Investing could be a useful way to bolster your savings and accumulate wealth for the future.
Yet, building an investment portfolio without appropriate knowledge and guidance may leave you vulnerable to costly mistakes.
Worryingly, the number of “DIY” investors has risen in recent years. According to Forbes, in the 12 months following the first coronavirus-enforced lockdown in the spring of 2020, a staggering 950,000 investment accounts were opened by investors opting to go it alone.
What’s more, research published by This is Money in August 2024 found that a third of DIY investors were planning to take a higher investing risk in the next three months, due to growing market confidence.
So, whether you’re thinking about investing for the first time or you have years of experience behind you, read on to discover three common investment mistakes and how to avoid them.
1. Investing without clear goals in mind
Forging ahead without a purpose in mind is a fundamental investing mistake.
If you invest without a good idea of what you want to achieve, you might struggle to make key decisions, such as:
- What to invest in
- How long to invest for
- What level of risk to take.
You may also find it hard to gauge your progress. This is why setting clear goals and a strategy for achieving them is a crucial first step for investors.
Do you want to grow your wealth over a fixed period to achieve a specific goal, such as early retirement or funding your children’s education? Or is your priority generating an income from your investments over the long term?
Aligning your investment strategy with these broader financial and life goals could help you build a portfolio that meets your specific needs.
2. Thinking short-term and letting emotions drive investment decisions
Market volatility is an inevitable part of investing. Changing interest rates, fluctuating inflation, and geopolitical events, such as the war in Ukraine, mean that markets move up and down over the short term – sometimes dramatically.
However, if you make decisions based on short-term fluctuations in the market, this could lead to emotional decision-making, which may hamper your progress towards achieving your goals.
For example, you might panic-sell your shares when they fall in value, turning a potential loss into an actual loss. Additionally, you could miss out on returns you might have received if you’d remained invested.
Remember, “time in the market beats timing the market”. In other words, focusing on your long-term goals and holding your nerve when faced with short-term fluctuations, could allow you to ride out the storm and benefit from any growth that may occur when the markets recover.
The chart below shows the performance of the FTSE 100 – an index of the largest 100 companies in the UK by market capitalisation – between 1984 and 2024. As you can see, volatility was almost constant. Yet, over the long term, the value of the index has risen considerably.
Source: London Stock Exchange
Had you taken a short-term view and sold your investments as soon as there was a downturn, you may not have benefited from the growth the index saw over these 40 years.
What’s more, by trying to predict the optimum time to buy and sell – timing the market – you might have missed out on some of the best-performing days.
Avoiding reviewing your investments too often and taking a long-term view could help you avoid this common investing mistake.
3. Failing to manage risk by putting all your eggs in a single basket
You might have a particular sector or asset class that you feel comfortable investing in – something you understand well and feel confident putting your money in.
Yet, if your portfolio is made up of a single category of investment, this could leave you vulnerable to sudden downturns in the market.
Imagine you invest all your money in the UK. If the country’s economic climate stumbles, the value of your entire portfolio could drop.
On the other hand, diversifying across a range of asset classes, sectors, and geographical areas could help you manage the risk in your portfolio.
As an example, figures published by JP Morgan show that the UK FTSE All-Share Index fell by 9.8% in 2020, while the US S&P 500 index rose in value by 18.4%. So, if you’d spread your investment “eggs” between these different geographical “baskets”, your gains in the US could have offset some or all of your losses in the UK.
Working with a financial planner could help you avoid these costly investment mistakes
Keeping these different factors in mind isn’t always easy, especially if you’re new to investing.
That’s why the DIY approach could be risky.
If you’re keen to avoid these common mistakes and build an investment portfolio that helps you progress towards your long-term goals, we can help.
Please get in touch by emailing info@lloydosullivan.co.uk or call 020 8941 9779 to see how we can assist you.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
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