COMMON MISTAKES TO AVOID WHEN INVESTING

Written by Investment Director, Jonathan Riley

The rise of digital investment services such as online brokers and fintech apps has helped democratise access to public investment markets. These platforms have low barriers to entry, low minimum portfolio values and low commissions, attracting significant numbers of retail investors. While increased accessibility has allowed more individuals to participate in markets and potentially benefit from investment returns, it also exposes an increasing number of people to some common pitfalls of investment decision making, which can have a detrimental impact on outcomes.

Common Mistakes

Taking the wrong amount of risk.

The first step in forming an investment plan is establishing your goals and understanding how much risk you need to take to achieve them. Judging the appropriate amount of risk to take is difficult. Taking too much risk is a common worry amongst amateur investors and at best, can result in an uncomfortable experience, or at worst can lead to permanent losses. Regardless, taking too little risk through holding low risk/ low-return assets, such as cash and fixedterm deposits, can represent an opportunity cost in terms of the risk of inflation, eroding the value of their savings over time.

Trying to time markets.

Investors can become fixated on trying to time their entry into markets with a view to ‘buy low and sell high’. To quote an age-old investment cliché, ‘it’s not about timing the market, but time in the market’. Whether or not it is a good time to invest is a common question from clients and, generally speaking, it is always an opportune time to invest providing you have the patience to see an investment strategy through to the end. By waiting for the perfect opportunity, investors risk missing the best days of markets. In the 20 years to the end of 2023, if an S&P 500 investor missed just the 10 best days of returns, their annualised portfolio return would be 5.6%, compared to 9.7% of an investor that had remained fully invested over the period. Furthermore, missing the 20 best days reduces this return to 2.8%, showing the power of remaining invested .

Letting emotions drive decisions.

Humans are naturally flawed investors. Our brains have evolved over hundreds of thousands of years to react in ways that seek certainty to ensure our survival. Such traits do not lend themselves to making decisions under pressure and with incomplete information about the future. Psychology plays a crucial role in driving investments decisions and emotions can frequently get in the way of good portfolio management. Retail investors can be easily swayed by compelling stories and narratives, which can cloud rational judgement, often leading investors to place their faith on the current fad or next

‘big thing’. Herd mentality can frequently be observed in markets and following the latest trend can result in buying the wrong investments, impacting long-term returns and reducing the chances of achieving one’s objectives.

Seeking help.

An experienced investment manager will establish a client’s risk profile using both qualitative and quantitative assessment, this is combined with an assessment of their objectives, wider financial and personal circumstances, and their attitude to risk, to determine the appropriate investment strategy that suits them. While it’s impossible to predict market returns over the short, medium and long term, following a tailored strategy with a relevant risk profile could lead to a more comfortable journey for you, maximising the chances of achieving your ambitions.

Psychology plays a crucial role in adhering to an investment strategy over the longterm and employing the services of an investment advisor can help ensure that the strategy outlined at the outset is followed when times get tough. Experienced investment managers can be more objective in their decision making, due to the time spent studying for their role and observing the industry and are less likely to make decisions driven by emotion.

Additionally, a reputable investment management business will have a robust investment process, increasing the likelihood of achieving your personal objectives.

If ever you are keen to discuss this topic further or would like a no-obligation initial chat to understand your personal situation and how we might be able to help you in the future, please give me a call on 0151 237 1240.