The stock market is only front page news or a TV sensation when it is crashing or hitting record highs. But headlines can be powerful and these are the danger points for investors, who may make the mistake getting market timing all wrong.
Duncan Carmichael-Jack, partner at Vestra Wealth, says: ‘Investors also need to bear in mind that during some periods, like the summer, company information on trading is much reduced and headlines instead focus on geo-politics. Sparse data can create false signals and there is limited new fundamental information to merit any change in strategy.’
Check back tomorrow for the 2nd part of our guide to the most common investing mistakes!
This piece was originally published on the UK investments portal for IG.com.