From putting all your eggs in one basket to chasing the mega mint, there are common mistakes investors make when it comes to putting your money into stocks and shares. But with a little bit of know-how, you can avoid these potholes to make sure your road to investing is a smooth one. Whatever you do, remember the value of your investments can go down as well as up and you may get back less than you invested.
1. Not investing at all
Keeping your money in a savings account or under your floorboards might feel safe, but it won't earn you much. By not investing, you're missing out on the opportunity to earn a return on your money and grow your wealth. The cost of goods and services tends to go up, and if your money isn’t growing at a rate that’s above inflation, its value shrinks in real terms. This can lead to a loss of buying power and gets in the way of your ability to meet future financial needs.
2. Thinking short term
Investing is a long-term game. If you're constantly checking your portfolio and making investment decisions based on short-term movements in the market, you're likely to make poor choices. Instead, focus on your long-term financial goals and develop an investment strategy that supports them.
3. Not reviewing your investments
Investing is not a set-it-and-forget-it activity. It's important to check in with your investments to make sure they still line up with your goals and risk tolerance.
4. Getting risk level wrong
Investing always carries a certain level of risk, but it's important to understand how much you’re willing to risk so can you stand to lose a bit of money should you choose higher risk investments or are you missing out by playing it too safe. Take the time to understand your risk tolerance – we have a risk profiling tool to help you do this – and choose investments that are best for you and your finances.
5. Investing too much in one asset
Diversification is key to successful investing. Investing too much in one asset, such as a single stock, can expose you to unnecessary risk. If those stocks don’t do very well, it could have a significant impact on your portfolio. It’s better to spread your investments across multiple asset classes (stocks, shares and bonds with similar characteristics and follow the same rules) and industries to spread the risk and reward.
6. Chasing returns
Investors choose assets that have performed well in the past, hoping to ride the wave of success. However, past performance is no guarantee of future success. Investing based on past performance alone can lead to poor investment decisions.
7. Ignoring fees
Investors can be liable to pay fees and charges for the investments they make. These fees are typically for the running costs of a fund and these fees can munch away at your returns. It’s important to understand what the these are and choose low-cost options where you can. Even a seemingly small difference in fees can have a significant impact on your investment returns over time.
8. Not learning from mistakes
Everyone makes mistakes. However, the biggest mistake you can make is not learning from them. Investing is no different. Take the time to reflect on your investment decisions and understand what went wrong. Use these lessons to improve your investment strategy and avoid making the same mistakes in the future.
9. Ignoring inflation
Inflation’s the rate at which the general level of prices for goods and services is rising. Over time, inflation can lower the value of your investments. If your investments aren’t growing at a rate that’s above inflation, you could be losing money in real terms. It's important to think about the impact of inflation on your investments and adjust your strategy according to your investment goals and to make sure you're not losing value over time.
10. Not using your ISA allowance
Another mistake some investors make is not taking advantage of their ISA allowance. An ISA lets you invest up to £20,000 each financial year without paying any taxes on your returns. So, while not using an ISA doesn’t increase your risk of losses, it could limit your gains.
Investing can be a powerful way to build your wealth and securing your financial future. However, it's important to navigate the investment landscape carefully and avoid common mistakes that can set your progress back. By being aware of these pitfalls, seeking professional advice and taking steps to avoid them, you can improve your chances of success.