Whilst making mistakes is natural, making them in investing can be painful and expensive. Poor judgement could hurt your investment journey and potential returns. Thankfully, we can learn from the past mistakes made by others. Here are five common investor mistakes you should watch out for:
1: Waiting for the right time: Many people wait for the “right time” to take the plunge. For example, during the height of the pandemic, many would-be investors were nervous and wanted to wait market to “settle down” before investing. In other words, waiting for the right time. When exactly is the right time? When the market is up or when it’s down? When markets are volatile or stable?
A common mantra in investment circles is this: “It’s about time in the markets, not timing the markets.” In other words, the best way to make money is to invest now and stay invested for many years, rather than worrying about whether now is the best time to invest.
2: Taking too much or too little risk: Investing comes with risk and as an investor, you have the power to determine how much risk you want to take. Taking too little risk, for example, investing long-term money in a deposit account could have a detrimental effect on your investment. Conversely, taking too much risk, for example, investing short-term money in the shares of a single company could be devastating if the share price were to fall. So how do you find the right risk level for you?
My first recommendation would be to have a discussion with an independent financial adviser who would guide you through investment risk and what it means for you. Regardless of your risk appetite, it’s always a good idea to spread your money across investment types and regions. This is called diversification. That way, if some of your investments performed poorly, they could be balanced out by others doing well, limiting your potential losses as a result.
3: Ignoring tax: Paying tax on your investments could reduce your returns by as much as 40%. The good news is that most UK investors can avoid paying tax on their returns by simply utilising pensions and ISAs, which allow your investment to grow tax-free. That way, you get to keep more of your profits. Make sure you take advantage of your pension and ISA allowances.
4: Overlooking investment fees: Paying fees on investments can rarely be avoided, whether you are a DIY investor or using an investment expert. Fees eat into returns, so don’t ignore them. Make sure you know what you are paying for. Some investors prefer low-cost trackers, others prefer to pay a little more to have an expert manage their affairs. Either way, knowing what you are paying for is vital. There is nothing worse than paying for a service you don’t need or want.
5: Panic selling: Financial markets have ups and downs and can be unpredictable. As an investor, it is important to learn to live with these unpredictable movements. Many investors lose their bottle and composure in poor markets and pull out prematurely. This can be costly and only serves to crystallise any losses you may have had. Past experience suggests that sticking with your investment can help iron out the bumps and that the longer you invest, the more likely you are to make a positive return. Would it help to have someone in the know to talk to when struggling to decide? Speak to your independent financial adviser.