Biggest mistakes new investors make
Clients that are new to investing frequently ask us what are the common mistakes new investors make, so that they can avoid them themselves. Here are the top ones we observe that people make before arriving at the point of coming to see us.
Lack of preparation
Jumping into the world of investment is just the same as any other significant decision we make and it’s vital to do your research before you start. This is especially the case if you are going in on your own, without the advice of a financial planner. For example, if you’re planning to invest in the share market, not only will you want to review share prices and performance, but you should also dig deep into the individual companies you’re looking to invest in. This requires a lot of time and expertise, so if you’re short on either it’s best to outsource this task to the professionals.
Too much focus on past results
Don’t ever take it as read that history automatically repeats itself in the world of investing. Good performance by an investment looking backwards doesn’t lock in a guarantee of the same outcome going forwards. There is no doubt that data on how an investment has performed historically is relevant, but it should never be the only factor to consider. Any investment is a statement of belief that the target will gain value over time. To be sure about this, a decision to put money down on an asset should be based on a wider investigation than just looking at its track record to date.
Putting all eggs in one basket
A common misstep involves focusing too tightly on just one form of investment. Property fills this place in the hearts of plenty of Australian investors. However the problem with this single-mindedness is that you’re loading in a higher level of risk. If you concentrate on one class of investment to the detriment of others, that risk can kick in if your favoured asset class struggles for returns in comparison to others. That can be exacerbated by a more generalised downturn. The solution here is to ensure you are diversifying your investments and spreading your investments across a variety of asset types.
Lack of liquidity
Investors who are new to the game sometimes make the mistake of locking away too much in their investment assets. This can lead to problems when they need to lay their hands on cash quickly in a crisis, forcing them to sell when their investments are down. So while it’s great to build that portfolio, ensure that you keep some funds accessible in a savings account (or similar) for emergencies.
Trying to time the market
A common goal among people investing for the first time is to hit the market at the perfect moment and hold off making their investment. But the reality is that there is no perfect sweet spot – either for buying in or for selling to get out. A more effective strategy is aiming to stay in the market for as long as possible so that you can outride all manner of market movements and instability. Longevity in the market can therefore yield greater returns than finding the perfect moment to enter.