Investing can be emotionally challenging, particularly when it comes to the stock market with its ups and downs. The potential long-term rewards of investing can be well worth the effort, but it is easy to make costly mistakes when the limits of our human psychology come into play. In this article, our financial planning team at Vesta Wealth offers an outline of common, costly investor mistakes and how to mitigate them. We hope this is helpful to you and invite you to contact us if you would like to discuss your own investment strategy.
Have a plan before investing
When investing, some people rush to open an investment account and simply start buying shares in companies they like. Little thought goes into examining the fundamentals of each company, or thinking about the philosophy driving the investor’s decisions e.g. growth vs value. Also, many investors do not have clearly defined goals for their investments. To avoid these errors, it is always wise to have a long term plan for your investments, which helps to keep you consistent and confident when markets go down and you see short term losses.
Remove emotions from decisions
Humans tend to have a strong loss aversion instinct, which is stronger than our desire to find pleasure. It is estimated that we experience losses at least two times more powerfully than we do rewards. This can lead investors to make poor decisions based on a desire to avoid further loss, such as selling assets when they go down in value.
Here, an investor can stay disciplined by using their financial adviser as a sounding board for their fears and concerns. You can also remind yourself of why you chose an investment in the first place. Did you buy shares in a company because you believed it would always go up in value and never experience volatility? Or, did you do so because you believe in the business and want to be part of its likely long-term success?
Positive emotions also need to be put in perspective when investing, not just the negative ones. For instance, falling in love with a company or asset e.g. a cryptocurrency, can lead you to throw caution to the wind and invest more than you should. Again, talk to your financial planner about what you want to invest in and ask for their guidance about the options available.
Avoid market timing
In early 2020 some brave investors benefited from the pandemic by buying at a low point, after stock markets had crashed in March. Others were not so fortunate, putting lots of money into equities in January and February, just before equities plummeted by over 20%. The reality is that it is very hard to time the markets with a lump sum.
One way to protect yourself as an investor is through something called pound-cost averaging. In simple terms, this means drip feeding money into your investment portfolio over time – e.g. month by month – rather than all at once. You can also mitigate your desire to beat the market by limiting your individual stock picking. Instead, concentrating your portfolio on a range of funds (each holding many different company shares) can help you reap the long-term rewards from going with the market, which tends to be very efficient at reflecting relevant information into its prices.
Ensure proper diversification
All of us know that putting your life savings into a single investment – e.g. a company stock – is a bad idea. If the company becomes insolvent or is affected by a specific event, then you stand to lose all of your money. This extreme example shows why it is crucial to diversify your investments properly. This can be quite hard to achieve on your own, but a financial planner can be hugely helpful here, helping you spread your portfolio appropriately across multiple markets, countries, asset classes and companies from various industries. In the event any single one fails or does poorly, other investments from different areas should help to buttress the portfolio.
Use good information
Investors can only make good decisions if they have access to good information. Without it, you cannot reliably value the fundamentals of a company, fund or other investment opportunity. If you want to purchase a Buy To Let property, for instance, then you need a range of up-to-date, trustworthy data and information to help ensure it will be a good investment choice (e.g. reliable surveys). The same holds true for bonds, equities and other non-property investments. Here, be careful about the information you use from online sources. Many YouTube channels recommend risky assets and investments due to the presenter’s limited experience and education about markets. Here, it can help immensely to have a financial planner to pose questions to, and to ask information.
Invitation
If you would like to discuss your financial plan and retirement strategy, then we would love to hear from you. Get in touch with your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.
Reach us via:
t: 01228 210 137
This content is for information purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.