There’s something about financial investments that brings out the worst in people. Everyone has an opinion, those with limited knowledge posture as experts, and people abandon what really matters and focus on the minor. As a result, if you’ve invested any amount of money before, chances are high that you’ve made some missteps. You’ve probably made one of the more common ones, like being impatient, investing in a sector (or company) you don’t know a lot about, and letting emotions cloud your judgment.
However, these are mistakes you make as a rookie investing hundreds of dollars, hoping to make a quick buck. As a grown up investing for the long-term, there are other types of mistakes – and these ones are more serious. This time, the capital is bigger, so missteps are more pronounced and can cause lasting damage. This article outlines five of these mistakes, and discusses how you can avoid them.
1. Focusing on the short-term
To earn significant returns on your capital, it’s important that your portfolio grows in size over time. This means seeing consistent increment over a 10, 15, or 20-year period. A common mistake people make is expecting to see significant results in 2 to 3 years. Thinking like this is dangerous for two key reasons: it makes them more vulnerable to asset classes that promise huge returns but rarely ever deliver.
Secondly, it makes them impatient, thereby affecting their ability to benefit from the exponential effect of compound interest. Bonds and stocks often have some really good years, but they also have years where things aren’t so great. The benefit of a long-term strategy is: you win on aggregate, and that may not happen in the short term.
2. Paying too much in administrative fees
This is one of the biggest issues people face when their portfolio is being managed by an advisor or wealth management company. The logic behind it is sound; get your money handled professionally and earn solid profits, but what’s the essence if a big portion of your returns ends up being charged as commission?
It defeats the purpose of a long-term strategy, and it’s an easy mistake to avoid. Want to know if you’re affected by this? Ask for a report from your advisor, then plot an average of your yearly earnings against how much you pay in fees.
3. Not diversifying according to risk tolerance
What’s your risk appetite like? Do you want your investment portfolio to bring in small but consistent returns every year? Or are you willing to take more risks in the hope of getting even bigger gains? Whichever one you prefer, talk to your advisor and ensure your portfolio composition aligns with it.
An alternative is to create a portfolio with a mix of both. This could be 50/50, 60/40, 70/30, or any other sharing formula that works for your risk appetite. Diversifying like this helps enjoy the best of both worlds, and if done right, it lets you maximize your capital.
4. Not protecting portfolio against black swan events
Black swan events are unpredictable and unplanned events that upset the natural order of things, impacting several business sectors at the same time. A good example is the 2008 financial collapse, COVID-19, or the war in Ukraine. Black swans often affect the financial markets, causing investors to lose money.
Here’s the thing though, you can design your account in a way that protects you from these events or at worst, minimize their impact on your investment. This can be done with the right mix of asset selection, diversification, and real-time management. After COVID, we helped several people assess their portfolios and found that most of them needed rebalancing.
5. Working with the wrong advisor
Ironically, getting this right helps you avoid mistakes 1 to 4. A great advisor knows the importance of a fair earnings-to-fees ratio. Furthermore, they’ll take out time to help you figure out your risk appetite and explain the importance of diversification to you. Finally, they’ll carry out regular checks on your account to ensure you’re covered against major events.
Essentially, the biggest mistake you could make while investing is not talking to the right people or working with advisors who have your best interests at heart. If you’d like to have a one-on-one chat with an investment specialist or assess the health of your portfolio, we can help you. Just follow the attached link to book an appointment, it’s completely free.
