6 investing mistakes to avoid

Investing successfully is all about taking a calm and considered approach and not blindly following trends or hot tips. Let’s delve into some of the most prevalent investing mistakes and look at the principles that underpin a robust and successful portfolio.

Chasing hot and trending shares

Every so often, there are industries or shares that dominate the media, and you may begin to worry that you are missing out on something. Jumping on every trend is like trying to catch a wave; you might ride it for a bit, but you’re bound to wipe out sooner or later. That’s because the hot tips and ‘buy now’ rumours often don’t pass the fundamentals of investing test.

The key is to remember that the real winners are often the ones playing the long game.

Not knowing your ‘why’

What would you like your investment portfolio to achieve? Understanding your motivations and goals will help you choose an investment mix that works best for you. This forms the basis of the conversations we have with our clients before recommending an investment strategy that suits them.

If you want to build wealth for a comfortable retirement, say 20 to 30 years down the track, you can afford to invest in riskier investments to play the long-term game. If you have already retired and plan to rely on income from your portfolio, then your focus will be on investments that provide consistent dividends and less on capital growth. Regardless of your appetite for risk, our investment philosophy is grounded in preserving our clients’ capital.

Timing the market

Timing the market involves buying and selling shares based on expected price movements, but at best, you can only ever make an educated guess and then get lucky. At worst, you will fail.

As the world-renowned investor Peter Lynch wrote in his book “Learn to Earn”: “Far more money has been lost by investors trying to anticipate corrections than lost in the corrections themselves”. ⁱ 

Putting all the eggs in one basket

Diversification can include different countries (such as adding international shares to your portfolio), other financial instruments (bonds, currency, real estate investment trusts, exchange-traded funds), and industry sectors (ensuring a spread across various sectors such as healthcare, retail, energy, information technology).

This is one of the classic concepts of investing, but it’s worth repeating because unless you are regularly reviewing your portfolio with the guidance of your financial adviser, you may end up having all your eggs in the wrong baskets, depending on what your goals are at the time.

Avoiding asset allocations

While diversification is key, how do you achieve it? The answer is by setting an asset allocation plan with the guidance of your financial adviser and reviewing it regularly.

You will have conversations about how much exposure you want to diversify into defensive and growth assets. Within them, how much should be invested in the underlying asset classes such as domestic shares, international shares, property, cash, fixed interest, and alternatives.

Making emotional investment decisions

The financial markets are volatile and that often leads investors to make decisions that in hindsight seem irrational. During the COVID-19 pandemic, on 23 March 2020 the ASX 200 was 35 per cent below its 20 February 2020 peak.ⁱⁱ By May 2021, the ASX 200 crossed the 20 February 2020 peak. Many investors may have made an emotional decision to sell out during the falling market in March 2020 but then would have missed some of the uplift in the following months.

To avoid committing common investing mistakes, it’s important to develop a thoughtful, systematic plan, that you can stick with. This is where the expert guidance of a financial adviser is crucial to create and manage your investment portfolio for your financial wellbeing and peace of mind.

Sources

i From the Archives: Fear of Crashing, Peter Lynch – From the Archives: Fear of Crashing – Worth

ii Australian Securities Markets through the COVID-19 Pandemic – Australian Securities Markets through the COVID-19 Pandemic | Bulletin – March 2022 | RBA