Taking your first steps into the world of investing can be daunting.
Becoming financially literate – and perhaps more importantly, market literate – is a long and sustained process with many conflicting strategies and opinions to sift through.
It’s easy to get lost among the indexes, indices and IPOs. The stock market is fraught with confusing jargon, inscrutable financial documents and unpredictable price movement.
According to a study on a popular trading platform, 80% of day traders make a loss over a year, with the median being a loss of a whopping -36.3%.
We spoke with Findex Wealth Management partnership manager Anthony Demetriou to get the top tips on how to avoid making the most common investing mistakes.
Not following an investment strategy
Demetriou explained: “It’s important to have a clear goal and timeframe for your investments. This will ensure your short-term and long-term goals align and that you aren’t picking stocks on a whim.”
Whatever your goals may be, decide on your strategy and stick to it, lest you fall foul of the ultimate stock market pitfall; being swept up in the moment and making a hasty decision you may well regret.
As Nobel Memorial Prize winner and ‘father of modern economics’ Paul Samuelson said: "Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas."
Speculating instead of investing
Demetriou noted: “Whether they’re driven by emotion or a stock tip from your friend or family member, under-educated investments can be dangerous to your portfolio. Researching the company you’re investing in is an important step in choosing a new investment.”
Doing your homework is an important first step in deciding where you want to put your money. Ask yourself why someone might be suggesting a particular stock to you, and what they might have to gain from it.
As American investor, mutual fund manager and philanthropist Peter Lynch said: "Know what you own, and know why you own it."
Only investing in a familiar asset class
Demetriou stated: “Putting all your investments into one asset class creates an undiversified portfolio which increases your risk of losing value if parts of the market drop.”
Research from the Institute of Business & Finance reveals that diversification can be achieved through a spread of just 20 stocks.
Obviously, any random 20 stocks will not provide the diversification you need, it’s also a good idea to ensure your investments are spread over a variety of company sizes, industries, sectors and countries to achieve the optimal minimisation of risk.
Ritholtz Wealth Management co-founder, chairman and chief investment officer Barry Ritholz conveyed it very simply: “The beauty of diversification is, it's about as close as you can get to a free lunch in investing.”
Investing without considering tax implications
Demetriou said: “The tax implications of investing are an important cost to bear in mind when considering the overall effectiveness of your portfolio.”
How you choose to invest your money can have a large impact on what taxes you pay. Investing in your superannuation, for example, can net you a sizable tax break depending on your income.
Thoroughly research superannuation options, capital gains taxes, negative and positive gearing and other tax offsets to ensure you’re getting the most out of your investments.
Fear of taxes should not prevent you from investing, however, as renowned investor Warren Buffet put it: “The arithmetic makes it plain that inflation is a far more devastating tax than anything that has been enacted by our legislatures. The inflation tax has a fantastic ability to simply consume capital.”
Impatience
Demetriou explained: “Markets naturally fluctuate, so riding out negative fluctuations is a key part of long-term success - don’t sell out and crystallise a loss due to impatience.”
Warren Buffet offered another gem on this one: “The stock market is designed to transfer money from the active to the patient.”
Not investing at all
Demetriou stated: “If you don’t invest at all, you’ll quickly get left behind by inflation, as costs rise but the value of your money doesn’t. You can keep ahead by investing funds that aren’t crucial to your day-to-day life or regularly investing a portion of your income.”
Robert G Allen, a highly influential investment advisor and bestselling finance author, put it frankly: “How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case."
Not seeking professional advice
Demetriou said: “Financial advisers are a fantastic source of support and advice about your investments, and they can ensure you’re on the right track.”
Especially as you’re just starting out, a consultation with a financial advisor can be very valuable for working out where you want your money to go.
“There is nothing wrong with a ‘know nothing’ investor who realises it. The problem is when you are a ‘know nothing’ investor but you think you know something," Buffet said.
The past doesn’t predict the future
Demetriou explained: “It can be tempting to use the performance of past successful investments as the foundation for future investments, but lightning rarely strikes twice. Don’t rest on your laurels - play close to attention to what’s emerging and upcoming to stay ahead of the game.”
As humans, we tend to be very pattern-based thinkers. If something has reliably happened in the past, we’re naturally inclined to believe it will continue to do so.
Unfortunately, no one can predict the economy or the stock market – but we can make educated decisions based on probability and good strategy.
Consistently investing in your own education is the single most valuable step you can take as an investor. As Benjamin Franklin said: "An investment in knowledge pays the best interest."