Top 5 Investing Mistakes (And Why We Make Them)
You could be undermining your best efforts to grow your portfolio.
2 November 2021
Caroline Ritchie looks at the five most common errors investors make.
1. Failure to start, and procrastinating
This, in my view, is the biggest preventer of success with investing – and it’s obvious why.
Other things can be sorted out later, such as whether you are in exactly the right fund or risk profile, or if you have a good adviser. But if you do not get stuck into a saving habit early on you hobble yourself at the outset.
Why we put this off – and why we put anything off – is rooted in human behaviour. We will always prefer instant satisfaction to restricting things that are pleasurable.
Start young being good with money and stick to your plan. Habits are easy to maintain once they’re ingrained, and saving is no different. It’s not a wildly exciting message, but it is the most effective thing you can do to grow your wealth over your lifetime.
With few exceptions, it does not matter how much or how little you earn, there is always room for a slice of saving. KiwiSaver has helped millions in this regard, taking the pain out of tucking away cash for later.
Many advisers recommend having KiwiSaver and setting up another savings fund as well. Run the two in tandem. That way you can have the long-term benefits of KiwiSaver, but also flexibility to use your other investments before the age of 65, if you need to. Put money into both from the minute you’re employed, and don’t stop.
2. Chasing magic
Once you’re on the savings runway, you want to see your lump sum start to grow. Or if you already have your retirement nest-egg in place, you start wondering about higher returns in this low-interest-rate environment.
In either case, looking at different types of homes for your stash becomes interesting, as the potential pay-off (and potential losses) increase in value. It’s very tempting to fall into what I call the ‘lure of easy money’ trap.
As with procrastinating, we are programmed to be greedy. In the Stone Age, this kept us alive, as we gorged on all the resources we could when they were available. Today, though, these instincts lead us into places where we shouldn’t be, such as investment scams.
‘Magic-seeking’ happens when you scour the landscape for returns that are too good to be true, then latch onto them, against your better judgement. Or, the people behind these dodgy schemes roam the landscape looking for you, and get you hooked. Investors at all levels need to cultivate a healthy level of scepticism.
Don’t believe every glossy advertisement you see for high interest rates. Certainly never answer any unsolicited emails about investing, or lotteries, or gold-bullion trading, or binary options.
The only people making the easy money here will be the crooks lurking in the dark on the internet.
3. Falling in love with certain shares
This has been one of the top frustrations over my whole career: clients who are emotionally over-invested in one or two of their favourite shares.
This usually happens when the companies in question have performed far better than the rest in the portfolio. Often this is over many years, and the stocks are household names. Sometimes it’s because the client worked for the organisation for a long time and holds a large number of shares (sometimes their only shareholding).
In both cases, there is a biased attachment. This can get hazardous, as the shares in question start to dominate the portfolio or, in the case of only owning one share, dominate your whole life.
I know it’s impossible to be completely impartial about money, but I do urge investors to try. The phrase I use over and over is: ‘The shares don’t love you back!’
The second danger here is that you are, or you become, under-diversified. No one company is bomb-proof. No one company has all the answers.
History is littered with the remains of devastated investors left with nothing once their too-amazing-to fail stock went under. Investing is not a game of faith, it is a game of moderation, so do not let this be you.
My personal rule of thumb is that no more than five per cent of your total portfolio should be in any one listed company.
4. Getting caught up with the herd
The cycle of greed and fear is one of the first things investors are told to guard against. In fact, “Be fearful when others are greedy and greedy when others are fearful” is super-investor Warren Buffett’s best-known phrase.
The problem for Mum-and-Dad investors is getting caught up at either end of the cycle. When things are going well and running hot, everybody wants to join in. Again, you can blame your instincts here. Nobody likes to be left out, and in the modern world this is especially the case with ‘easy money’.
If you’re not invested in shares, or you’ve been sitting on some extra cash for a few years, you might begin to feel as if you are being left behind by everyone else’s great returns.
If someone suddenly pipes up and says, “Oh, I’m getting 11 per cent in Fund X” and you start to feel jealous, please hold fire. How much of that is capital gain versus income? Over how long?
It might turn out that over the last six months the fund did just that, but the previous three years were nowhere near as fantastic.
The really big mistake you can make when racing with the herd is selling into a crash. Missing out on the upside is one feeling. The sensation of true fear when markets are tanking, and thinking you will be left with nothing, is something else.
It might sound exaggerated, but this is how you will feel when markets take a turn for the worse. Selling at these points of fear will damage your long-term investment. It is impossible to buy back in at the ‘right’ time, though many try. The result is usually a hefty loss.
If you have a properly diversified portfolio, your best plan is to ride out the cycles, difficult though that may be. Don’t try to time the market and pick the tops and the bottoms. Make a solid plan with some professional help at the start and – very important – stick to it. Being consistent is your best method of navigation through good and bad.
5. Fees are not the devil
This is the surprise that no one was expecting, and is contrary to a lot of the mainstream advice saying “Always keep fees low.”
My point is what you get for the fees. This might seem like a simple thing to say, but there are two very different parts to it. All fees pay for administration and custodial services in a fund or portfolio – this is a given. But this is a very small part of the overall fee.
A large chunk goes to the branded company you signed up with and the adviser who looks after things for you. What you have to decide is whether their service is worth it. Here’s where it gets interesting.
Advisers often use this line when selling their services: “I can achieve better returns for you than if your money is just sitting in an index.” The only problem is that most have no proof, over any decent stretch of time.
Another, much better line, used by the best in the profession is: “I will be there to hold your hand.” And by this they mean that you will have a relationship. They will save you from the very serious mistakes that can occur, caused by greed and fear (see above). This, for some clients, is well worth paying for.
Before you do pay, however, be under no illusion that the adviser is going to make you any more money in the long term than any other adviser.
The good news is that most advisers will happily consult with you about your situation before you commit to a plan or any payments, and this is definitely a meeting worth having. For many clients taking a big first step into the markets, I recommend visiting several different advisers.
Sure, there will be fees, but having a professional who really understands your situation can be worth so much more in the long run, in terms of giving you comfort and security around your money.
By Caroline Ritchie, Investment Stuff
First published 20 November 2017.
The editorial below reflects the views of the editorial contributor only and content may be out of date. This article is sourced from a previous JUNO issue. JUNO’s content comes from sources that it considers accurate, but we do not guarantee that the content is accurate. Charts are visually indicative only. JUNO does not contain financial advice as defined by the Financial Advisers Act 2008. Consult a suitably qualified financial adviser before making investment decisions.
Informed Investor's content comes from sources that Informed Investor magazine considers accurate, but we do not guarantee its accuracy. Charts in Informed Investor are visually indicative, not exact. The content of Informed Investor is intended as general information only, and you use it at your own risk.