2nd July 2013
With a big shake up in the way everyone is paying for financial advice and in the way your fund platform is gets paid by fund managers, a host of players are bidding to win your business. One such firm is the stock broker Charles Stanley Direct which says it is compliant with all the regulations about clean share classes. Among other things, such firms are falling over themselves to provide guidance about investing. Here Charles Stanley’s head of investment research Ben Yearsley running down the ten common mistakes investors often make. Now of course, these firms/stock brokers/platforms all want your business, but Mindful Money thinks it is rather a good list so we have no compunction about printing it in full below.
“Investing is not a science. There is no right or wrong and it is only with hindsight that you will realise whether you have made the best decision. However, it still requires discipline and time or a good adviser to invest sensibly. Below I outline what are, in our view, 10 common investment mistakes and how to combat them.”
1. Falling in love with an investment
You might be stuck following a certain sports team for life (Liverpool for me) but there is no need to become emotionally attached to investments. Critically reassessing the investment regularly should help – be brutal if you have to!
2. Buying just because it has been a big faller or riser recently
Buying an investment just because it is going up might sound silly but this is precisely what “momentum” investors do. However, doing so without having an idea of value is foolhardy. Similarly, bargain hunting among shares or funds that have fallen heavily might seem tempting but quite often bad news begets more bad news – only buy in if you truly want to own it for the long term.
3. Selling just because an investment has made or lost a lot of money
Selling too early is a mistake many investors make. Often it is done for the right reasons, for instance when a successful position has become too large. However, “running your winners” is a strategy that has benefited many of the world’s most successful investors; think Warren Buffett. A big faller is a different matter. Usually, a large fall means something has gone wrong or something has changed making the investment less appealing or more risky. This requires a cold assessment of the facts.
4. Doubling up on risk
A common mistake is having too much of a portfolio facing in one direction. For instance investing in mining funds and Chinese equities may bizarrely offer little diversification. As the mining sector is dependent on Chinese growth it may mean the two rise and fall virtually in tandem. Similarly, owning funds which have big stakes in shares you already hold.
5. Going for the highest yielding investments
Investors are naturally attracted to investments producing a high level of income. However, it is also a warning sign. There is likely to be a very good reason why an investment yields so much. Is it a share where the dividend is likely to be cut? For bonds, higher yield means higher risk – there is more chance of default.
6. Having too few investments
Diversification is the cornerstone of sensible portfolio management. Having all your eggs in one basket might make you a fortune – but equally it might lose you one.
7. Having too many investments
While diversifying is sensible there is no point having ten funds, or shares in the same sector doing the same thing. Strike a balance between backing your best ideas and diversifying sensibly.
8. Not having enough time to monitor your investments properly
To have a portfolio of shares it is our view that you probably need at least 20 – so you will need a lot of time to monitor them. Funds need less monitoring, but you should certainly check them at least every six months.
9. Being too short term
You should invest for a three to five year time horizon as a minimum – so there is no need to react to every market fluctuation. When constructing a portfolio it often makes sense to hold off buying everything in one go. There is nothing wrong with dripping money into the markets or buying on the dips once your chosen investments have been identified.
10. Not taking a profit
Finally, there is nothing wrong with banking a profit, especially if an investment exceeds your expectations. Use profits to diversify your portfolio or to rebalance it. Rebalancing or buying into areas that have been struggling recently is often known as contrarian investing. This style often needs patience to work but can be very rewarding, but as detailed above, don’t buy just because it has been a big faller!