Independence and Clarity Of Aim
Top five investment mistakes
There five frequent investment mistakes that come with a high price tag, and if they are not corrected, they can take toll. If you stick to a certain plan (and revise it over the time), frequently review the investments, and have a long-term vision you will not face such problems.
Last decade has been troublesome for financial markets, the bust of the financial crisis followed the boom and still the recovery is rather unsteady. Anyway, most long-term investors should have hardly noticed this, as they are not prone to short-term fluctuations in the financial markets.
Sticking to a simple rule set and avoiding the common pitfalls, anyone can become a more prosperous investor.
So what are those pitfalls? Here are five common mistakes that investors make.
A prosperous investor needs to have clear goals, and keep in mind how they’re going to reach these goals. Whether you want £25,000 for a new car in three years’ time, £100,000 to cover your child’s education over the next 20 years, or £1 million for retirement, you need to make your investments work for you.
In case you’re going to build up the right portfolio and choose the right distribution of assets you’ll need clear goals.
The key point is to have both feet on the ground and do not expect too much, and not to use someone else’s expectations. There are many methods to help you.
Your plan needs to consider risk. Risk that you’re prepared to take for reaching your goal, and risk that asset inefficiency hurts the way to your goals.
The vital point about risk is to vary your portfolio and make a range of assets from shares and bonds to commodities.
The further you are from the goal target date, the less you should worry about market fluctuations. The closer you get to achieve your goal, the more risk-adverse you should be. By the way, you should always keep in mind the risks of inflation affecting your portfolio, the impact of fees on your portfolio, and the prospects that compounding interest or capital gains make.
Focusing on the short term
This is about adhering to your investment plan. Investing is about spending time in the markets, not trying to time growth and decline of individual markets.
Short-term fluctuations in the markets, even if they seem to be severe stock market crises, can send hurried investors to switch to assets that are performing better at that time. This is the wrong thing to do. The FTSE 100 fell 28% in 2008, but it is still up 9.4% over the past ten years. Have in mind, you’re an investor not a speculator. You are in the long run. Don’ give vent to your emotions. Prosperous investors stay firm on the ground when everyone around them is panicking. One of the world’s most successful investors, Warren Buffett, thinks that it’s his temperament that made him reach the heights and his ability to control the incentives that lead other investors to problems.
This means not buying and selling too often, and not chasing trendy sectors. Such things not only distracts an investor from the total amplifications of his or her portfolio, but it can also cost a round amount, pushing up the fees that eat into returns.
You’ve chosen your asset allocation as part of your investment plan. During a year term, some assets have performed better than others. That means that some assets that performed well that year outweigh your portfolio and those assets that didn’t short-weight. You need to review your portfolio in order to bring back the balance.
It’s a heavy lifting. It seem obvious to keep the assets that have performed well. At the same time, in length of time this is changing the risk balance of the portfolio. Underperforming of best assets in future can result in proportionally bigger impact on your portfolio unless you’ve rebalanced. So check in and rebalance at least once a year.
The opposite of rebalancing is racing performance. Resist the suggestion. It may seem that you lose a chance to make a great performance. Resist it. The smart money has probably already moved on. Rebalance your portfolio, don’t race performance.
Not considering the impact that fees and charges will have on your portfolio
Even a small change in fees can have a huge impact on wealth over the longer term. Fees can put you off your stride. There can be initial fees, annual management charges, in-process charges and outperformance fees. Under constraint of regulators, the industry is getting much more clear about its fees and charges, but investors need to feel certain of what they’ll be paying and compare the fees from different providers.
It’s a common thing, actively managed investment funds tend to have higher fees, but do the returns worth of those fees? Passive investment funds have much lower charges.
A seeming small change in fees can make a huge difference to returns over the long term. To be sustantive, let’s say a 30-year-old individual receives an inheritance and decides to invest £15,000 of it. He puts it in an actively managed large-cap UK equity fund in an ISA tax wrapper with an average annual return of 6% before tax. If left for 35 years, the investment pot should be worth £115,291. However, if the investor has been paying just 1% in fees and charges, these would have taken out a chunk worth £31,273, leaving just £84,018. If the investor instead put the money into an exchange traded fund (ETF) replicating the performance of the FTSE 100 with an ongoing charge of 0.1%, then the total cost of investing is just £3967, meaning the pot after 35 years is £111,324.
As is seen from above, it highlights the difference fees and charges can make, and how that difference compounds over time. Investors should keep track of fees and charges being on a minimum.
Overconfidence in the ability of fund managers to outperform
Fund managers raise high fees based on the assumption that they’ll be able to provide investors with superior returns. Nevertheless, many fund managers can occur less successful that the benchmarks, and there’s no way to divine which of the fund managers will be able to cope with and for how long. Statistics show that managers operating in the same area can demonstrate various progress over the same period. Fund managers also sometimes shift firms, and this can influence greatly on the performance of the funds they’ve left and the ones they’ve now taken on. There are sites where you can compare and examine fund manager and fund performance. It’s also vital point to make sure the fund manager invests in the right areas for you. Remember, you have your own investment plan and asset allocation that you’re sticking to.
Passive investment choices generally offer lower fees, although you’ll only be able to confront the efficiency of the underlying assets you’re investing in (before the fees). Nevertheless, that may be enough for reaching the goal of your investment plan. As set above, it’s unclear whether an active fund manager will achieve the outperformance you’re paying for, and that’s true in both a bull (rising) and bear (falling) market.
You may reach a decision to combine active and passive funds, or decide that you can deliver results you want by passive funds investing only. Just remember to avoid the common mistakes that we’ve described above.