Sometimes even the most successful investors make mistakes. Here we delve into four common mistakes by investors and explain how you could avoid them. All investments fall as well as rise in value, so you could get back less than you invest.
Everyone knows the old adage of putting all your eggs in one basket.
You could make a lot of money when certain sectors do well and that’s where your money is, but putting everything into one area is unlikely to work well long-term. If you invest all your assets in only one type of share or sector and it performs poorly, your whole portfolio could take a hit.
Instead, you could diversify your holdings across different types of assets that usually perform differently from each other like shares, bonds and cash. You can spread your shareholdings between different sectors, like food industries or tech companies.
The idea of diversification is that if one area performs poorly, others might rise or hold steady and help offset the losses. We think a diversified portfolio is likely to do best over the long term.
Not assessing risk
Risk in the investment world often refers to uncertainty. When you make an investment, it can be hard to say with any certainty what you’ll get back when you decide to cash it in. Share prices fluctuate, interest rates vary and inflation is a risk, too.
You need to understand what risks you’re taking before you invest. The first step is to look at your own attitude towards risk – what level of risk you’re comfortable with and can afford to take.
Some investors will prefer low risk investments while others will be happy to take on a higher level. Generally speaking, higher-risk investments can potentially offer higher rewards but can also mean more potential for loss.
Consider your goals and timeframe, as well as the risks in your existing portfolio. If you’re 30 years old and saving for retirement, you’re less likely to be worried about a higher risk of loss. You’ve got plenty of time to ride out the market’s ups and downs compared with someone who wants to retire in less than five years. Those coming up to retirement are likely to be more worried about inflation, which can erode the real value of your money over the long term.
Trying to time the market
Ideally you’d be fully invested while the stock market is rising, and then jump quickly into cash when the market begins to fall. This is where the maxim ‘buy low, sell high’ comes from.
But while this might sound logical, it’s also much easier said than done. For this to actually work investors must know exactly when to move out of shares and precisely when to buy back in. Given that the stock market is inherently unpredictable, this is almost impossible for even professional investors.
If you can build a portfolio that meets your long-term goals and considers your risk tolerance, you can stay invested – even when the market is volatile. Regular investing can also smooth this out – in months where the market is lower, your investment will buy more shares, and over time you’ll pay an average price.
Not doing your research
Understanding how a company works before investing has major benefits. First, you’ll have a better idea of what to expect. For example if you know a lot about technology, you’ll know if what a tech company is saying is good or bad, and what it might mean for its future performance.
As well as this, you manage your portfolio with confidence. The stock market can be an intimidating place for the untrained eye, but it can provide you with a lot of potential. Doing as much research as possible can only help you make better decisions.
Doing the research can be time consuming, which is why at HL we have a group of experts who do a lot of the research for you, making it easier to know about where you’re invested. And it’s free.
This includes monthly research roundups from our meetings with fund managers, share and fund research, as well as our carefully selected favourite funds in the Wealth 150.
Make the most of your money
Another tip to look after your investments is to have everything in one place. Too many people have investments spread about the place across different platforms. This makes it hard to know what you have and how to reach your goals, let alone avoiding common investment mistakes!
With HL, transferring your investments to us is simple. You could do it online and we'll do the rest for you.
Before transferring please make sure you read the Terms and Conditions (including tariff of charges) and Key Features for your chosen account. Please make sure you will benefit, not incur excessive exit fees or lose valuable guarantees. Pensions are usually transferred as cash so you will miss any market rises of falls for a period.
You could also get cashback as a thank you if you act before 17 December. Transfer ISAs, pensions, funds or shares worth £5,000 or more to HL and we’ll give you between £20 - £500. The money is a thank you from us. It won’t come from your account or investments.
The more you transfer, the more you receive. Terms apply.
The value of investments can go down in value as well as up, so you could get back less than you invest. It is therefore important that you understand the risks and commitments. This website is not personal advice based on your circumstances. So you can make informed decisions for yourself we aim to provide you with the best information, best service and best prices. If you are unsure about the suitability of an investment please contact us for advice.