8th February 2016
Investing can be much more straightforward than many believe. By following a simple set of rules and avoiding the pitfalls even the most inexperienced investor could become a successful investor.
Adrian Lowcock, head of investing at AXA Self Investor, highlights 10 mistakes investors should avoid to try and boost their portfolios…
1. Putting too many of your eggs in one basket
Every investor has to start somewhere and to begin with this will often involve buying one share or fund. Ensuring you pick a global fund provides diversification at the start of your investing career.
As the portfolio grows, so does the need to diversify. To be successfully diversified means investors should have exposure to Bonds, Shares, Property, Commodities as well as a spread across the world and different areas of business from shops to healthcare to technology. To achieve this, a portfolio should have no more than 10% in any one fund and hold between 10 and 20 funds.
2. Not using your tax breaks
The golden rule for any investor – new and experienced – is to always take advantage of your annual tax wrappers such as the ISA and Pension allowance. Any investment held in an ISA will not incur any capital gains tax on capital growth, nor is there further tax to pay on income generated by share investments. Whilst contributions to a pension can mean you benefit from income tax relief at your marginal rate, possibly more.
You can put a wide variety of asset classes into your ISA including individual shares, funds and gilts (government bonds) and corporate bonds. The ISA allowance until 5th April is £15,240. From the 6th April you will get a new ISA allowance also of £15,240.
3. Having high expectations
Many investors make their first investment hoping to beat the market and make huge returns. They try to pick the one stock looking to turn their £1,000 into £10,000 overnight (A ten bagger). The reality is much more prosaic. Investing is about getting rich slowly, whilst gambling is for those looking to get rich quick, but willing to risk losing all their stake.
4. Not looking after your portfolio
Over time your portfolio should and will change shape. Different investments will perform at different times with some growing faster, while others may fall in value.
In addition, the world does not stand still, fund managers change jobs, personal circumstances also change. As such your attitude to risk changes and the suitability of funds needs reviewing.
Review your portfolio at least once a year to make sure your holdings are still right for you. Ideally do this at the same time you are considering investing new money. Some investments may require more attention, individual shares for example.
5. Following the herd
This is probably the biggest mistake all investors make, whether they are professional or otherwise. A rising stock market builds confidence and more people invest as they see the returns others are getting. The result is investors end up buying when the market is high. Ignore short term noise and focus on your goals and longer term objectives. Invest for the future and not based on past performance.
6. Trying to time the market
Trying to time the market is almost impossible and even the most experienced investors get the timing wrong.
Investors are driven by human behaviour and often sell only after the market has fallen, when they are at their most cautious or fearful. It often takes a long time for confidence to return and investors usually only come back after the market has recovered.
Trying to time the market requires getting a lot of decisions right. Instead, you should focus on the longer term, as over time the short term volatility of markets is smoothed away. Investing is for the longer term.
7. Not recognising your investment mistakes
One of the most difficult things to admit in investing is that you got it wrong and made a mistake. However, if you are able to sell a poor investment before it gets worse you will preserve your money and may be able to reinvest into a better investment. Likewise no-one ever lost money taking a profit. The best fund managers recognise their mistakes quickly and get out, they also sell their successes once they think the investment has become expensive, even though the share price might continue to rise.
8. Not reinvesting dividends
Dividends continue to be under appreciated by investors. Companies that pay dividends tend to be well managed, have good cash flow and are more share-holder friendly. In the last 10 years, an investor who reinvested dividends in the FTSE would have got a 46.54% return, whilst one who didn’t reinvest dividends would have seen their capital rise by only 1.54% (although they would have got some income each year).
9. Making new investment decisions in isolation
Pundits and commentators do not judge a fund with your portfolio in mind but on its own merits. It is important for you to consider any new investment in the context of your other investments. If you don’t you could end up with a very risky portfolio which is biased to a particular asset class, sector or full of high risk smaller companies.
10. Following a trend or fad
Investing is full of trends and certain investments come and go out of fashion. For example, mining shares have been unpopular for several years and have been shunned by investors, whilst over the past few years’ biotechnology companies had been the flavour of the month. The trouble with chasing trends is you need to know when to get off, you don’t want to be the last one off as all you’ll do is end up losing money. Focus instead on the valuation of a business, not its popular