11 Common Investment Mistakes
Investing might seem simple…buy low, sell high right?
You hear stories of investors buying shares in an emerging start-up and ending up a millionaire. It sounds easy enough, all you need to do is find the new Amazon or Facebook and you’re laughing. However, you’ve probably got more of a chance of winning the lottery…and that golden investment ticket? Well let us know when you find it and I’ll prepare my hat for eating.
In reality, investing is a road riddled with potholes and cracks and successfully navigating it isn’t as easy as it might seem. There are only two actual ways through which you can lose money on an investment:
The investment goes bust.
You sell an investment for less than you paid for it.
However, there are myriad mistakes that inexperienced or reckless investors frequently make which can lead to one of these two reasons for losing money. We’ve picked 10 of these mistakes that we believe are some of the most common and explain why they should be avoided for sensible investing.
1. Don’t be a fish.
Clickbait is the lure being dangled in front of you waiting for an inexperienced investor to bite. The long term return on the FTSE is 8% and on the US market is 10% (in dollars); active managers can turn that up to around 10-12% including income.
Sucker products are almost always labelled with a high % figure – ‘Get 8% guaranteed’, ‘12% yields on property’.
In the UK investors get taken for £1.2bn a year, losing an average of £29,000 each.
2. Understanding investments
Its essential not to invest in investments you don’t fully understand and to ensure that you’ve got to grips with how the investment itself makes money – hope is great, but it’s a pretty flimsy investment strategy and one you would refuse to accept from a professional, so don’t kid yourself.
The latest “in-vogue” industry might seem a hot thing, but it might not be something you know anything about. Instead, look for investments in fields that match your areas of knowledge as you will better be able to predict developments in the industry giving you a natural advantage.
It’s also important to assess what you want from an investment. How will it grow your money or provide income? How does it relate to your investment plan? In what ways does it match your aims? These are all important questions that should be answered before committing to an investment.
3. Patience is a virtue, don’t take short cuts with your money.
Everyone wants a quick pay-out, but this shouldn’t be your motive behind investing. It’s likely that it will have taken lots of work, time and patience to generate the money you want to invest, so don’t blow it looking for a shortcut to the big bucks. Just like everything, careful planning and consideration makes for good investing.
Investors are constantly in search of a short cut or gimmick that will provide instant success with minimum effort. Consequently, they initiate a feeding frenzy for every new, product and service that the Institutions produce. Their portfolios become a hodgepodge of Mutual Funds, iShares, Index Funds, Partnerships, Penny Stocks, Hedge Funds, Funds of Funds, Commodities, Options, etc.
The finance market employs teams of marketeers to keep the market simmering – don’t fall into that pot.
Think of this – if something was really that good, that certain, why would the giant investors like Goldman Sachs, JP Morgan etc ever let you and Joe Consumer have any of it, and why would they need to advertise?
4. The importance of diversification
The volatility of investments is a scary and very real issue and as a result a diverse portfolio is a must to ensure that any hiccups don’t cause too much damage to your portfolio. A rule of thumb is not to allocate more that 10% to any single investment and should be stuck to irrelevant of how appealing some stocks might be. If such a certain widows & orphans bank like the Co-op can go pop, then anyone can – and it will happen again.
5. Invest with your head, not with your heart
Money can do strange things to people. The fear of losing money or promise of a windfall can make people impulsive and reckless. Any investment made should be done so with a clear head and properly rationalised and should be ruled by your head not your heart. Remember, making money from investing takes time so take time on it. Invest for a purpose, don’t play with your money.
6. Never gamble
You might get a win on the Grand National every year and think that investing will be second nature for you. Wrong. There are so many variables when it comes to investing and it should never be treated as a form of gambling. This is particularly true when it comes to predicting market timing which is notoriously hard to do. In many ways the market is like sailing in a gale. You need to work with the conditions not against them to get anywhere.
7. Expectations, expectations, expectations.
It’s essential to manage your expectations when it comes to investing. The market can be unpredictable and volatile so never take anything as a given. Investing should never be seen as a get rich quick either. How do you expect to make money from the investment? What do you think will make it go up in value?
Investing is owning a company or a part of a company. The prices are always cyclical, they will always go up and down – that’s normal. If your home fell in value, you’d never consider that a reason to sell – it’s the same with investments.
Plus, volatility is not risk, it’s just normal volatility. Volatility won’t lose you money, your reaction to it will – don’t react, don’t be irrational.
8. Buy high and sell low
I know what you are saying, you don’t need to explain to me that this is a bad idea. If there’s a guaranteed way to lose money, this is it. But in reality, the unpredictability of the market means that it’s a bit trickier than it sounds. It’s easy to see a stock that’s doing well and buy it as recent history has shown it’s on the way up. This is a common mistake as what you are actually doing is buying high. This is the same with falling stocks which panic investors into selling before it falls too much. This is selling low.
This is never a sustainable way to invest and can result in significant losses. DON’T DO IT!
9. Review, review, review
When putting together an investment portfolio, you need to have even a simple strategy, a simple idea of what you expect. However, the world can change with the drop of a hat so what might have been a perfect strategy for you at the start might not be 6 or 12 months down the line. This is why it’s essential to regularly review your investments and portfolio to account for any life changes or changes to the market that might mean your requirements change.
10. Holistic investing
When you see one of your investments doing well, it’s easy to ignore the rest of your portfolio. Your position should never be judged on the success of your best performing investment nor your worst. It’s essential to view your portfolio holistically as, with a well-diversified investment strategy, it’s about the collective, not the individual.
11. Not all advice is good advice, not all advice is even advice.
Everyone’s done it. A slight pain in your arm is followed by a cursory google of the symptoms and all of a sudden you’re reading you have 10 minutes to live! You should know by now that it’s rarely a good idea to turn to the internet for an ailment and it should be exactly the same when investing your money.
What training have you done on investing – does reading the papers or websites really count? Really? The biggest source of financial advice in the UK is friends and family – it’s your money, how serious are you about what happens to it?
Remember this: in the stock market you can only buy shares from someone else – so who’s getting the good deal here, you buying the shares or the other person selling them?