Easy mistakes to avoid with investmentsPosted by Peter McGahan
How emotions get in the way of sound investment strategy and why you should learn lessons from good times as well as bad.
When asking a friend, who was in charge of leading Olympic high-performance athletes, what one piece of advice he could give that we can all learn from, his answer was beautifully simple.
Whether dealing with a win or loss, a good training day, or bad, he said only one thing mattered: “what did you learn from that?”
This way, mistakes wouldn’t be repeated and we wouldn’t be too self-congratulatory when things had just ‘gone our way’ or vice versa.
Investing your capital is no different, but the mistakes seem to be regularly repeated. Another friend stated ‘insanity is doing the same thing, but expecting different results’.
In a two part article, here are a range of mistakes to avoid, to maximise your pensions and investments, and ensure your advisers are kept on their toes.
Every 1% counts. A 1% annual difference in performance over 25 years in a £100,000 pension is colossal. At 5% return, for example, the fund reaches £348,129. At 6%, it’s £446,496, nearly £100,000 more.
The differences in returns between investments varies much more than 1%, so you can imagine the importance of maximising your gains and minimising losses.
There is no defying logic in investments. If you want the biggest returns - they will be found where the most fluctuation is. That is mathematical and won’t change. The best returns aren’t always in the most solid companies, as the market has them calculated, and the share price is already reflected. Don’t believe that ‘good’ companies have ‘good’ shares.
Trying to time markets is not an efficient use of your time. Moving in and moving out, are extraordinary skills I’ve never seen executed. Don’t expect your adviser to do it either, as there is no bell rung at the peak or low of a market, and the ensuing market (newspaper) noise every time the market jerks, may only be for the market makers to buy more as you sell.
I can give you a study that shows to always stay in the markets and a contradictory one that says to trade it and be in and out. Both are viable. On balance, it’s a fool’s game and the objective can be achieved of minimising your risk in a different way.
That said, if market clouds darken, and you can’t deal with fluctuation in your capital because you are coming closer to the point when you need the money, you should obviously consider whether or not to disinvest. Gambling with markets isn’t efficient. Remember, like gambling per se, the house always wins. Sometimes you are up, sometimes down, but in the end the house always wins if you try to beat it.
Don’t follow the news. Invariably it’s someone trying to sell you their old TV on EBay - as a new TV.
‘Getting in the way’ is another great mistake. When we set out our financial plan and invest according to our risks, the plan is balanced and within our view of risk and return. Markets can swing heavily one way or another, and that’s when emotions run high.
So much so, we can easily react and sell out of funds that have fallen, or stay in funds that have soared, as we think they are ‘bad’, or ‘good’. That is where we can ‘get in the way’ and emotional factors such as fear, greed or confirmation biases can take over.
Simply rebalancing a portfolio to take gains from your ‘winners’ and balance to your ‘losers’ seems counter intuitive to many, but it’s what the initial plan was built for i.e. the correct risk for the return you want, or the correct return for the risk you want.
When we break a neck on ‘Black Friday’ to buy a depreciating material asset because its price has fallen, it doesn’t seem logical, yet we do the opposite with our investments, buying more at the high and selling at the low.
Take your time and follow your plan. The train will get there, but not always the way it always has.
If you have a question on investments or pensions, please call 01872 222422, email email@example.com or visit us on WWFP.net.
About the author
Peter McGahan is Chief Executive of Independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority.
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