Avoiding potential pitfalls with investing

Investing is one of the best ways to build your wealth, and while it isn’t brain surgery, you do need some level of knowledge and experience to make consistently good decisions.

Because let’s face it, making money is more enjoyable than losing it!

Whether you’re new to investing or already familiar, here’s some of the things you can do to set you on the path to success.

#1 Steer clear from making emotional decisions

When your stomach starts to churn because your portfolio has dropped by 20%, you may feel compelled to make changes.

All investors will at some point face setbacks, especially during a market crisis. But as we’ve seen from history, the market can eventually recover with time.

In these situations, it’s important to focus on the bigger picture—if you sell into the fear of the market dropping, you’ll miss out on its recovery.

If in doubt, consider reviewing your long-term goals. If you find that the reasoning behind your investment was sound, stick with it, as the market is likely to pick back up.

If you need proof of the wisdom of patience, look at 2020. COVID smacked markets around in February and March – but the markets spent the rest of the year recovering. For example, as at 16 February 2021, the one-year return from the US Stockmarket (the S&P 500) was over 16%!1

#2 Diversify your investment portfolio

Investing your money across multiple different asset classes – shares, property, bonds, cash can help to lower your investment risk.

This strategy known as diversification—works because different investment types perform well at different times so if one area of your portfolio falls, another may be rising. Having a variety of investments helps balance out your overall risk.

It also means you have diversity in types of return. Instead of relying on all your investment performance to come in the form of cash returns, rents, dividends from shares or capital gains from property and shares means you can enjoy a mix of all of them. 

This is especially important for retirees who may not have the same investment time frame as someone in their 30s who’s more easily able to withstand short-term market volatility. However, shifting all your money into low-risk assets could be costly – your portfolio may be unable to outpace inflation. It’s therefore important to have some exposure to higher risk, higher returning assets, such as shares and property.

Just be careful not to over diversify as this too may affect the performance of your portfolio. Your diversification needs to be strategic. We can help structure your diversification to match your own circumstances such as – performance goals, risk management, age, health etc. 

#3 Focus on long-term financial goals

There’s a big difference between playing a game of roulette and investing – having a strategy in place is one of them.

Too many investors focus on the latest investment fad, rather than creating an investment portfolio that has the highest probability of achieving their long-term goals.

Understanding what your long-term financial goals are, will provide the direction on how you set up your investment portfolio. This includes the types of investments you choose to buy into, how long you need to generate those returns and how much risk you’re willing to take on.

We can review your investments to assess where you currently stand and determine if your investment portfolio needs adjusting to meet your goals.

#4: Avoid trying to time the market

Timing the market is extremely difficult – even institutional investors often fail at it.

Most successful investors give their assets a chance to perform over years, not days. They also adjust how their money is allocated quarterly or annually rather than in response to events where reactions can be emotional rather than logical.

Continuously modifying your investment approach can not only reduce returns through more transaction fees, it can also result in more risk. One of the reasons most investors underperform the market is a consequence of them buying when prices are rising and selling when prices are falling – intuitive but often the opposite of a good strategy.

So, you may be better off contributing consistently to your investment portfolio rather than trying to time your market moves.

#5 Consider your asset allocation

Often the variation of return you’ll see in your portfolio is due to how your assets are allocated, rather than the individual performance of one company’s shares.

But most people focus their time and energy in trying to pick out individual companies to invest in, rather than looking at how their portfolio is set up.

As you become a more sophisticated investor, you may want to consider investing in lowly-correlated markets like gold, currencies, commodities and other asset classes that do not perform in the same way at the same time, as opposed to adding more assets with a similar risk profile. You then need to determine what percentage of your portfolio should be allocated to those assets.

#6 Contribute regularly to your portfolio

True investing relies on contributing regular amounts at regular intervals, in both rising and falling markets.

You can’t control what the market will do, but you can save more money. Continually investing capital over time can have as much influence on building your wealth as the return from your investments. It will also help to increase the probability of reaching your financial goals.

#7 Conduct thorough research

Even if you’ve been advised to invest in a particular company or asset, it’s still important to do your own research.

This will help you identify if there are opportunities, assess any risks (different assets have varying levels of risk) and determine if this investment aligns with your financial goals.

For example, if you’re looking to invest in shares, study the company’s performance, the capabilities of its management team, and the latest industry trends. For property investing, research the areas you’re considering buying into to determine if there is potential for long-term capital growth. 

#8 Invest with a plan

A plan helps you determine what you want to achieve with your investments, whether that’s paying off your home, saving for retirement or your kids’ education.

Without a clear investment plan, you might make hasty decisions, miss opportunities, or take on more risk than you’re comfortable with. So, take time to outline your investment goals, how comfortable you feel about risk and how long you intend to invest for. This should dictate how and where you invest.

Summary

Losses and gains are all part of the investing process but knowing what the pitfalls are, and how to avoid them, will help you on your road to success – and the more enjoyable lifestyle that comes with it.

1 S&P 500 return over a 12-month period as at 16 February 2021

https://www.spglobal.com/spdji/en/indices/equity/sp-500/#overview

The information in this article is current as at January 2024 and may be subject to change. The information in this article is factual in nature only and does not and is not intended to imply any recommendation or opinion about a financial product. You should obtain appropriate advice before making any decisions based on the information in this article.