Common investment mistakes and how you can make more money
Investing has grown in popularity over the last few years, mainly because the banks offer little or no return on your cash anymore and rising house prices along with changes in the buy to let market, make property less attractive. However, an increase in the number of self-trading apps and the effects of stock market crashes – the most recent being 2020’s coronavirus crash – have prompted many, including younger generations, to explore other ways of saving and investing to beat the eroding powers of inflation.
While people used to associate investing with taking high risks and being dangerous, the stock market is still here today and is still making money despite the perceived dangers of tying your money up for the short, medium or long term. In fact, for many years people mainly invested to generate an income, generating an annual amount to live on from the dividends paid by shares. However, we have seen a big change in this and today, people invest mainly to make money and are losing the fear commonly associated with investing that’s perpetuated by the media.
So, whether you want someone else to manage your money for you or you feel like trying your hand at it, here are some common investment mistakes people often make, and how you can avoid them in order to make more money and achieve your goals.
Not understanding an investment
If you don’t understand something, it means you may have to rely on someone else or put the control in their hands. When it comes to your money, this can be risky. Too often, investors lean towards the ‘popular’ or latest “fund manager fad” just because it could be profitable. But when you have an understanding of a particular business or investment sector, you automatically have an advantage. Just because the technology sector is doing well right now, it does not mean that will carry on forever.
You should also seek to understand a few basic principles :
- How you feel about investing – are your expectations realistic?
- Time until you’ve reached your goal – how long do you have until you need your money?
- How much you can lose and still reach your goal – stock markets go down as well as up, can you still achieve your goals if you have a few down years?
Failing to diversify
Spreading the risk over several types of investment or sectors, reduces the negative impact of potential falls and volatility in the markets. Putting all your eggs in one basket is extremely risky. Diversification means holding investments that will react differently to the same market or economic event. Therefore, you will increase your odds of growth and success as it minimises the risk of loss to your overall portfolio and exposes you to more opportunities for return.
Diversifying too much
Not to confuse you but diversifying too much can be just as bad as not diversifying at all. Over diversification can reduce the quality of your investments as there are only so many quality companies out there. If you have too many assets in your portfolio, you also risk it becoming an index or tracker fund, which would actually be cheaper to buy than to create.
Paying too much in fees and charges
If you have an investment adviser, they should be your partner in achieving your investment goals and should not walk away with more money than you do. After all, you are not the investment vehicle. Taking the time to find the right adviser in terms of personality, ethos and goals, is far better than choosing quickly in order to get started. If you are already investing, ask yourself these questions:
- How much profit did I make on my investments last year?
- How much did I pay my adviser and/or investment manager?
- The answer should ALWAYS be that you made more money than your adviser and/or investment manager.
Investing in last year’s best performing funds or managers
Last year’s returns will not necessarily yield the best returns this year. However, following the herd is something that is very prominent in the investment world. Instead of looking to achieve the same wealth and status as successful investors, it is better to analyse past returns from the last ten years or more. If a fund or stock goes up 18% one year, you won’t know if it is a good, longer term investment. However, a fund or stock that has shown average annual returns of 8% over the last 30 years, may be a good sign that it is consistent. Many new investors have FOMO and are quite often the ones with the most to lose. Trying to get rich quick by investing money in funds or companies that performed well last year, is probably the quickest way to lose everything.
Lack of patience
Patience really is everything when it comes to the investment world. If you don’t have it, then it’s a quality you need to work on if you want to start investing. You need to remember that stocks are shares in particular businesses and often, those businesses operate at a much slower rate than we would like – particularly when it impacts growth.
Also, when the stock market starts to go down or there’s a correction, people panic and close their investments as they think they are going to lose the whole lot. However, it’s very rare to lose all the money you invest. You only ever lose money when you close an investment that’s worth less than what you initially invested.
When the share price of Apple fell by almost 20% in February and March of 2020, was that because Apple was no longer going to be a good company that would survive for many years to come? Or was it simply a market reaction to the Coronavirus news?
If you believed Apple would still be here a year later, you would have either lost no money at all, or gained a handsome profit if you were brave enough to invest at the lower prices.
Having the patience to wait for the right conditions for making an investment choice or decision, can be the simple difference between success and failure in your investing goal.
Not reviewing your investments regularly
It is important to check your investments regularly to ensure they are on track to meet your targets. If there are any negative changes in any market or sector you’re invested in, then your investments could be adversely affected. For long-term investments, you might wish to check once every three months while younger investors saving for retirement, might check annually. However, how often you check is up to you.
If you use an adviser or investment manager, you should expect them to agree to a review process and meet with you however many times a year they recommend and you feel comfortable with.
Not knowing the true performance of your investments
Too many people have no idea how their investments have actually performed. It’s no use looking at just a few of the stocks you have invested in, as that will not determine how your portfolio has performed overall. By reviewing individual performance as opposed to overall performance, you will be in a better position to make changes.
Also be careful what you are reading. 7IM’s AAP Adventurous C Acc fund has grown by 21.7% over one year! Sounds great, but look at the 3-year performance – it has grown by 21% – not so great.
It actually grew by 21.7% over 0 to 12 months, it lost 2.4% over 12 to 24 months and grew by 1.9% over 24 to 36 months.
So, is this likely to be a consistent performer or did it just get lucky over the last year?
Source: Trustnet/FE Analytics 27th Sept 2021.
Taking too much, too little or the wrong type of risk
While many people will say they are uncomfortable with risk, taking too little risk can be just as dangerous as too much. While too much risk might mean stocks could fall in the short term, having too much of your money in low-risk investments will hamper the level of growth you are able to achieve over a longer period of time. However, you should always understand your own attitude to risk. While some investors are comfortable taking calculated risks (if it means the chance of a higher returns on their money in the long run) there are some people who really don’t want to lose money under any circumstances.
It is important to note here, that no asset is truly risk free. Cash is least risky but delivers low returns, followed by bonds, shares, cryptocurrencies, gold and silver and then property. While risks include inflation risk, specific risk, market risk, currency risk and manager risk, one thing is for certain and that is, if you want a greater return on your investment, then you will have to accept higher risks.
Not investing at all
Of all the mistakes someone could make when it comes to investing, the biggest would be to not invest at all. It is unlikely your money will beat the rate of inflation if it remains in the bank, meaning that as time goes on, your cash loses its spending power. People still seem to associate investing with taking risks as they only seem to remember the crashes, coupled with the fact the media mainly reports on bad news.
Despite the misinformation that exists around the stock market, the reality is, it’s still making money and will continue to do so. Over the last 20 years, it has offered very good returns and while investing isn’t for everyone, it can be.
If you are thinking about investing or would like help managing your investments in the future, we would be delighted to discuss what we do and how we do it.
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