Originally published at: Four mistakes to avoid when investing – InvestEngine Insights
When you first start out, investing can be a daunting thing to jump into. This is only natural given that it’s your money on the line, but the potential benefits of building a portfolio are well worth overcoming any initial trepidation.
There are, however, some common mistakes that investors make. Avoiding these errors can be the difference between steady, long-term financial growth and patchy performance. So, to help investors keep their finances on track, here are four key investing mistakes you should avoid.
- Trying to time the market
During the Covid-19 pandemic, a lot of people turned to day trading both for entertainment and quick profits. The problem with this is that most people don’t have the money, time, or inclination to make any real money or to sustain the losses day trading can bring. What happened, in the end, is that quite a lot of people lost quite a lot of money.
Trying to time the market is a dangerous way to invest, as well as being antithetical to a long-term approach to investing. Day trading takes time – watching markets daily or even hourly – and expertise. It also often needs a crystal ball; you need to be lucky, time and time again, to make money.
Whether or not consistently timing the market is even possible is up for debate, though most people in the industry will tell you that getting it right for any substantial period of time is unlikely. It’s possible for investors to pick the right stocks and make a lot of money in the process, but it’s equally possible for one bad bet to set you back years financially.
As unexciting as it might sound, the best time to start investing is, almost always, sooner rather than later. It’s become a cliche at this point, but time in the market really does beat timing the market. The length of time a person has to invest in is their greatest asset – it’s why we always say that InvestEngine is for long-term investing, not trading.
It’s worth mentioning that there is still potential to be found in investing when you expect the market to have a resurgence. Many people, for example, invested their cash when the pandemic drove markets down and many of these people made money in the recovery. You can decide when you think the conditions are right to invest, but chasing the next big win is, often, a recipe for losses.
- Not diversifying your portfolio
One of the most common mistakes investors make is to rely too heavily on a particular geography or industry when putting together their portfolios. Whether it’s having too few individual stocks in the roster or investing with a home country bias, it’s common for investors to set their sights a little too narrow.
For the vast majority of investors, however, a diversified approach to investing is the right way to go. Put simply, this is the practice of spreading your investments out over different regions, sectors, businesses and asset types so that you’re never too heavily reliant on any one of them. The principle is that, with enough of a spread, you can make up for any losses in one area with gains in another – it is, first and foremost, a risk management tool.
You can read our deep dive inyo the importance of diversification here.
This is where ETFs can make life a lot easier. For an effective diversification strategy, you ideally have access to a large number of assets – ETF investing can offer this in just a few clicks. To get started on a path to effective diversification, take a look at InvestEngine’s range of 550+ ETFs from every corner of the globe.
- Allowing expensive fees to eat into returns
The growth of online investment services has made investing more accessible than it’s ever been. It’s also played a role in reducing fees – investing isn’t just for the super wealthy in 2023.
It’s important to note, however, that just one or two percentage points in fees can make an enormous difference to the overall value of a portfolio when stretched out over many years. At InvestEngine, for example, we don’t charge fees on our DIY portfolios, while our professionally managed accounts cost just 0.25% a year. This is a big part of the reason we’ve been able to bring ETF investing to so many people since we began.
Every few months or so, it’s a good idea for any investor to sit down and fully assess their investments. This means a deep dive into the performance of different parts of your portfolio, as well as a look around to make sure your money couldn’t be better used somewhere else.
So, check your investments regularly to ensure that your provider is still up to scratch, that you’re not paying too much in fees and that your investments are performing well enough relative to industry benchmarks. Expensive fees can make a huge difference to returns over the long run, don’t take on any more than you need to.
- Not sticking to your long-term plan
The number of years that you plan to invest for – let’s call it your ‘time horizon’ – has a significant impact on your ideal investment strategy. Primarily, it affects how much risk you can take on. Generally, the longer your time horizon, the more risk you can add to your portfolio (and vice versa).
A common mistake that investors make is to abandon their long-term strategy when markets become difficult. When there’s a downturn, it can be tempting to withdraw your cash and re-invest when markets are more steady.
The problem with this is that you risk crystallising the losses taken in the downturn and missing out on the recovery. Markets tend to bounce back quickly after significant dips and disinvesting before these important recovery days can be costly – in the worst case scenario, you end up selling at the bottom and buying back in once prices have improved.
Of course, financial priorities can change and unforeseen circumstances can mean you need to access your investments prematurely. Generally, though, it’s important to broadly stick to the time horizon you laid out when you started investing. If you’ve invested for the next 20 years, it can be counterproductive to withdraw that cash after two years when your portfolio wasn’t built for that.
Important information
Capital at risk. The value of your portfolio with InvestEngine can go down as well as up and you may get back less than you invest. ETF costs also apply.
This communication is provided for general information only and should not be construed as advice. If in doubt you may wish to consult a professional adviser for guidance.
Tax treatment depends on personal circumstances and is subject to change, and past performance is not a reliable indicator of future returns.