Common investment mistakes, are you guilty of these?
Chasing interest rates but overlooking inflation
In times of higher interest rates, we are often asked “why would I invest my money and take risk when it can earn a guaranteed rate sat in the bank?” The answer is inflation will always devalue cash. If you don’t intend to use the money for at least five years, history shows us that, over long periods, no other strategies have been as effective as investing in the stock market.
Letting your emotions dictate your decisions
Manging clients’ emotions is easily one of the most common challenges we face. We are all human and guilty of letting our emotions get the better of us at times, and our finances are no exception to this. Here are some of the most common things we see:
Refusing to take a loss – possibly one of the hardest mental obstacles to overcome with investing – not knowing when to let go! But holding on to an investment with no true potential for recovery hinders your opportunity to get out and get into an alternative with opportunity for actual growth.
Jumping on the latest trend - Hearing success stories of overnight millionaires can make it tempting to jump on the latest investment bandwagon for fear of missing out. However, with opportunities of great success also comes great risk. For those that insist on the thrill, we suggest setting aside a sum you can both afford and would be comfortable to lose. This ‘fun-fund’ can be used to dabble in the investment market as you please without introducing unnecessary risk to your overall long-term goals and objectives.
Reacting to market noise - It can be tempting to react in turbulent times and make changes to your strategy, especially as there is usually someone you know, be it a friend, cousin or know-it-all neighbour, who’s apparently enjoying higher returns or less volatility. Our message is to tune out this noise, sit tight, focus on the long term and remind ourselves that the only ones who get hurt on the rollercoaster are those who jump off!
Forgetting about the tax advantages available to you
We recommend that, where possible, as much of wealth should be held in tax efficient wrappers. By that we mean products like Pensions and Individual Savings Accounts (ISAs), both of which allow investments to grow free of Income and Capital Gains Tax. You can withdraw funds from an ISA without any tax implications and pensions offer tax relief on personal contributions.
Lack of diversification
Diversification means spreading your risk across various investment types like shares and bonds as well as countries, regions and industries in order reduce the impact of any single area underperforming. One of the most common errors is to be under diversified or overweighted to certain areas. Not only does having a wide spread of different holdings maximise opportunity for growth but it is also the surest way to reduce risk in a portfolio, leading me onto…
Inappropriate risk approach
It is imperative that your investments reflect your attitude to risk. Investing in high-risk assets when you have a low tolerance for risk, or vice versa, can lead to stress, emotional decision-making, and ultimately poor investment outcomes. Assessing your emotional risk tolerance, the investment risk required to meet your objectives as well as your financial capacity to ensure you can bear financial loss if markets fall is essential.
Not having access to an emergency fund
Having a rainy day fund on hand for when you need access to a lump sum will mean you can avoid having to sell your investments at a time when markets are down and you’re potentially getting back less than you put in.
When it's done right, investing can help you build a more secure financial future and reach your goals and objectives, all whilst being able to sleep soundly at night. Here at BFP, we are passionate about planning for peace of mind and so if any of these mistakes sound familiar and you’d like to discuss how we can help, do get in touch.
