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The unfortunate nature of money and investing is that they are always at risk. Cash stored under your bed might be caught in a house fire. Property investments might fall in value, and equity investments might go down. The point is this: risk is tied up with all kinds of capital. The crucial task of the investor, however, is to learn how to mitigate these risks and live with them.
One of the great advantages of constructing a strong investment portfolio is that it helps to spread out your risk. Yes, your equities might go down in value during a bear market. Yet until you actually sell your shares, you haven’t actually “lost” anything. In the meantime, if you hold fixed-income securities (e.g. government bonds), cash investments and other “low-risk assets” then these can also help your portfolio to ride out the storm.
With that said, it would be a mistake to claim that simply putting your money into an investment portfolio effectively “shields” your money from all disasters. Many people make costly decisions about their investments – possibly out of fear or panic – and often come to regret them later. Here in this article, our financial planning team here at WMM will be sharing six common mistakes made by modern investors and some thoughts on how to avoid or minimise them.
#1 Don’t follow the crowd
Within particular circles of friends, family and colleagues, it is easy to become tempted by talk of the latest “hot stock” which everyone seems to be piling onto. Whilst human beings naturally want to follow the crowd due to herd mentality, it’s important to tell yourself during moments of rush like these: “Just because everyone is doing it, doesn’t make it a good idea.” Remember the bursting of the Dot Com Tech Bubble, where thousands of investors speculated on tech firms during the 1990s and $5 trillion in market capitalization was lost by 2002.
#2 Don’t watch your investments every day
This might sound like a strange point. After all, shouldn’t you keep an eye on how your portfolio is performing? Yes, of course, you should. Yet most people find it unhelpful to regularly watch their investments as they go up and down. Logging into your portfolio obsessively is likely to cause you to focus on short-term performance rather than long-term growth, which can lead to impulsive and costly decisions. Log in every month or so, some even say annually is a good option, but just try to avoid compulsive checking.
#3 Don’t over-commit to one opportunity
An age-old maxim amongst financial planners, but an important one regardless: “Don’t put all of your investment eggs in one basket.” As great as property might look at a given moment as an investment, resist the urge to commit all of your capital to that one market. Gold might look good at various points in time, but think carefully before committing vast sums to that one asset. The same applies to equities and cash. Speak to your financial planner about how to appropriately diversify and avoid unnecessary risk exposure.
#4 Stay in for the long-haul
If you plan to invest for less than five years, then you risk crossing the barrier from investing into speculating or even gambling. Only in very specific circumstances might it be appropriate to consider investing some of your money over a shorter time frame (e.g. sophisticated investors weighing up an asset-backed, time limited opportunity). Always seek professional financial advice about how to build an effective, balanced portfolio for long-term wealth preservative and growth.
#5 Rebalance regularly, at least every 12 months
Whilst it is generally unwise to obsess daily over your investment performance, it is a good idea to check your portfolio at least once a year to make sure you are still on track towards your financial goals. It might be that your equities have performed particularly well, for instance, and you need to rebalance your portfolio so that it is not sitting outside of your established risk tolerance. Or, perhaps your financial planner has identified poor fundamentals in one or more of your funds, placing your equities at unnecessary risk. Here, you might speak to them about moving your capital across into alternative funds which offer similar potential for generating returns.
#6 Breathe and tame your emotions
One of the investor’s biggest enemies is their own emotions. Fears over a dreaded, imminent market fall can lead people to “panic selling”, which can lead them to miss out on vital growth opportunities for their wealth should these not transpire. The excitement that a particular stock is about to “rocket upwards” can lead to impulsive buying, which might not later pick up and could even take a nosedive. In moments when you read headlines about the markets which cause you to start panicking or get worked up, try to breathe and gather your thoughts. Ask yourself some calm, rational questions before rushing to any investment decisions:
- Have I seen volatility in the market like this before, or is it unusual?
- Generally speaking, is it a good idea to make investment decisions out of emotion?
- Do I need the money in my investments anytime soon, or can it sit where it is?
- Do I expect my portfolio to always go up, or should I expect it to sometimes go down?
- Is this something I should speak to my financial planner about?
If you want to start a conversation about your financial plan or investment strategy, then we’d love to hear from you. Get in touch today to arrange a free, no-commitment consultation with a member of our friendly team here at WMM.
Reach us on 01869 331469