BLOG: The top five mistakes that investors make
The disappearance of final salary pension schemes and the rising cost of housing, amongst other things, mean that a sensible financial planning strategy can make the difference between success and struggle. However, despite this, many people make investment mistakes that they aren’t even aware of – and these can prove to be costly. Here are five to avoid.
1. Not sticking to an investment plan
The average person on the street probably has pretty simple investment goals, which are likely to include basic objectives such as saving a suitable amount for a pension, a house, paying off a mortgage, and possibly leaving some money left over for their children. But if you asked them if they had a proper plan in place to help them meet these goals, it’s equally likely that they will say no. But this is dangerous. Without a suitable investment plan, it can be hard to keep on track with your goals and resist short-term temptations.
2. Being emotional
Ever wondered why it is so hard to be completely rational and objective when you are managing your own investments? The reason for this is that our brains are hardwired to make financial decisions for emotional reasons. We can see this with ‘herding’, where people buy or sell an asset based on what others are doing, and ‘confirmation bias’, where an individual interprets information to suit preconceived ideas.
Additionally, when one of your investments is underperforming, it’s hard to get rid of it. Studies have found that the best professional stock selectors are those who know when to sell, rather than those who are simply good at picking them.
3. Not diversifying
Holding too great a proportion of assets in the same asset class can be disastrous if the market takes a sudden turn for the worse. Different asset classes (such as equities, bonds or cash) tend to be correlated with each other, so when one goes up in value, another goes down. When it comes to long term investing, it is very important to diversify your assets to protect them against any sudden market fluctuations.
4. Being impatient
There’s nothing the financial press likes more than talking about the latest ‘must have’ stocks, and there are many experienced investors out there kicking themselves for not buying into the likes of Google when they were in their infancy. However, for every success story out there, there are hundreds of unmitigated disasters. At the same time, there are thousands of stocks which have tanked, only to rise consistently over an extended period of time. The successful investor understands that this is a long term game and is not seduced by short term gains.
5. Listening to investment ‘noise’
The trouble with online information is that it can be difficult to verify what is a good source of information and what should be overlooked. Different experts can often have vested interests and this can influence what they say – so a bond specialist will encourage you to buy bonds, while an equity fund manager might tell you that the stock market is rising and now is a good time to buy equities. Equally, some execution-only sites will promote a fund of the week. Faced with all this information, it can be hard to work out what is best for your investments.
The simple secret of successful investing
Recognising these common investment mistakes should make them easier to avoid. At heart, investment is very simple. Invest in a diversified portfolio that’s tailored to your goal and your attitude to risk – and leave it alone. Do that and you give yourself the best chance of investment success.