The ‘seven deadly sins’ of investing
There are many traps that investors can unwittingly fall into. Here are some of the most common mistakes
Mistake no 1. Don’t be a dedicated follower of fashion
Investment trends and themes constantly come and go when it comes to investing your money. The problem is that this often causes losses or falls in investment values. The most recent memorable investment trend was the ‘dot-com boom’ 10 years or so ago – what happened next was a huge fall in value and unwary investors lost huge amounts of money.
Many of these so called ‘technology companies’ never made a profit and soon went out of business. This is how many investors were drawn into investments that ultimately lost them a lot of money.
The key to successful investing is not to jump on the latest band wagon, but to create a well-balanced portfolio which is more likely to give you good, steady returns. Of course, you need to ensure that you are comfortable with the level of risk you are taking.
Mistake no 2. You are not a city trader
Investing in ‘collective investments’ such as pension funds and unit trusts is very different to investing directly in stocks & shares. Typical pension fund investment objectives are to provide long-term returns rather than short-term profits. The holdings within a pension fund are usually held long term and are not traded on a regular basis. Fund managers take a long term view of the future profits and value of the companies that they buy shares in.
Timing the market is incredibly difficult at the best of times and very few people are successful. Professor Markovitz carried out study of market timing in 1956 and concluded that it was virtually impossible, later winning a Nobel Prize for his work.
Successful investing is achieved from choosing the right type of assets and holding them for the longer term. This is called Modern Portfolio Theory.
Mistake no 3. Know how much you are paying in fees
All investments carry a charge and these charges can vary widely. It’s important to know what charges you are paying, so that you are confident that the returns you are getting are reasonable relative to the charges you are paying. Sometimes the charges can out way the returns you are getting on your investments.
Conversely looking for investments with the lowest charges is not necessarily the best way to get good returns. As in most things in life, buying the cheapest rarely pays off in the long run and is often a false economy.
Mistake no 4. Keep your investments under review
Many investors forget that looking after a portfolio is an on-going process. Make sure to continue monitoring your investments. Failure to keep your investments under review can result in them not meeting your goals. Remember that investments don’t always continue to perform over time and also the level of risk you are prepared to take will almost certainly change as you get older.
Mistake no 5. Build a portfolio of investments
Instead of investing in one or two individual funds, look at building a portfolio of funds to form your portfolio. This way you can manage the level of risk you are taking with your investments. Some funds will undoubtedly perform better than others, however it is the overall performance of the portfolio that is important.
Mistake no 6. Do not fail to diversify
Most would agree that investing in any single asset is risky. So spread your investments across a range of assets. If something goes wrong with a single investment, your entire portfolio will have suffered as a consequence.
Diversification helps to reduce investment risk, and can be used when building a portfolio of any size.
Diversify your portfolio by allocating amounts of money in different assets, sectors, markets and geographical regions.
Mistake no 7. Not investing …. by far the worst sin
This may seem blindingly obvious, however, ‘Not investing’ is a major problem. Sadly many people keep postponing their first investment for years or sometimes never start at all. One of the major benefits of investing is the power of ‘compounding’. One of the keys to successful investing is time. Let time do the work for your investment portfolio.
Start with small amounts sooner rather than waiting until you think you have enough to save and you will benefit from compounding for a much longer period of time. Put simply, the longer you save, the less each month you will need to save to achieve your goals and objectives of a secure financial future.
