Avoiding The Investment Pitfalls
Whatever your financial goals, investments are a key part of getting you there, as they have the ability to generate far greater returns than simply keeping your money in a savings account. But investments aren’t without their pitfalls and even experienced investors can fall into common traps. Here are the key things to watch out for to limit any potential losses:
Failing to plan
Having a written investment plan is an essential part of safeguarding your financial security, as you need to be confident your investment decisions will fit within your overall portfolio. Without a thought-through plan, it’s far too easy to be swayed by rumours, articles or hot tips, and end up with products that are simply not suitable for your circumstances. Remember, without a plan you are not investing, but gambling.
Not having a diverse portfolio
Spreading your money across different types of investments is known as diversification and can help to minimise the risks associated with keeping all your eggs in one basket. For example, when the dot com bubble of the early 2000s collapsed, many investors with tech-heavy portfolios saw their savings virtually wiped out.
Your portfolio should contain a blend of cash, property, shares, bonds, commodities and other investments to add several different sources of return. When one area falls, others may rise to compensate, helping to smooth out returns and increase your overall profit in the longer term.
Chasing short-term returns
When you start investing, it’s very tempting to adopt an aggressive strategy and chase quick returns. Making decisions based on recent strong performance in the hope of a big profit is an extremely risky strategy, as a sudden rise in value is often followed by an equally sudden fall, leading to inexperienced investors buying and selling at the wrong time and losing money. Instead, the ideal scenario is to buy low and sell high, even if that means waiting for a much longer period of time while the price climbs.
Investing with your heart instead of your head
Maintaining a cold and logical approach to your investing can be tricky. Often, a particular investment will appeal to you for personal reasons; it supports your beliefs or was recommended by a friend or family member. Greed and fear are also emotions that can easily lead you into making knee-jerk investment decisions. It’s much more important to remain dispassionate, so you can do your research, monitor your investments and resist the urge to sell at the wrong time.
Failing to monitor performance
Once you’ve selected your investments and set your strategy, it can be tempting to just leave them to it and get on with the rest of your life. However, it’s vital to keep track of your portfolio’s performance and adjust if necessary. You don’t have to constantly keep on top of things – reviewing every 6 months to a year should be often enough. If a particular asset has over- or under-performed, you can choose to adjust your goals or rebalance your portfolio.
Not understanding risk
When investing, it is important to spend some time working out the level of risk you are prepared to accept. Any investment with big potential gains is likely to have corresponding risks and there’s no such thing as a ‘sure thing’. The longer your time horizon, the higher the potential level of risk you can take on, as you’ll have more time to even out any short term volatility.
One useful way to measure risk is to look at the past volatility of your portfolio, which will give you an idea of how likely it is to fluctuate in value in the future. It is also important to understand that investing without advice carries less regulatory protection, and is therefore riskier, than investing with advice.
Not seeking expert advice
It’s easy to make money in a bull market, but successful long term investing requires the skill to position your portfolio to both benefit from rising markets and weather the declines. Professional financial managers keep their clients focused on long term goals and help them achieve their goals.
The advisers at John Lamb Wealth Management have the expertise to build a personalised plan that takes into account your current and future needs, investment time horizon, and appetite for risk, so you can be confident of achieving your long term goals, whatever happens in the markets.
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