1: Not having a Financial Plan
Humans are impulsive. Jumping into the world of investing without a clear, structured plan can be dangerous. Investment risk, currency risk, political risk and even inflation can seriously affect your future and the importance of a solid financial plan must not be understated. A professional financial planner will map out your likely future, building in inflation and potential growth, to give you a clear picture. The plan can then be tweaked to provide different scenarios.
2: Underestimating the power of Compound Interest
Compound Interest is effectively interest on your interest. Saving and growing your wealth over the long term can create significant compounding, and the earlier you start the better. For example, if you save £300 per month from age 20 you will, by the age of 68 have paid in £172,800. However, once you add in growth (at say 6% per year) and compound growth, the portfolio could be worth almost a million pounds! Worth considering…
3: Following your emotions
Humans are emotional beasts and the markets bring out the best of it in us. The euphoric optimism of rallying markets often send the emotional hurrying into purchases at high (and overvalued) prices (think FOMO). The fear and panic of falling markets often cajoles the emotional to sell and flee the markets at their lowest valuations, thus crystallising losses. The trick is to be the contrarian. One of the best investors in the world, Warren Buffet, believes we should “buy the fear” i.e. buy the market when it is fearful and low in value, and “sell the greed” i.e. sell the market when it is rallying and everyone is jumping on board. Although we cannot predict the markets exactly, we can get a feel for them, and many analysts would argue for accumulating fundamentally sound investments when the markets are fearful, and decumulating when everything is heading to the stratosphere.
4: Trying to Predict the Market
An impossible task! In the words of John Maynard Keynes, “Markets can stay irrational longer than you can stay solvent”. Many of the best investors aim to buy assets that are rooted in good fundamentals, and are prepared to play the long game, ignoring the short term noise and volatility. In the old stockbroking days, traders would have their own special way of saying it: “Those who pick bottoms get smelly fingers!”
5: Failing to Diversify
One of the most important things about investing in the markets is to DIVERSIFY, across assets, sectors, and geography. In other words “don’t put all your eggs in one basket”. The premise is simple – spread the risk across various markets so that your portfolio cannot be disproportionately damaged by the failing of a single investment. Whilst this cannot defend against systemic risk across the economy, it can spread the risk of your portfolio and give you a better chance of success in the long term.
6 Starting Late
The Most Important Rule - Start saving early to reap the benefits long term.