The most common investing mistakes - and how to avoid them
By Renee Eagar*
Have you ever asked yourself, “Am I doing the right thing with my money?” Maybe you’ve kept cash in the bank because it feels safer and somewhat more accessible. Or you’ve thought about selling your investments because of something you saw in the news.
These are normal reactions. But they’re also the kinds of decisions that can quietly hold you back consciously or maybe even unconsciously and make a big difference over time. Most people don’t lose money because they picked the wrong fund. They lose money because they let fear or emotion drive their decisions. The graph below shows how easy it is to destroy your wealth just based on reacting in periods of volatility.
The good news? These mistakes are easy to avoid — once you know what to look out for.
Investors for years have been making emotional decisions when it comes to their finances—some can’t help it because money is emotional. It is personal – tied to our hopes, fears, family and future plans.
The emotional traps we fall into
The problem is what feels right in the moment can often be the wrong move for the long term. That is why it helps to know the difference between emotional reactions and smart, practical choices.
One of the biggest traps is being sold something that sounds great — without being shown how it fits into a real plan. You might walk away with a product to invest in, but no strategy behind it. Good advice starts with understanding your full situation, objectives and building a holistic plan that works for you.
Another common mistake is holding too much cash. It feels safe, especially during uncertain times. But over time, inflation eats away at its value. Cash is useful for emergencies, but if you want to grow your money, it needs to be working harder. It makes little sense to hold cash for long periods of time especially when your tax rate is high as this makes your monies after tax yields much lower and most definitely won’t outperform inflation over the longer term. This becomes a problem especially when Interest rates are on a downward cutting cycle. There are better options for cash that remain conservative.
Panic selling is another big one. When the market drops, people often feel they should do something — anything — to protect themselves. But acting in fear often locks in losses which are almost impossible to recover. It is difficult to do especially nowadays when it feels like every other day there are frequent big events, they happen instantly and far too quickly but unless your circumstances are a life changing event such as death, divorce or even a risk profile decision as an example. The best thing to do is to stay calm and wait it out.
Common traps you can easily avoid
A lot of people invest in whatever did well last year. But just because something performed well recently doesn’t mean it will necessarily persist, a longer term track record and understanding where you are invested for as an example is way more fundamental to a successful investment result.
Diversify, the lack of variety and different fund manager views can make your portfolio more fragile. Spreading your investments, reduces the risk and helps protect you if something goes wrong.
If your money isn’t growing faster than the cost of living, you’re slowly falling behind. These days, even retirees often need to take on a bit more risk to stay ahead of the curve. And while it is important to understand fees, fees are only one part of the picture.
Do not let a fear of costs stop you from investing. A 1% growth differential over a 30 year period, can mean millions of rands extra towards your savings and or retirement plan.
So, if it relays to better investment growth, lesser tax you pay or even a fee saving within an investment product or the time it takes you to invest, good advice can help you achieve that extra growth.
It’s easy to wait until things “feel right.” But waiting often turns into months or years on the sidelines. And the longer your money sits dormant, the less time it has to grow.
Don’t leave it to chance
Getting started, even in a small way, is often better than doing nothing at all.
If you are not sure what to do next, or if you are worried your money isn’t working hard enough, talking to a financial advisor can help. A good advisor won’t sell you just a product. They’ll help you build a plan that fits your life.
* Renee Eagar, Certified Financial Planner®, is head of Brenthurst Wealth Claremont, Cape Town