In yesterday’s blog, we explored three mistakes that could blow your investments off course – trying to time markets, following the herd and getting spooked by bad news. In today’s blog, we look at two more mousetraps facing investors – and finish up with some quick tips for investors starting out today.
Emotional attachment – don’t fall in love with certain investment narratives
Falling in love with companies or sectors can be dangerous. You get emotionally attached, and end up with an unbalanced portfolio with not enough diversification. That increases your risks.
John Langrish, head of investments at James Hambro & Partners, says: ‘People go for all associated companies simply because in the past one has done well for them. If you concentrate your money in one sector, you run the risk of being hit hard when there is a banking or commodity crisis, or suffering heavily when a country has a prolonged spell of poor performance, as happened to investors in Japan in the 1990s.’
A related error is holding on to failing investments. A successful investor detaches emotionally from his or her investments, recognises mistakes and corrects and rebalances the portfolio to maximise success.
Lee Goggin, co-founder of findawealthmanager.com, says: ‘Fear of admitting you were wrong can also cause losses to be more extreme than they need to be. Investors can often ‘ride a stock down’ when it is plummeting rather than recognise their mistake, get out fast and limit their losses.’
Patrick Connolly, of Chase de Vere, the independent financial adviser, adds: ‘The big danger with not rebalancing is that it can change the risk profile of your portfolio so that you can end up taking too much or too little risk.’
False insights – try not to let your brain deceive you
Investing needs discipline. An investor should make a plan and stick with it, refining it and rebalancing the portfolio where necessary. Don’t try and read markets, and don’t get emotional with your investments.
‘It’s a natural human bias to see patterns in everything,’ says Colin McLean. ‘We create stories and linkages that reassure us we can interpret events. It can encourage investors to jump aboard trends, and buy into shares too late. That may give the illusion of controlling events that are actually more random than we think. Having an investment checklist or other analysis discipline can help to reduce the emotional appeal of patterns.’
We also tend to get stuck in the past, through what psychologists call ‘anchoring’. That means we base our judgements on false insights about a sector, or macro-economics, or a perceived investment ‘theme’.
Chris Justham at wealth manager 7IM says: ‘If investors are not careful, this can lead to decisions being made on what may be irrelevant or out of date information.’
And a reminder of the basic investment principles if you want to make a good job of it;
1. Make a plan – what are you investing for? A holiday, capital for your first business, property? Whatever it might be, you have to figure out what your #goals are, how much they might realistically cost and how long you have to achieve them. Also, don’t forget the unsexy stuff; for instance, you might not be thinking about retirement but if you’re fortunate enough to live long enough, you will need to make provisions, and your auto-enrolled pension at work might not be enough (shock horror!)
Your ambitions will determine whether you *can* invest, and if so, for how long. Investing for any less than five years won’t be enough to make a decent return and see out the volatile waves that sweep over markets as a matter of course. The longer you can invest, the more time you have to navigate the choppy waters of markets and get to your destination…so the sooner you start, the better. Also, being in markets for longer means you can afford to take risks, up the ante and invest more in shares, and in turn more adventurous sectors.
2. Refine your plan over time – if and when your life changes in a meaningful way, your targets and investment approach will change too. Getting older, getting married, having children, changing jobs, starting a business – all might be a catalyst for reviewing your investment strategy. The biggest change you are likely to encounter is the need to switch into “safer” assets (e.g. bonds) as you near your investment target to protect as much of your capital as possible (whilst never counting on investments to guarantee a return).
3. Frequently review your investments – but not every five minutes. Looking at what you’re invested in every quarter is more than enough (and even that might be tad excessive). Check-ups are definitely more necessary for those investing in individual stocks but TBH, a newbie investor should probably steer clear of these anyway. If you are invested in a fund (either a unit or investment trust), it would be foolhardy to chuck out a fund that has been performing badly – it may come good again – and pile into a hot fund that may tank just as you buy in. The only changes that are necessary are “rebalancing” perhaps once or twice a year to ensure you are maintaining the same mix of assets in your portfolio that you started out with – like 60/40 in shares/bonds – and good online investment services should offer to do this on your behalf.
4. Take a long-term view – this one speaks for itself, but it really is the core of good investing. Once you have sussed out your goals and made your investment choices, stick to your plan and let markets do the hard work for you in the long-term.