Here are the most common mistakes made by the new and not so new investors:
Over exposure to one area
Don’t put allyour eggs in one basket. Yet it’s easy to do: new investments are made without reference to what’s already in your portfolio, so you end up with most of your money in just one market. Or you add a new fund without checking to see if its largest holdings match what you already hold.
Failure to monitor performance
The best planned portfolios need to be reviewed and rebalanced every so often. It’s important to do this because your original allocations will change significantly over time along with shifts in the market. The layout of your portfolio may no longer match your risk profile or your goals.
Having too many holdings, and too small holdings
This makes it more difficult to administer a portfolio and have a real understanding of how it’s performing. Sell or amalgamate small holdings and focus on those investments that are best-placed to achieve your financial objectives.
Not minimising costs
Think of costs as the enemy, and keep a close eye on them at all time. Over five years you can sacrifice thousands by paying too much in fund and dealing charges.
Not being brave
Following the herd in and out of markets and sectors is likely to lead to losses as you will be buying when prices are rising or already high and selling when they are falling or already low. Think about why you bought the investment in the first place. If those reasons are still valid, don’t let a short-term blip cost you a small fortune.
Not minimising tax
It’s a cliché because it’s true; the first rule of investing is not to hand money to the taxman unnecessarily. This doesn’t mean investing in fancy tax-dodging investments. It just means taking advantage of the allowances you have.
Forgetting about tracker funds
It’s not just the taxman you should avoid giving money to. You should also not hand money over to fund managers without good reason. If you want exposure to equities, your default position should be a low-cost equity tracker
fund. Only depart from this if you have good reason to do so.
Not diversifying across assets – including Cash
Although you can’t easily spread risk by diversifying across shares, you can do so across assets. Over the last 20 years, monthly returns on gilts and gold (in sterling) have had zero correlation with equities, which means that if shares fall there’s a 50:50 chance that either gold or gilts will rise. Correlations, however, vary with macroeconomic conditions. It’s possible that these will become positively correlated if or when investors come to fear a serious tightening of monetary policy.One asset that protects you from this correlation risk is cash. Which is one reason why it’s worth holding some, even at negative real returns.
Diversifying too much
It’s very easyto buy more than sell and to build up a portfolio of dozens of shares over time, and end up with a sprawling mess that is merely an expensive tracker fund. Use a core-satellite strategy instead. Use a tracker fund to get general exposure to the stock market, and complement this, if you want, with a few specific stock picks.
One of the strongest findings in economic research is that people who trade a lot end up poorer for it. One reason for this is that they are overconfident about their ability to pick winners. Another is that we fail to appreciate that a lot of news is just noise, which conveys no signal about future returns
What makes a successful investor? According to Lasse Pedersen and colleagues at AQR Capital Management, the answer is discipline. They show that the key to Warren Buffett’s success is not so much great stock-picking as the willpower to stick with the strategy of holding defensive, quality stocks even in times when they did badly, such as during the tech bubble. This discipline means he’s been able to profit enormously when good long-term principles come back into favour. Finding a few good rules and sticking to them is better than hyperactivity.
Not assessing risks
Pretty much all assets carry risk. You need to assess the risks for each individual investment that you make, and to consider if you are overexposed to one type of risk – for example,that a certain technology will become redundant. There are also risks to consider that matter more for some people than others.For example, if you’re retired and on a flat-rate annuity, inflation risk will matter more to you, while younger people can cope better with the large risk of short-term falls in share prices. So ask: which risks bother me? Hold the assets that protect you from this danger, but not those that protect you from risks that don’t trouble you. And remember – there’s always a case for holding cash.
Ignoring danger signs or not acting quickly when trouble shows
The real keyto preserving your capital actually lies in acting decisively when it is clear that a company whose shares you own is in trouble. Otherwise known as falling in love with a share and giving it chance after chance. The humble stop-loss, whether it is a mental rule of thumb or a preset trade stored in an internet stockbroking account,can be a real life saver. Danger signs to watch include profit warnings and high and rising debt etc.