Whether it’s your pension fund, or other savings and investments, how you actually invest your money can have a massive bearing on your future wealth, and your future quality of life as a result.
Here are six common investment mistakes that can cost you money, which you should make every effort to avoid.
1. Not having a plan in place
While it’s a cliché, its regular repetition doesn’t make it any less apt: if you fail to plan, you’re planning to fail.
Your pension fund, for example, could well be the key to your retirement years. Indeed, it might be the difference between living the life you’ve planned once you’ve stopped work, and having to watch every last penny.
So, not having a plan in place for how you invest your pension fund, and other savings, really is taking an unnecessary chance with your future.
Your plan doesn’t have to be detailed, but it’s wise to set some parameters within which you’ll invest your money. Some key factors that could inform your plan include:
- Your current financial situation
- How much you want to invest
- How much investment risk you’re prepared to tolerate in order to meet your goals
- Where you want to invest.
Once you’ve got your plan in place, the challenge then is to stick to it – subject to regular reviews confirming it’s on track.
Given the stakes, we would strongly recommend you speak to a financial expert who can help you ensure your plan is appropriate and fit for purpose.
2. Adopting the wrong investment risk strategy
The amount of risk you’re prepared to accept should be central to your investment planning.
Don’t forget that this is likely to change as you get older, and your aims and aspirations evolve. For example, as you get closer to your intended retirement, you may feel that reducing your risk exposure may be prudent – effectively protecting what you’ve accrued.
Too little risk could mean you suppress potential investment growth. Meanwhile, too much risk could result in your investments being inappropriate for your purposes. It’s crucial to find a suitable balance between the two.
3. Reviewing too often, and not often enough
As with your attitude to investment risk, how often you review your holdings can very much be a “Goldilocks” problem – too much, too little, or just right.
Again, this is all about finding a balance you’re happy with.
Checking your investments too regularly could cause you to overreact to bad news, while not checking often enough could result in you holding inappropriate investments for your purposes.
There’s no one-size-fits-all answer, but for something so important, and part of your long-term financial planning process, you should look to carry out a review at least annually.
4. Over-managing your investments
Investments are for the long term. We would normally recommend a minimum period of five years for any stocks and shares-related investments, for example.
Any term shorter than that and you run the risk of not being invested for long enough to offset the inevitable fluctuation that’s part and parcel of investment markets.
Clearly, retirement savings could entail an investment period far longer than that.
A share or fund underperforming is not an automatic sign that you should sell it. Indeed, constant buying and selling doesn’t necessarily mean better investment returns – and the charges you’ll incur can eat into the value of your holdings.
5. Forgetting the golden rule
This is really a continuation of the previous point, but given how important it is, it’s worth reiterating.
Never forget what is often cited as the “golden rule” of investing: “time in the market beats timing the market”.
Every investor aims to buy when prices are low and sell when they are at a peak. But who knows where the peaks and troughs are?
Standard & Poor’s research reported by CNBC revealed that nearly 80% of active fund managers failed to match their fund benchmark in 2021.
If experienced fund managers, with teams of researchers and analysts, can’t time the market effectively, what chance has the average investor?
A “buy and hold” strategy can often be far more effective than constantly meddling with your portfolio holdings.
6. Focusing on the past
One of the most common investment warnings is that “past performance is not a reliable indicator of future performance.” You’ll find it underneath this article, on our website, and in a lot of our literature.
It’s there for a reason.
Past performance wording stems from funds over-emphasising previous returns and implying that such returns will be maintained in the future.
That may well be the case, but there’s no guarantee that will happen. It’s impossible to effectively predict the future, so the circumstances that enabled a fund to show impressive returns may not repeat themselves in the future.
Get in touch
If you have any queries regarding any aspects of investing your money, please get in touch with us.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
This article is for information only. Please do not solely rely on anything you have read in this article and ensure that you conduct your own research to ensure any actions you may take are suitable for your circumstances. All contents are based on our understanding of HMRC and ATO legislation, which is subject to change.