Investing successfully requires a balance of strategy and action
Most investors fail on both counts as they lack any sort of initial or ongoing strategy and then fail to action on a regular basis. Below is a list of some of the most common reasons why this is the case.
1. Trying to time the markets
Too many investors brought up watching Wall Street think investing is about trying to time the markets. In reality that game is one based on ego. To think you know better than everyone else in the world who is trying to do the same thing as you can only ever be about ego. Chasing returns is akin to gambling, and we all know who wins at that game. Sound, long term investing is about sticking to a plan and taking what the markets have to offer. Stock markets will provide you with the return you need if you just let them.
2. Lacking a plan or reason why
Without a plan or a reason why you are investing you will not know what return you need. Understanding your own financial position, goals and strategy as well as how this relates to your personal life is key to coming up with the right mix of assets. Having the right mix of assets should reduce the amount you have to worry about your investments. That is because you will have a greater level of confidence that you are doing the right thing, understanding the reasons why you have done what you have done.
3. Not spreading it around enough
This is probably common mistake number one of the average investor. “Stick it in technology”, just invest in the “FTSE 100”, “Emerging Markets are doing well” are all excellent examples of how not to do it. Focussing on one type of investment, whether that is one country, one sector or even one company is, again, akin to gambling. The beauty of investing is that you do not have to gamble. You can spread it around as much as you like and the best bit is that it actually makes your investing experience a much smoother ride. Different types of investments will work with each other to minimise the ups and downs so that you can focus on long term success.
4. Spreading it around too much
Of course the opposite to getting the right amount of diversification is making a hobby out of it. Putting your investments in lots of different places will most likely end up with you just holding the same shares, for example, through different funds. So getting the right amount of blend is key to achieving a nice ‘lean, mean and ready for action’ portfolio.
5. Poor administration
This one can hurt you just as much as any other factor. Poor administration can lead to simply forgetting about your investments over periods of time. Though in one sense that is not a bad thing, generally you should be able to access your investments any time, online, and be able to make changes at the drop of a hat. Having your investments all over the place with ten different providers is firstly just a nightmare when all that paper comes through the door, and secondly very much against the spirit of mistake number 2 above. If you have a nice succinct plan as to why you are investing then it’s likely that your investments are held in a nice succinct way too. Plans change, and so it should be easy to change your investments in line with that.
6. High charges
Quite simply, the more you pay in charges the less you have to invest for growth. Reducing your charges where possible and appropriate is so easy to do. So many investors hold expensive, older investment plans like endowments, pensions, even just simple unit trusts and ISAs. Clean out your portfolio and get it working for you with a more modern, lower cost version.
7. Paying too much tax
Getting your investments into as tax efficient order as possible takes constant monitoring. Obviously I would say that being an investment planner. But the truth is that you have a new ISA and Pension contribution allowance each year that change every year. You also have a Capital Gains Tax allowance to make use of each year. Not forgetting that your income most likely changes each year so the considerations are constantly changing with that. Then of course the government likes to shift the goalposts pretty much annually. So making sure your investments are saving you tax and minimising it where you might be paying too much is key to simply making better returns.
8. Not taking enough risk
Finally we have those that cannot bear to invest in the markets because they feel it is too much risk. Of course everyone should invest according to their preference but that is not to say that saving your money with the bank is not risky. I always say that you work hard to earn the money you have, so it should make you feel safe and secure when you do have it. Worrying about it should not be the objective. However a completely worry free life would probably see us lounging on the sofa, getting unhealthy, not earning money and slowly dying away. That is probably the best way to describe what could happen to your savings if you keep too much in cash. This is Money wrote just yesterday that there are only 3 savings accounts that currently offer interest rates that beat inflation, everyone else is offering you the chance to slowly lose your money by keeping it in their savings account. So it is probably fair to say that taking a little risk is necessary to making your money work for you.