How to avoid the biggest investment mistakes

April 12, 2021

Some of the biggest investment mistakes

While investing isn’t brain surgery, you do need some level of knowledge and experience to make consistently good decisions.

Because let’s face it, making money is more enjoyable than losing it!

To help you on your path to success as an investor, we’ve outlined some of the most common and expensive investment mistakes, and how to avoid them.

Investment mistake #1: Allowing emotion to influence your decisions

When your stomach starts to churn because your portfolio has dropped by 20%, you may feel compelled to make changes.

All investors will at some point face setbacks, especially during a market crisis. But as we’ve seen from history, the market can eventually recover with time.

In these situations, it’s important to focus on the bigger picture—if you sell into the fear of the market dropping, you’ll miss out on its recovery.

If in doubt, consider reviewing your long-term goals. If you find that the reasoning behind your investment was sound, stick with it, as the market is likely to pick back up.

If you need proof of the wisdom of patience, look at 2020. COVID smacked markets around in February and March – but the markets spent the rest of the year recovering. To take just one example – as at 16 February 2021, the one-year return from the US Stockmarket (the S&P 500) – is over 16%!1

Investment mistake #2: Failing to diversify your portfolio

Investing your money across multiple different asset classes—shares, property, bonds, cash—can help to lower your investment risk.

This strategy—known as diversification—works because different investment types perform well at different times so if one area of your portfolio falls, another may be rising. Having a variety of investments helps balance out your overall risk.

It also means you have a diversity of types of return. Instead of relying on all your investment performance to come in the form of cash returns, rents, dividends from shares or capital gains from property and shares, you enjoy a mix of all of them.

This is especially important for retirees who may not have the same investment time frame as someone in their 30s who’s more easily able to withstand short-term market volatility, shifting all your money into low-risk assets could be costly—your portfolio may be unable to outpace inflation. It’s therefore important to have some exposure to higher risk, higher returning assets, such as shares and property.

Just be careful not to over diversify as this too may affect the performance of your portfolio. Your diversification needs to be strategic – not scattergun. A financial adviser can help structure your diversification to match your own circumstances such as – performance goals, risk management, age, health etc.

Investment mistake #3: Not setting long-term financial goals

There’s a big difference between playing a game of roulette and investing —having a strategy in place is one of them.

Too many investors focus on the latest investment fad, rather than creating an investment portfolio that has the highest probability of achieving their long-term goals.

Understanding what your long-term financial goals are, will provide the direction on how you set up your investment portfolio. This includes the types of investments you choose to buy into, how long you need to generate those returns and how much risk you’re willing to take on.

You may want to speak to us on Phone 02 4342 1888 if you would like to review your investments to assess where you currently stand and determine if your investment portfolio needs adjusting to meet your goals.

Investment mistake #4: Trying to time the market

Timing the market is extremely difficult—even institutional investors often fail at it.

Most successful investors give their assets a chance to perform over years, not days. They also adjust how their money is allocated quarterly or annually rather than in response to events – where reactions can be emotional rather than logical.

Continuously modifying your investment approach can not only reduce returns through more transaction fees, it can also result in more risk. One of the reasons most investors underperform the market is a consequence of them buying when prices are rising and selling when prices are falling – intuitive but often the opposite of a good strategy.

So, you may be better off contributing consistently to your investment portfolio rather than trying to time your market moves.

Investment mistake #5: Not focusing on your asset allocation

Often the variation of return you’ll see in your portfolio is due to how your assets are allocated, rather than the individual performance of one company’s shares.

But most people focus their time and energy in trying to pick out individual companies to invest in, rather than looking at how their portfolio is set up.

As you become a more sophisticated investor, you may want to consider investing in lowly-correlated markets like gold, currencies, commodities and other asset classes that do not perform in the same way at the same time, as opposed to adding more assets with a similar risk profile. You then need to determine what percentage of your portfolio should be allocated to those assets.

Investment mistake #6: Failing to contribute regularly to your portfolio

True investing relies on contributing regular amounts at regular intervals, in both rising and falling markets.

You can’t control what the market will do, but you can save more money. Continually investing capital over time can have as much influence on building your wealth as the return from your investments. It will also help to increase the probability of reaching your financial goals.

Bottom line: Mistakes are part of the investing process but knowing what they are, and how to avoid them, will help you on your road to success – and the more enjoyable lifestyle that comes with it.

For more information, contact us on Phone 02 4342 1888 today.

1 S&P 500 return over a 12-month period as at 16 February 2021

Source: MLC Insights March 2021

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