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The top 6 investment mistakes..........
As you know, investing is all about risk and reward and whilst there is no such thing as a completely risk-free investment, we can certainly decrease our risks and increase our chance of reward by avoiding certain pitfalls.
1. Set your goals
This is your clear starting point. Why are you investing? What are you investing for? What’s your timescale? Do you have a buffer? What are your limits?
It may sound obvious, but like most things in life, if you have a goal you have something to shoot for and to measure against. That way you can judge your progress over a set timescale. Simplistically, if you’re after short term gains and quicker returns, your strategy will most likely involve greater risk; for lower risk and a longer term horizon, diversify and consider some uncorrelated products.
2. Eggs and baskets
A common mistake is to narrow your field too much, often because we focus on what we know or have heard about or occasionally due to somewhat myopic financial advice (after all financial advisers are only human and will sometimes ply the path of least resistance).
The stock market is the ‘obvious’ place to invest, but if your horizon is short, you could lose and lose hard; many people have. The key then is to watch out for correlations and to diversify your portfolio.
It’s also a mistake to think that your portfolio is properly diversified just because you’ve chosen stocks across differing sectors – they may be related or all affected by interest rate fluctuations for instance. Consider uncorrelated assets and also think beyond your domestic market. This way you maximise your opportunities for building a strong, balanced portfolio over time.
3. Costs and expenses
Beware charges, fees, high expense ratios, hidden costs (insurance), transaction costs…
Just make sure you are aware and that these are transparent. For instance, in a recent academic study (Spaenjers and Dimson, 2009), the conclusion was that equities had a 5% annualised return, compared to 3% for rare stamps (and 1% for gold). However, when the low costs of rare stamp investments (generally a % of any profit made, so only relevant at exit) were compared to the high and frequent transaction costs of equities, there was little difference between the two.
It’s a sobering fact that investor returns are often largely undermined by the fees they pay.
Your wealth manager or investment choice should have profit incentives where the goals align closely with your own.
4. Be patient
We would all love a quick return, but the key trait needed for successful investment (as well as a degree of common sense) is patience.
Too many investors follow short-term volatility rather than focusing on the long term return of achieving their goals. That can also occasionally lead them to take a chance on a ‘get rich quick scheme,’ which unsurprisingly, 9 times out of 10, is not all it’s cracked up to be, or laden with fees.
Do beware, however, of playing too conservative and, for instance, loading too much into bonds and gilts which, though secure, often give a yield not much better than inflation. Again, it’s a balance, but probably overall, like the hare and the tortoise of Aesop’s fable, slow and steady wins the race.
5. Too much knowledge / not enough knowledge
Be wary of listening to the tips of friends, however well-meaning!
Bluntly, if ‘insight’ is widely known, then that’s probably been taken into account by the markets. And please don’t base your investment decisions based on what you read in Wikipedia (it happens!).
It comes back to diversification again to spread your risk; plus, get involved with people you can trust, both in terms of product and in terms of expertise. It also involves finding that golden nugget of information that the majority of investors don’t know about and that’s no mean feat.
6. Think about the horizon
We’re living longer. That means it’s important to plan your financial future over the long term and to have some capital anchored for that far horizon. It’s easy to underestimate your lifespan or that of your spouse and therefore to deplete your funds too early. Having a long term hedge, therefore, makes a lot of sense.
Is this you?
If you were nodding in wry recognition at any of the above (and I’m no different to you), then you could do a lot worse than do two simple things right now.
First watch our short video on investing with Stanley Gibbons to get a visual snapshot of what we offer as a diversification option.
Secondly, download our free guide on maximising your returns and protecting your capital with one of our investment products.
