Everyone makes mistakes at some point in their lives. Some are relatively minor, like accidentally hitting ‘reply all’ and broadcasting a message to your colleagues. Others can have more long-lasting consequences, and this is especially the case when it comes to your investments.
Making a mistake with your investments could set you back hundreds, if not thousands, of pounds. Some blunders are immediately obvious, whereas others might not become apparent until much later in life, when the damage may be harder to repair.
Here are ten of the biggest investment mistakes to avoid.
- Ignoring inflation
Many people assume that investing is riskier than holding cash and therefore keep all their money in a savings account. However, if the interest rate on your savings is below inflation, its ‘real’ value will gradually erode over time. There are several ways to mitigate against the erosive impact of inflation, but history shows us that, over long periods, none have been as consistent as investing in the stock market.
- Failing to build a ‘rainy day’ fund
While investing gives your money the opportunity to grow, it’s important to set aside a ‘rainy day’ fund to pay for emergencies. It’s generally wise to have around three to six months’ worth of essential expenditure in an easy access account. If your boiler breaks or you receive a large, unexpected bill, your rainy-day fund will help you avoid resorting to loans or selling investments that have fallen in value.
- Forgetting your tax allowances
Investing through a tax-efficient wrapper like an ISA or pension could provide a significant boost to your finances. Income and gains on investments inside an ISA are completely tax free, and you can withdraw the money whenever you like without paying tax. Pensions offer 20% tax relief on personal contributions, meaning a £100 contribution only costs you £80. Higher rate and additional rate taxpayers can claim further tax relief of up to 20% or 25%, respectively.
- Failing to diversify
You’ve probably heard the expression, ‘Don’t put all your eggs in one basket’. When it comes to investing, these are wise words to live by. Spreading your money across different asset classes, including cash, shares and bonds, as well as across different sectors and regions, can help to minimise your losses when one type of investment underperforms.
- Taking a short-term view
The stock market can be volatile, with share prices moving up and down from one week to the next. This is why you should approach investing with a long-term view and invest for at least five years, ideally longer. Investing over the long term gives your money the chance to recover from stock market downturns and grow in value over time.
- Making rash decisions
When stock markets tumble, it’s easy to panic. But knee-jerk reactions could leave you in a worse place financially. Selling investments that have fallen in value risks crystallising losses. And if the market suddenly recovers, you could miss out on subsequent gains.
- Refusing to take a loss
On the flipside, another common mistake is refusing to take a loss and, instead, holding on to an underperforming stock in the hopes the share price will recover. Yet if the investment circumstances have changed, leaving your money tied up in a company with poor prospects rather than reinvesting into something where the prospects are brighter could really cost you over the long run.
- Fear Of Missing Out
We all suffer from FOMO at some point in our lives, but copying the investment choices of your friends, neighbours or colleagues could backfire. Many investments become overhyped, only to come crashing down months later. Even if the investment does seem solid, it won’t necessarily be right for your individual circumstances.
- Confusing brains with a bull market
When stock markets are flying, making money feels easy, but it is important to realise that a good couple of months in equity returns does not make you Warren Buffett. Investing is complicated and to do it carefully requires a great deal of time, research and knowledge.
- Not learning from your mistakes
Many of us may look back on previous investment decisions and realise that we were not as correct as we might have liked to have been. Failure can be a difficult thing for investors to admit, but it is essential that you examine your failures as well as your successes. This will help you avoid making the same mistakes again in the future.
When it’s done right, investing could help you build a more secure financial future; when it’s done wrong, you risk losing money and jeopardising your long-term plans.
The value of investments, and any income from them, can fall and you may get back less than you invested. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. Neither simulated nor actual past performance are reliable indicators of future performance. Information is provided only as an example and is not a recommendation to pursue a particular strategy.