COMMON INVESTMENT MISTAKES AND HOW TO AVOID THEM
Mistake #1: Failure to properly diversify portfolios
In an economic environment that remains challenging and uncertain, the importance of a well-diversified portfolio cannot be underestimated. There are certain economic environments in which one type of asset manager will flourish, and others in which they may not. The same is true for specific asset classes. Allocating an investment to several different asset classes, industries and financial instruments reduces overall investment risk. In addition, allocating an investment to a number of different quality single managers, an investor also receives diversification across asset management strategies and styles. This further minimises the risk of not achieving the investor’s objectives, as it removes the reliance on any single manager to do so on its own. For investors who would like to ensure their investment is well diversified, a multi-managed unit trust may be worth considering as multi-managers deliberately try to mitigate risk by sensibly diversifying portfolios across multiple investment styles.
Mistake #2: Not having started to invest earlier
Too many people leave investing for retirement too late and are thus unable to retire comfortably because they haven’t saved enough. Delaying your contributions even for just a few years can have a huge impact on your final retirement fund. Having even a five-year head start can make a substantial positive difference to your investment in the long term – particularly due to the power of compound interest. For example, if you wished to retire at 65, and started investing R500 per month from the age of 25 in a fund earning 10% per year, by the time you retire, you would have accumulated R3 162 039.79. This is compared to the R1 898 319.03 you would have accumulated had you started investing at 30 instead. This will of course differ from fund to fund, and from person to person, so speak to financial planner before making any investment decisions. But the important thing to remember is that your investment outcome depends on how much you invest, how long you remain invested and the growth your investments generate. The more you save and the longer the duration, the greater the reward when your investment reaches maturity.
Mistake #3: Focusing too heavily on the short-term
Some investments are designed to target their benchmarks over a longer period and others over a shorter period, and the options you choose will primarily be determined by your investment goals and appetite for risk. Shorter-terms goals, such as a holiday in December may require a very different approach to saving for your daughter’s wedding in ten years’ time, or your retirement in twenty. In other words, a low-risk, low-return investment that provides easy access to your cash is very different to a higher risk investment that requires you to remain invested for a long enough horizon to see the long-term gains. Typically investments with longer-term horizons will be more volatile over the shorter term, but should smooth out over time. If you focus too heavily on short term fluctuations, and hop from one investment to the next in the hopes of timing the market, chances are that you can do more harm than good. Much of the everyday volatility and news headlines are factored in when investment decisions are made by reputable managers, so the key is to think long term and stick to your investment strategy.
Mistake #4: Being emotional over investments
When we encounter difficulties in our lives, the natural reaction is either “fight” or “flight.” When our long-term investments encounter some turbulence, it’s easy to default to the same natural reaction. But in this case, most of the time, there is one critical thing we have to do immediately: nothing. Reacting emotionally could result in the buying or selling of investments at the wrong time destroying investment value unnecessarily. We typically suggest that investors who have a tendency to react emotionally and are susceptible to the herd mentality should strongly consider two simple preventative measures. The first is to enlist the services of a qualified and experienced financial adviser who puts your investment objectives at the centre of their advice process. Financial advisers tend to bring objectivity to decision making and ensure you’re able to adhere to a long-term plan. The second is to implement a recurring monthly debit order. Regular recurring investments reduce the temptation to time the market and you receive the benefits of cost averaging which reduces your overall unit prices. By investing fixed amounts at regular intervals over a long period, you are spreading risk over time and avoiding the temptation of buying only at inopportune times.
Ultimately, your investments should help you achieve your goals and dreams. Once you’ve established what your goals and dreams are, designing a financial plan and finding an investment to suit you becomes less complex. Don’t be afraid to use professional support, as long as your adviser is accredited and reputable. And then ensure you stick to your strategy and review it as you move from one life stage to the next.