THIS week I am writing about common investment mistakes and providing you with some useful tips. Whether it’s your pension, ISA or general investments, there can be some tough times when reading your investment reports each year.
This can lead to an understandable response, and a biological hijack of your thoughts and subsequent decision-making with where your investments are held. These are all natural responses, but need to be controlled if you don’t wish to make those losses real (ie you sell in a down market).
Let me give you an example: The S&P500 sat at 3380 on Valentine’s Day 2020. As a lovely present, we were introduced to Covid. Six days later on March 20, the S&P had fallen 32 per cent. Coupled with a global panic, and being told to stay at home, it’s easy to see how investors might be emotionally hijacked as that prehistoric part of the brain takes over, and the logical part is shut down.
And so, an investor might respond with – “I can’t take anymore, get me out and I’ll reinvest when its calm again”. Errr no.
One week later, the S&P500 was up over 10 per cent. Two and half months later, the S&P was up 38.5 per cent. A year later it was up 69.8 per cent. At the end of 2021, and still in a pandemic, it was up over 106 per cent. Coming back in then when the ‘dust had settled and calm’, would have meant you missed out on over 106 per cent, and then joined a market that was about to have a series of falls over the next 10 months by 24 per cent. If you panicked then and hopped out, you would have missed the 27.8 per cent return over the next nine months.
And that is investment mistake number one. Don’t time markets.
Naturally, no investor should be exposed to just one stock market index such as the S&P500, as that would be a concentrated risk and that is lesson two – fully diversify your portfolio. Fund managers do not know for sure what will perform well and when, so they just ensure you have the very best stocks and holdings for when they do and as much protection for when they don’t.
Don’t get discouraged when the values are not going up. If the markets aren’t rising, you shouldn’t really expect to make returns during that period. There are doldrums, and you have to sit them out. You can’t pop into a money market fund in cash and hop back into the market when: ‘it’s ready’- see one above.
Do not allow your emotions to get the better of you either with upward excitement, or downward dismay.
Understand your true attitude to risk so there are no surprises. The potential for return comes alongside the potential for fluctuation in the market both up and down. If you know that and understand it, there won’t be any surprises. Downside fluctuation creates opportunities – see one above.
Use an independent financial adviser and particularly one that has investment specialism and excellent research. It is not a given that all independent financial advisers have this specialism, so check that out, but buying from a person who is tied to just one company will mean you will miss out on thousands of better options. And you will pay more.
Don’t chase fad investments; don’t fall in love with a stock, and don’t think you are smarter than the market. It’s not a fair competition for you. Learn to control what you can. Watch out for the investment mistakes.
Peter McGahan is chief executive of independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority.
Our advisers are here to help you so please do get in touch. To contact our Northern Ireland office, call 028 6863 2692; our Cornwall office – 01872 222422 and you can reach our Southampton office on 023 8064 9674. If you prefer to email, please contact us on info@wwfp.net.
Worldwide Financial Planning Ltd is authorised and regulated by the Financial Conduct Authority (FRN: 440668) ‘The FCA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.’ Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made. All information is based on our understanding of current tax practices, which are subject to change. The value of shares and investments can go down as well as up. Your home may be repossessed if you do not keep up repayments on your mortgage.
You can also join our social conversations on Twitter with Peter McGahan and Worldwide Financial Planning and you’ll find us on LinkedIN – Facebook and Instagram