Common investing mistakes to avoid


Updated on 22 September 2020 | 0 Comments

Experts reveal eight common (and potentially costly) investing errors and how you can avoid them.

It’s easy to make mistakes when investing your money. Here are some of the major blunders to be wary of.

1. Having too much in cash

With savings rates so low, holding cash could be one of the biggest mistakes you can make.

While global stock markets might be particularly volatile at present, they've generally provided a far greater return than cash over the long term (although, of course past performance is no guarantee of future returns).

So, you should keep enough cash for emergencies and short-term spending and see if you can do better in the stock market.

And, of course, make sure any cash you do hold earns the best possible rate.

2. Not spreading your risk

One of the oldest and best ways to lose money from investing is by having a heavily concentrated portfolio.

In the good times, having a highly focused portfolio can bring bumper returns, especially during one of the market's periodic bubbles.

But when bubbles burst, it’s far better to have a well-diversified portfolio than to be nervously holding a basket with one giant egg in it.

Indeed, research conclusively shows that diversifying your portfolio produces better risk-adjusted returns in the long term.

3. Piling in all at once

Another fundamental mistake that investors make is to mess up the timing of their ISA investments.

Instead of drip-feeding money over a period of time, millions of us throw lump sums in on a single day, often just as the end of the tax year looms.

The big problem with piling 'all in' at the end of March or April is that you can easily become a victim of one of the stock market's seasonal effects.

It is a well-known phenomenon that the London stock market often rises in late March and early April as it is pushed up by a flood of cash flowing into ISAs as the tax year ends.

A far less risky approach is to spread out investing in your ISA throughout the year and take advantage of market weakness to top up your holdings.

Also, to automate the entire process, why not divide your ISA allowance into 12 chunks and then invest monthly? 

4. Not ‘de-weeding’

Poor-performing funds can hold back how well your portfolio does and can cancel out the good work done by making the right choices.

So, make sure you regularly review what’s doing well and what’s not – then act.

Dog funds: the worst places to have your money invested

5. Not watching those fees

And it's not just the performance of your investments you need to regularly review.

Fees can seriously erode your returns over the years, so it's important you ensure you aren't being ripped off.

We previously explained how some older tracker funds in 2017 were charging well over 10 times more in fees than the cheapest providers out there.

Whether it a specific fund or your share dealing service, keep a close eye on those fees and don't be afraid to move if needed. 

6. Ignoring the rest of the world

Although the UK has the world's sixth-largest economy, we Brits account for only 2.21% of world output according to the data from the International Monetary Fund.

So, by having heavily UK-centric portfolios, British investors risk missing out on possibly superior returns on offer from other developed and developing nations.

For example, according to research by Moneyfacts, the average Stocks and Shares ISA grew 4.8% in 2017/18.

But some of the best top-performing Stocks and Shares ISA fund sectors focused on Japan and China, with returns over the same period of up to 25% – much higher than UK-focused funds.

So, when investing, don't overlook the opportunities available in the rest of the world.

7. Mismatching income and growth

Another tip to create a properly balanced portfolio is this: don't buy growth investments when you need income, and vice versa.

If you want a regular income, look for investments that are likely to pay a dividend. If you want capital growth over time, seek out investments that look undervalued.

8. Making things complicated

If you have been investing for a while, it’s likely you’ve built up a portfolio that is spread across a lot of different funds and providers.

But these can be hard to manage and keep track of, so consolidating can help you get a grip on your investments.

Danny Cox, head of communications at Hargreaves Lansdown, said: “The easier your pensions and investments are to manage, the more likely you are to take good care of them, and make better, timelier, investment decisions.

"Create a single bird’s eye view of your portfolio by consolidating your investments into one place, making them considerably easier, quicker and often cheaper to manage.”

More on ISAs and investing:

Beginner's guide to stocks & shares ISAs

The Dividend Allowance: what it is, how to benefit and the best share picks

Ways to avoid Capital Gains Tax

 

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