Investing money is a key component of your financial strategy when it comes to building your wealth and securing your future. Indeed, it’s often been described as the engine that drives your wider financial plan.
While you clearly have no control over external issues, you can manage your own behaviours and how you react to events when it comes to managing your investment portfolio.
Often, behavioural biases, emotion-led decisions, and knee-jerk responses to certain events can throw you off track.
So, in this article, read about five of the most common mistakes you can make as an investor, and why it’s often your own actions that can damage your wealth more than the vagaries of markets.
1. Trying to time the market
One of the most common investment mistakes you can make is to try and time the market, rather than staying invested.
Continually trying to second-guess your original investment choices when share prices fall, and making frequent trades, is more likely to result in your fund value being eroded by transaction costs. Furthermore, it can often result in you missing out on any subsequent market recovery.
Data from JP Morgan evidences this. It confirms that missing out on the 10 best trading days on the S&P 500 in the last 20 years would have resulted in your annualised investment return falling from 10.4% to just 6.1%.
Trying to predict when markets have reached a peak, or a floor, also creates a “double jeopardy” scenario for yourself. Effectively, you will need to be right twice to be successful, rather than simply staying invested and taking advantage of the long-term growth in markets.
2. Letting cognitive biases affect your investment decision-making
We are hard-wired with unconscious cognitive biases and making good investment decisions requires you to be consciously aware of these reflexes, to counteract them. Three of the most common of these that can affect your investment decisions are:
1. Confirmation bias
When you look for information that reinforces an opinion regarding a specific investment option that you already hold. This can cause you to disregard other valid data and reports that contradict what you have already decided.
2. Loss aversion
Landmark research carried out by Nobel prize-winning psychologist, Daniel Kahneman, revealed that the pain of a loss is typically felt twice as intensely as the pleasure of an equivalent gain. This means that if the value of your portfolio falls by 5%, it can have a more extreme effect on your emotions than if it had increased by 5%.
This can result in you becoming overly risk-averse and missing out on potential investment growth opportunities.
3. Anchoring bias
This bias emanates from simply trusting a specific piece of data about an investment choice and then letting that drive your decisions.
For example, you may want to buy or sell a fund at a particular value and hold off making a move until that value is reached. This could result in you missing out on a still-acceptable investment gain or suffering a consequent loss.
3. Failing to diversify your investment holdings
While any investment carries an element of risk, you can help mitigate this by diversifying your portfolio investments across many different markets, sectors, and regions.
This means that if one particular market sector suffers a downturn, any losses you incur could be offset by fund growth in other sectors.
For example, if you have a large proportion of your portfolio in US stocks and funds, you may suffer disproportionately if the US went into recession. By spreading your investments across all global markets, you can help reduce the effect such a recession could have on the value of your holdings.
It’s important to remember that most fund markets are cyclical and will go through periods of loss and gain over time. However, these cycles do not necessarily coincide across all markets. For example, if tech stocks are suffering a downturn in value, it’s possible that other sectors will be rising.
In this way, by not overly concentrating your portfolio in a limited number of shares or funds, you can increase your chances of enjoying steady, long-term growth.
4. Overreacting to market events
The nature of stock markets means that they will fluctuate. This is because they are driven by the value of businesses, which can be affected by any number of external factors, many of which are outside their control.
By panicking when markets fall, or becoming overly exuberant when values are rising, you are likely to make decisions that could end up costing you money in terms of lost investment growth.
When you are investing your money, it’s essential to focus on your long-term strategy, trust your plan, and not look to constantly adjust your portfolio in the light of short-term economic changes.
With 24/7 news cycles, and any number of investment analysts looking to share their opinion about every market event, it can be hard to stay focused. This is particularly the case when you consider that the media thrives on bad news, making headlines such as “Billions wiped off of the value of shares” far more common than good news.
It’s important to try and tune out the noise, accept that market returns aren’t straight lines and not to be distracted by single events.
It’s always worth remembering the wise words of Warren Buffett, who said that “the stock market is a device for transferring money from the impatient to the patient.”
5. Not reviewing your investment strategy regularly
It’s important to have a coherent investment plan in place rather than simply selecting a series of funds at random and then hoping for the best.
Your plan should reflect your long-term objectives and take into account key issues such as how much investment risk you are prepared to accept in order to achieve your financial goals.
The investment choices you make when you are 40, with at least 20 years until your retirement, may well be different to when you are just a couple of years away from retirement and planning to start drawing from your pension fund.
You may also want to earmark elements of your investment holdings for specific purposes, such as paying for your grandchildren’s education or helping family members get on the housing ladder. Your plans should reflect this, both in terms of how you invest, and the length of time your money will stay invested.
Get in touch
We would strongly recommend that you get expert advice, both when you are putting your investment plans together and when you are reviewing them. This will help you make the correct decisions and avoid any costly mistakes.
Please get in touch with us if you would like to talk about your own investment plans.
Please note
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, it does not take into account your personal objectives, financial situation, or needs. 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.