26th January 2015
Investing does not need to be complicated. Follow a simple set of rules and avoid the pitfalls and even the most inexperienced investor can become successful. Adrian Lowcock, head of investing at AxA Wealth, highlights the top 10 top mistakes investors should avoid…
1. Putting too many of your eggs in one basket
Every investor has to start somewhere and to begin with this will often involve buying one share or fund. Ensuring you pick a global fund provides diversification at the start of your investing career.
As the portfolio grows the need to diversify evolves. Too often investors continue to build up portfolio’s which are dominated by one or two investments. To be successfully diversified means investors should have a good spread across asset classes, sectors, and funds. Any portfolio should not have more than 10% in any one fund and hold between 10 and 20 funds.
2. Trying to time the market
Trying to time the market is almost impossible and even the most experienced investors get the timing wrong. They very best fund manager’s don’t even try to time the market. Investors often sell after a share or the market has fallen. By pulling out of the market as soon as share prices dip or trying to second-guess when a share will reach its peak, you could lose out on sharp recoveries or see the price fall again before you had a chance to cash in. Instead, you should invest in good quality companies and fund managers, and focus on your long term goals. In this way it is time in the market which counts, not timing the market.
3. Making new investments decisions in isolation
Investment ideas are provided on their own merits, pundits, commentators are not able to make suggestions with your portfolio in mind. Therefore it is important for you to consider any new investment in the context of your other investments. If you don’t you could end up with a very risky portfolio, which is biased to a particular asset class, sector or full of high-risk smaller companies.
4. High expectations
Many investors make their first investment hoping to beat the market and make huge returns as they pick the one stock that turned their £1,000 into £10,000 overnight. The reality is much more prosaic. Investing is about getting rich slowly, whilst gambling is for those looking to get rich quick.
5. Not reviewing your portfolio
Over time your portfolio should and will change shape. Different investments will perform at different times with some growing faster, while others may fall in value. In addition, the world does not stand still, fund managers change jobs on average every 4.5 years, which may change the appeal of an existing fund.
Your personal circumstances also change over time. You may have started investing when you were in 20’s or 30’s and single, but now have a family and mortgage. As such your attitude to risk changes and you may no longer be happy to take on the same amount of risk as you were. Review your portfolio once a year to make sure your holdings are still right for you. Ideally do this at the same time you are considering investing new money. Some investments may require more attention, individual shares for example.
6. Following the herd
This is probably the biggest mistake all investors make, whether they are professional or otherwise. A rising stockmarket builds confidence and more people invest as they see the returns they are getting. The result is investors buy high and sell low. Few investors are skilled at avoiding this, but those that are ignore short term noise and focus on the longer term and invest for the future not past performance.
7. Not taking a profit or realising a loss
One of the most difficult things to admit in investing is that you got it wrong and made a mistake. However if you are able to sell a poor investment before it gets worse you will preserve your money and be able to reinvest into a better investment. Likewise no-one ever lost money taking a profit. The best fund managers recognise their mistakes quicky and get out, they also sell their successes once they think the investment has become expensive, even though the share price might continue to rise.
8. Not reinvesting dividends
Dividends continue to be under appreciated by investors. Companies which provide them do not tend to be high growth businesses. Their share prices are unlikely to double in the short term. On the other hand companies that pay dividends tend to be well managed, have good cash flow and are more shareholder friendly. In the 15 years since the FTSE 100 reached its peak on 31st December 1999 an investor who reinvested dividends would have got 57.8% return, whilst one didn’t reinvest dividends would have seen their capital fall 5.3% (Although they would have got some income each year).
9. Following a trend or Fad
Investing is full of trends and certain investments come and go out of fashion. For example mining shares have been unpopular for several years and have been shunned by investors, whilst biotechnology companies have been the flavour of the month. The trouble with chasing trends is knowing when to get off, you don’t want to be the last one off as all you’ll do is end up losing money. Focus instead on the valuation of a business, not its popularity. In doing so you will get into an investment earlier than other investors and benefit when it becomes popular.
10. Not using your tax breaks
The golden rule for any investor – new and experienced – is to always take advantage of your annual tax wrappers such as the ISA allowance. Any investment held in an ISA will not incur any capital gains tax on capital growth, nor is there further tax to pay on income generated by share investments.
You can put a wide variety of asset classes into your ISA including individual shares, funds and gilts (government bonds) and corporate bonds. You get a new ISA allowance each tax year – in the current tax year (2014/2015) you can invest up to £15,000 within an ISA.