5 ways to avoid investment mistakes
Are you in danger of or are you making these mistakes?
Knowing what you shouldn’t do when investing is as important as knowing what you should do. Here we outline five ways you can avoid making some very common investment mistakes.
1) Do not underestimate how long you’ll need your money
How long do you think you will live? Or your spouse or partner? Research shows that most of us underestimate how long we are going to live and not just by a little. Most of us underestimate our life expectancy by between five and 10 years.
This is obviously wonderful news for us and our families and, with major breakthroughs in medicine now happening at a steady pace, the likelihood is that this general underestimation is only going to increase.
So what’s the problem?
The problem is that if you are planning your investments over a 20 or 25 year time horizon, but actually need your money to last for 25 to 30 years, then you will probably run out of cash.
To avoid this, build in contingency. Don’t plan to spend every single penny and don’t de-risk too soon.
2) Make sure you align your investment strategy with your objectives
You are likely to have a mix of short, mid and long term financial goals. Short term goals will be things like saving for your next holiday, a car or maybe even extending your home – in most cases, investing in funds for these types of goals doesn’t make sense. Using a good quality bank account with a decent rate of interest should suffice.
Mid-term goals will include saving for children’s school fees, housing deposits for your children in the future or other major purchases. In these circumstances, you will have a longer period over which to invest and so can take on more risk than a bank account. Make sure you are taking enough risk to add value to your money over time, but don’t take too much so there is a risk it won’t be there when you need it.
The main long term investment goal is likely to be your pension. Most people do not take enough investment risk with their pension, particularly early on when they can afford to and should hold higher risk investments to boost returns.
Failure to match your investment strategy with your objectives can lead to big disappointment or, in the case of your pension, potentially major financial difficulties.
3) Do not misunderstand risk
No matter how well you pick funds, if you don’t fully understand the risk in your portfolio, you could be making a very severe investment mistake.
Picking the 10 best performing UK equity funds may seem a wise move, especially if UK equity markets are on the up. This approach could even do well for you for up to five years, but when things turn – as they always do with equity markets – you will feel the full brunt of a “bear” market. This is not a happy place to be.
You need to understand that equities will do well in rising markets, but that other assets such as bonds or even cash will protect you when things begin to turn. This works the other way too, and if you have too much in so-called “lower risk” assets, then you could miss out significantly on market rises.
4) Don't allow yourself to be sold to
This one is quite simple but yet very commonly made. Don’t allow a pushy salesperson to sell you an unsuitable, high risk product based on the fact it will deliver you “guaranteed high returns”, especially if it is apparently “uncorrelated to markets”. There are countless examples of where so-called uncorrelated, guaranteed return products have failed miserably and wiped out investors’ portfolios. There is a reason these esoteric funds are small – and it isn’t because everyone else is missing a trick!
Stick to well-managed funds from blue chip fund managers.
5) Don’t pay too much in fees
The returns generated by private investors are often undermined by fees. For a smaller investor, running a portfolio can result in very high percentage charges which can make the difference between outperforming and underperforming the market.
There are many fees and charges which can impact the performance of your investment portfolio. These range from the dealing fees, annual management charges, initial fees and performance fees levied by the fund manager to the charges you can pay for advice or even for your saving product, such as a pension.
Knowing how much you are paying and what for is a very good first step in managing these and lessening their impact.
For example, a decent financial advisory company will have negotiated favourable charges with a fund manager, meaning it is likely you could pay less by not going direct. You may also want to consider the way you are investing – some products, such as offshore bonds, can have high charges and may be an unnecessary additional expense in some circumstances.
Are you in danger or are making these mistakes?
About Simon Danaher
Simon Danaher previously worked for AES International, in marketing and communications.