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10 Investing mistakes and how to avoid them

Nick Louth outlines simple rules for investing success
April 24, 2015

I've been investing now for almost 30 years and over that time it has become clear that investing for long-term gain doesn't have to be difficult or complex. In my new and fully revised investing guide, Multiply your Money*, I've endeavoured to show that while it's fun to try to beat the market, just like a seasoned Investors Chronicle reader, that isn't actually necessary. Market-average returns are actually fine, if you start early enough, invest consistently and keep costs low. For the less experienced it's a truly simple route to wealth creation (see 'It's not complicated'). For the more experienced investor, dealing with individual shares as well as funds, things are a little more complex. There are still plenty of easy mistakes to avoid. Here, then, are 10 common errors.

  

1. Letting charges sap your returns

High investment charges are like driving with the hand brake on. Even 1 per cent a year can eat a quarter of your cash over 25 years, but many pay far more than that. With-profits life insurance, endowments, old-style personal pensions and most actively managed investment funds may have much higher fees buried within them. It is tough, of course, if you are already saddled with them. But with pension freedom here, and more low-cost options available, discovering what fees you actually pay, the costs of exit and contesting charges where possible is vital.

The spread of low-cost trackers and exchange-traded funds (ETFs), even into specialist sectors, means there is less excuse than ever to pay through the nose. Bear in mind, it is easier to cut 1 per cent from your annual costs than to gain an extra 1 per cent in performance. The costs cut lasts years with no further effort, but performance has to be fought for every year.

 

2. Throwing good money after bad

This is probably responsible for more poor market performance than anything else. If a share or other investment you own is continuing to fall compared with the broader market, then you must sceptically (and rapidly) re-examine the investment decision. If you were wrong you must be prepared to sell. If there has been bad news, such as a substantial profit warning, you will rarely regret selling immediately, even if it means a loss of 20 per cent.

There is nothing wrong with being wrong - many professionals admit to being wrong almost half the time - as long as we admit it quickly. Even if we are convinced the company is sound, we must never throw in more money immediately. Once a share starts sliding, we may have many opportunities to buy the shares more cheaply.

 

3. Overtrading and impatience

Sitting in a long motorway queue for roadworks is a good metaphor for investing. Many drivers constantly switch lanes, trying to second-guess which line will get them ahead. But with so many others taking a view on what we might term 'vehicle positioning futures' it is clear that there is a lot of fuel and concentration wasted for what, on average, is zero gain.

Likewise, jumping in and out of the market has costs in money and time for scarce gains. The stock market grows long-term returns mainly because of reinvested income, but the short-term price trend can be anything. It always surprises me that there are so many people tempted into day trading by promises of consistent gains which, academic studies show, are quite rare. Indeed, common sense shows trading gains cannot be available to the average participant, because every trade has both a winner and loser.

 

4. Buying what you don't understand

This is Warren Buffett's advice, and if it's good enough for him it should be good enough for us. Never buy shares in a company you don't understand - however many share tips, bullish articles, or gushing tributes appear about it. If you don't understand the products it makes, its market or growth prospects, you won't recognise the signs when things start to go wrong and you may be left holding yesterday's failures. Knowledge is not only the key to making sound investments, it also gives the confidence to retaining them when the less well-informed are panic-selling, and to know the correct moment to take profits when the good times really are over.

 

5. Putting all your eggs in one basket

Balanced risk makes a stable portfolio. However good we think our judgement is, we will be surprised by good events such as takeovers or bad ones such as profits warnings. Having a collection of shares in different industries, some money in bonds, and the rest in cash, will give a balance to these risks and rewards, and a smoother upward ride in our overall investments. The risk assessment must be broad, too: don't put all your savings into a share scheme with your employer, nor invest too heavily in the industry you work in. If disaster strikes and you lose your job, you need to know your cash is well away from the trouble.

  

6. Following the crowd

Investors cannot make money without buying at low prices and selling at high ones. Those opportunities only exist because the investment crowd, with its short-term fixation, is doing the opposite. Contrarians are sceptical of the never-ending market booms, but confident that the slumps don't last forever, either.

 

7. Letting it take over your life

The buzz of investing in the markets can be addictive. Widespread access to the internet means that either at work or at home, many keen investors can pretty much stare at share prices all day. This can be anxiety inducing as well as a waste of time, and it may lead us into overtrading.

 

8. Letting tax drive your investment

Tax benefits are like the streamlining on a car: they confer benefits when you're really motoring, but they're not much use when you are standing still. Don't forget that it is the investment engine that really gets you to your destination. Investors in film finance partnership Eclipse 35 geared up on their investment and were then ordered by a court to pay tax on much more than their original stake. Be wary of schemes that rely on a particular tax interpretation, or are not that profitable to begin with. If the investment isn't compelling as a standalone opportunity, it is rarely a good idea to be drawn in just because of tax benefits.

 

9. Falling for scams

We should find good investments - they will almost never find us! There are hundreds of dubious schemes on offer. They can be anything from time-shares, pyramid selling, and boiler-room scams at the least respectable end, to penny share investments, savings schemes that offer cash back and free gifts, and property-related offers. Some of the ones that I particularly detest are the funeral saving plans or lump-sum life insurance payments, which appear regularly in TV listings magazines fronted by a trusted celebrity. The lump sum returned is usually less than that which is contributed based on average life expectancy. No wonder you don't need a medical!

The harder the sell, the more persistent the salesman, and the more the scheme is being targeted at the financially inexperienced, the more suspicious we should be. If an investment is abroad or unregulated, think twice. Most IC readers are probably too savvy to fall for these scams, but quite a few experienced investors do get lured in. If it sounds too good to be true, it almost certainly is.

 

10. Not being in the market

The superiority of average investment returns over high street savings is well enough known, but the long-term effect of compounding those differences still isn't sufficiently appreciated. A study by Barclays Capital showed that £100 invested in a building society account in 1945 until the start of 2014, and adjusted for inflation, would be worth £180 with all income reinvested. The same money similarly invested in a broad range of shares would be worth £5,140.

The only other asset that may match those gains is in buy-to-let investing. While being a landlord has made many wealthy, it is a much more hands-on experience, and does not yet have the depth of reliable long-term data that we need to be sure of its consistency.