New to investing? Don’t make these 7 common mistakes
Common pitfalls often cause budding investors to stumble. We investigate what they are, and how to avoid them.
By Shilpa Ganatra
So you’ve saved some cash, decided against ploughing it in property or a savings account, and are taking your first wobbly steps into the lucrative world of investments. Exciting times, right?
You don’t need to have a degree in economics to invest in stocks and shares – a basic knowledge can get you far. “The world of finance can make everything sound so complicated, but it doesn’t need to be,” says Katie Royals, a financial journalist. She founded The Twenty Percent blog aimed at a young audience, “because I realised a lot of financial knowledge was in the hands of really rich people, but most of these strategies work for anyone.”
While there are certainly good practices to know about, it’s just as useful to understand what to avoid. Here are some common mistakes – and how to avoid them.
1. Not investing at all
Unless you’ve got supportive friends and family already in the know, no one’s going to invite you in to the world of investing – the first small steps have to come from you. And while this can feel intimidating, and the value of your investment may go down as well as up so you could get less than you put in, sometimes the biggest risk is to take no risk at all.
“Especially where we are with inflation, you’re could effectively be losing money if you keep all your savings in a standard bank account,” says Royals, who also advises holding on to investments for the long term. “There is a risk with investments, but if you know you're holding for the long term, it's likely you're going to see a much better return than if you left it in a 0.1% interest rate account.”
Investing as early as possible can really make a difference. Not only does it give your cash more time to build a return and recover from any dips, but compounding (when the return itself earns more return) can stack up – all without you having to lift a finger.
2. Forgetting about your tax-free allowance
Each tax year, you can put up to £20,000 into ISAs (Individual Savings Accounts) and you don't pay any tax on the earnings. A common mistake is not using your allowance to its full extent. So rather than putting money into a standard investment account, first consider putting your savings up to £20,000 into a stocks and shares ISA instead. Then you can use any excess money for a standard investment account. That way, you're making the most of your tax-free allowance.
3. Going DIY too early
While investors might underestimate their own investing smarts – it’s a point to balance carefully. A common mistake is doing away with ready-made investment accounts in favour of ‘stock picking’: choosing specific companies to invest in. This certainly gives you more control over your money, but you’ll have to do the legwork yourself, and it means losing an advisor’s industry expertise and on-the-ground experience of the markets. If you’re a beginner, it might be a good idea to build some confidence and experience before you go DIY.
“It’s important to protect yourself, and make sure you’re getting sensible advice on your investments,” says Royals. “It’s not only that money you’re losing, but if you’re put off investing, you miss out on the money that you could have made in the future.”
4. Thinking short-term
One noticeable difference between more and less experienced investors is the ability to play the long game. Newcomers are more likely to get nervous if markets fall, meaning they’ll withdraw their funds at unprofitable times. “It’s all about holding your nerve,” says Royals. “Really, you want to invest for at least five to 10 years. So it’s a good idea to have an emergency fund with three to six month’s’ worth of expenses in an easy-access cash account, so you won’t have to take money out of your investments if there’s a sudden expense, like if your car breaks down.”
5. Putting all your eggs in one basket
It’s a brave soul who’ll plough all their money into one investment, as they’re really relying on it to come good. Instead, diversifying your money across different companies and sectors is the sensible approach. “We’ve seen in the pandemic that hospitality really struggled, so if you just invested in a restaurant chain, your portfolio is going to look terrible, even now,” says Royals. “Whereas if you diversified across markets with something like a FTSE 100 tracker fund, you would have exposure to many different companies and sectors.
“It’s also important to think about diversifying across geographies. For example, people got scared about what might happen in the UK because of Brexit. Or if you invest only in the US, you’re going to miss out on gains in European or Asian markets.”
6. Getting the risk level wrong
…Or to put it a better way, wrong for you, because our risk appetite is as individual as our fingerprints. Whether we’re ready to opt for a high-risk strategy, or we’re happy with a smaller return with lower risk, comes down to knowing what your long-term financial goals are, and what options you’re comfortable with if that doesn’t happen. It’s important to reassess risk level as life circumstances change. “That’s when speaking to an advisor to work out your long-term goals can help,” says Royals.
7. Not reviewing your investments
A major benefit with investments is that you don’t have to do much work to see your money grow. But newer investors are more likely to leave their investments be entirely, and hope that they’re doing their job. Seasoned investors will check in every six months to a year or so to know they’re doing their job. “You've worked hard for that money so it's important to review them every now and then to make sure you’re getting the most return you can,” says Royal. “Just don’t check them too often as you don’t want to react to short-term. Again, if in doubt, talking things through with an advisor can really help.”