Deciding to invest is one of the best ways you can make sure you are financially stable in the future. If you’re keen to give it a go and manage your own investments, it pays to take into consideration the following common investing mistakes to avoid getting bad investment returns.
A successful investment portfolio is all about finding the best assets. Then skilfully combining them to create a diverse portfolio which works for you. Certain assets, like equities, may provide the best returns over a longer period of time. But that only matters at the time you want to access your capital. It’s wise to allocate stocks in all major sectors.
By putting all your eggs in one basket you will expose yourself to a higher level of risk.
Trying to second guess the markets
You may think that you are equipped with all the knowledge you need to ‘beat the market’. You may think that you will know the exact time to invest and divest to make you money work hard. But, you’re probably wrong. There have been numerous academic studies which show that, even in the hands of professional investors, there’s a high chance this strategy isn’t going to work.
In fact, on average 94% of a portfolios return can be put down to investment policy decision, not the timing of a selection. At the end of the day, it’s not market timing that counts, it’s time in the market.
Being too emotionally invested
The aim of buying stocks in a company is to make money. Should the fundamentals of the company that prompted you to invest in them change, you should consider selling your stock. The problem is, if the company has done well, it can be hard to break ties. You could have invested a lot of time watching the company grow, but if the fundamentals change, it could no longer be a good investment for you.
Further to this point…if you’re using money you can’t really afford to lose, your stress levels could soar. Stress often leads to poor decisions that otherwise wouldn’t have been made.
Failing to spread your bets
If you have previously invested just before a large fall in the markets, you may be disinclined to have another go. But remember, even skilled advisers may not always be able to predict a huge downturn, it’s just the way the markets operate.
A reliable approach would be to spread the timing of your bets. This will minimise the chance of you hitting an unlucky hurdle. A common method might be to split the investment into four chunks, for example. Then invest those chunks at regular stages over the following year or so. This phasing approach takes a lot of stress out of large investments as long as you stay rational and stick to your plan.
Jumping on the bandwagon
You will have heard the old adage, ‘fear and greed rule the market’. Well, it’s true. Don’t fall victim to fear or greed. When there is a downward turn, panic selling tends to take hold and the market bounce back is often missed.
The trouble is, the media only reports when there are big movements in the markets. That, along with tactically placed adverts from product providers, could encourage you to jump on an investment just because everyone else appears to be.
The most effective way to avoid this is the focus on the bigger picture. While returns may fluctuate over the short term, focussing on your long-term goals will prevent you from investing with your heart over your head. You may even benefit from the irrational decisions which others make.
Play to your strengths
The same can be said for investing in a ‘hot’ new start up. Following a trend doesn’t always pay off, especially if you don’t have a clue how the business works. Boom could quickly turn to bust.
Sticking to investing in businesses you have knowledge of will give you a natural advantage. You’re likely to have a better idea of whether the industry is booming or slowing down before other investors find out.
Unfortunately, investing isn’t likely to make you a million overnight. Expecting your portfolio to do exactly that is foolish. The key is to remember that investing is a marathon, not a sprint. A slow and steady approach is always going to come out on top and show you greater returns.
Keep your expectations realistic by using historical market returns as a guide. For example, in previous years has the investment gained percentages in single figures, or in the hundreds? Check out how competitors in the same industry are faring too.
Falling victim to a scam
Whichever way you turn, scammers are becoming increasingly common. Regrettably, the investing world is no exception. Scams are becoming increasingly sophisticated, targeting the vulnerable, the uninformed and the greedy.
Avoid being caught up in a scam by first checking out the company you think you are talking to. You should only ever take advice from regulated firms. Take down the firm’s registration number and check whether they are regulated by visiting the FCA website.
Secondly, does the offer seem too good to be true? If so, it probably is. If you’re still unsure it could help to talk the offer through with friends, family or colleagues to see what they make of it. Finally, the FCA has a warning list on their website so it would be worth checking on there too to see if it is a listed scam.
Failing to regularly review and rebalance your portfolio
Undertaking regular reviews of your portfolio is a must. If one investment is performing particularly well, great! But make sure it isn’t increasing your exposure to risk by losing its original balance.
When looking at rebalancing your portfolio remember to take into account transaction fees and any tax implications there may be.
The best way to avoid making investment mistakes
Before you begin investing, it helps to have a goal in mind. With something to aim for you are more likely to feel inspired to save as well as find the right allocation for your portfolio. Work out where you are in the investment life cycle and how much you need to invest to get there.
Once you have begun your venture keep an eye on your investments. If your income grows you may want to increase the amount you have invested. It’s important to review your investments at least once a year. It will ensure you are on track with your investment goals and your equity-to-fixed-income ratio is still correct.
You may find it beneficial to speak to an independent financial adviser (hello!). This is their bread and butter so guidance and advice from the right expert should help you avoid the majority of these mistakes and help you with a strategy that will help you reach your goals more quickly.
Allow for letting your hair down
It’s human nature to want to be a little spontaneous sometimes. You may be tempted to invest in a brand-new company which you find exciting. It wouldn’t make sense to do this as part of your long-term plan but that doesn’t mean you can’t have a go. If you set aside a sum of money which you are allowed to spend on a whim.
- Limit the amount to a maximum of 5% of your total investment money.
- Do not use your retirement money. Only use disposable income.
- Use a reputable financial firm
- Be prepared to lose 100%.
Mistakes will happen
Don’t be too hard on yourself if you do make an investment mistake. They are all part of the journey. Even the most successful investors will have had losses in their time, but they will have learned from them. As long as you can do the same, and do not make any decisions which could threaten your future financial stability, you will become a better investor in the long run.
Seek professional advice
These pointers for avoiding common mistakes in investing will help you along your way to successfully managing your own investments. If you don’t feel comfortable or have the time to manage them yourself speak to an independent financial adviser.
The value of investments can fall as well as rise. You may not get back what you invest.