10 Common investing mistakes you should avoid

20 August 2024

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American businessman Warren Buffett once said; ‘Risk comes from not knowing what you’re doing’, which is why you shouldn’t invest without doing your research first. Some mistakes are inevitable, but here are some common pitfalls you should try to avoid, whether as a first-time investor or a market regular.

1. Not doing your research

This may seem obvious, but to invest you first want to understand what it is you’re investing in. What kind of asset is it? Do you understand the company’s business model? Investing purely because something ‘looks good’ can be a foolish move.

How to avoid: Reading this article is a good place to start. Conducting your own research from reputable industry sources is key, but obtaining professional advice from a financial adviser before committing to an investment is important as well.

2. Not having clear investment goals

Investing is more than just making money, think about what you are saving for. Maybe you are saving towards your retirement, or wanting to help pay for your child’s future wedding. Highlighting these goals allows you to assess your ideal returns, your preferred level of risk, and ensures you stay on track.

How to avoid: Note down your specific investment goal, how much you need, and the timeframe. Then, use this as your compass when making future investment decisions.

3. Working with the wrong adviser

Whilst it’s highly recommended to seek professional advice, that advice should be relevant to you. Think of your adviser as your investing partner. The ideal adviser will share your philosophies and know your risk tolerances and investment goals inside and out.

How to avoid: Don’t be afraid to ask both financial and non-financial related questions (check out our article: 5 Questions to ask your Financial Adviser). Trust your gut, if it doesn’t feel right, walk away and find a new adviser.

4. Being impatient

Many first-time investors fall victim to the myth that investing is a great way to get rich quick. However, often it’s very much the opposite. Good portfolios can take years to grow and appreciate in value. Expecting to see results immediately is unwise, and may cause investors to react irrationally when their portfolio isn’t working as expected.

How to avoid: Go in with the mind-set that you may not see results for a long time. Don’t invest money that you see yourself needing in the next few years, as you may not have access to it during the investment term.

5. Being led by your emotions

Being swayed by emotions is an easy trap to fall into. Fear, jealousy, greed, pride, all these feelings can lead to irrational decision-making and make investors lose sight of the bigger picture. Inevitably there is always a degree of emotion involved, we’re only human, but keeping a calm, collected demeanour can reduce hasty decisions.

How to avoid: Stick to analysing fundamental success indicators (returns, performance, benchmarking etc.) and keep a cool head. If you think you are unable to make an impartial decision, seek professional advice.

6. Attempting to ‘time’ the market

Timing the market is like trying to predict the weather a month in advance; it’s extremely difficult to do, even many experts get it wrong. Sometimes the ups and downs of the market occur seemingly randomly, so trying to time the market to avoid ‘bad days’ can lead to adverse results and instead kill your returns.

How to avoid: Don’t try to outsmart the market. Prioritise strong asset allocation and don’t be afraid to leave investments alone.

7. Being swayed by trends/media

Thanks to the internet, all the information you could ever want is at your fingertips – but it isn’t always the information you need that grabs your attention. Bad news travels fast, and it can make unseasoned investors panic and withdraw their money too early at signs of a market decline. Just like timing the market, riding out the storm can often be healthier for your returns.

How to avoid: Don’t make rash decisions. Think to yourself: Is this a short-term blip or a sign of a deeper issue? It may be worth letting the storm pass and holding on to your investment.

8. Waiting to ‘break even’

Whilst at times it can be better to leave an investment alone rather than panic at the first sign of profit decline, it’s also important to recognise when an asset is actively harming your portfolio. Sunk-cost fallacy can be an investment killer, and not only are you losing money by staying committed, but you are missing the opportunity to invest in a better prospect.

How to avoid: Keep a close eye on assets that are continuously losing and make the decision to move on at the right time.

9. Not diversifying your portfolio

Overconcentration in one individual stock or sector can be volatile on your portfolio if that sector takes a hit. Diversification essentially spreads the risk across your portfolio, so if one investment underperforms the other parts of your portfolio should help compensate those losses. Whilst it can lead to slower returns, it reduces your overall risk of losing money.

How to avoid: Invest in a diverse range of funds and asset classes across different industry types. Adjust the balance of assets regularly, as some can appreciate/depreciate quickly.

10. Never starting

Investment carries risk, but it also carries great opportunities. The longer you wait to start investing the more money your future-self misses out on. A great analogy for this is the story of the tortoise and the hare: A slow, consistent approach throughout your lifetime is better than a quick sprint just before the finish line.

How to avoid: Talk with your financial adviser today about your investment goals and options.

*This article is intended for general information purposes only. You should consult your financial adviser before making any financial decisions.