Justin Urquhart Stewart, Co-founder and Head of Corporate Development at Seven Investment Management, highlights the “Seven Deadly Sins” investors must avoid lest they erode their capital and fail to meet their financial objectives.
There is a lot of investment “noise” out there and the financial world is often unhelpfully plagued by hype, metaphors and parables. There are nuggets of wisdom to be found, however, and the notion of the “Seven Deadly Investing Sins” teaches particularly valuable lessons.
There are a great many traps to fall into and we often find former DIY investors come to us having been very badly burnt by ones of the “sins” below.
Sin #1: Sloth – inactivity; reluctance to make an effort
Money certainly isn’t everything, but it is the key to gaining many of life’s pleasures and avoiding its woes. Yet apathy over financial affairs is only too common.
We are all living longer than ever and there has never been greater choice about how you can invest for your retirement, but many of us aren’t being nearly as proactive about pension planning as we need to be.
It’s easy to let life get in the way, but the fact that many of us will spend 30 years or more in retirement is a very sobering thought.
As with every element of wealth management, the earlier you take action the better. However, it is never too late to take advice to maximise your living standards in retirement.
Sin #2: Greed – unwisely pursuing (unnecessary) material possessions
There are a huge range of investment opportunities available and it is vital you assess them with a dispassionate eye rather than falling victim to greed.
For example, some companies now offer discounts to shareholders holding a certain (often quite hefty) number of shares. But this can easily result in a wildly skewed portfolio and exposure to heavy losses if, say, the leisure or retail sectors took a hit.
Investments should stand on their own merits. You should only ever invest towards your wider financial objectives, not to make small short-term savings.
Sin #3: Gluttony – habitual greed or excess
There can definitely be “too much of a good thing” – particularly in investment risk. You may have seen strong returns from an asset class, market or sector, but overloading on a particular type of risk often leads to financial heartburn.
Risk and return must be weighed carefully in the balance and your portfolio carefully calibrated to deliver the performance you need in the timeframe required. Be realistic about upside you hope for and the downside you can tolerate as you work towards your goals.
Don’t mistake gluttony for good. If an investment opportunity sounds too good to be true, it probably is.
Sin #4: Envy – discontent and longing for others’ rewards
Investors are beset by biases, and none is more insidious than envying the luck the fates have dealt others (or even yourself in the past). Envy can powerfully obscure logic and lead to very poor decisions, like taking on more risk than you want – or need to.
Everyone’s financial situation, objectives and mind-sets are different. What’s more, “survivor bias” means that your fellow investors will often over-emphasise good results and gloss over the bad.
One person’s “red hot tip” may well leave you cold. As the warnings say “Past performance is no guarantee of future returns” and you must look ahead to the results you can realistically achieve in an ever-evolving investment environment.
Sin #5: Wrath – engaging in self-destructive behaviour
The “once bitten, twice shy” feeling can be particularly painful when you’ve lost money. At the start of your journey, you should be particularly careful to avoid risky investment behaviour likely to result in an emotional rollercoaster that will put you off.
Our research shows you only need to start putting some investment risk to work when your returns exceed the money you pay in. Until then, there often isn’t enough in the pot for it to compound meaningfully.
Advisers play a crucial role in helping you know when it is wise to increase risk, given your circumstances and comfort level. Please don’t just follow the herd only to find that you’re angry with the results.
Sin #6: Lust – lacking self-control against powerful desires
We all know the urge to throw caution to the wind and indulge in something that deep down you know you shouldn’t, but acting impulsively is a sure way to scupper your financial goals.
Taking profits at the wrong time or too often may mean you don’t benefit from time in the market, giving up the chance to reinvest dividends and benefit from compound returns. Even more worrying is people dipping into savings accounts or even pension pots that will have to sustain them for decades.
You certainly shouldn’t stint yourself, but a highly disciplined approach to managing your finances is vital. Here again, taking some objective advice is key.
Sin #7: Pride – refusing to admit one’s own limits, faults or errors
If I had a pound for every time a DIY investor told me that their investments were doing better than the professionals’…
There are, of course, very competent DIY-ers out there, as well as some poor professionals. Yet I’d be very worried about someone who thought they had the time, expertise and energy to keep outperforming year after year – and in different environments – all on their own.
It’s next to impossible for one person to keep on top of the entire investment universe, let alone the ever-changing tax landscape.
Don’t reject the idea of expert help and let pride come before a fall – particularly if you’ve had the good fortune to build up a significant sum.
This seven are just some of the top “deadly sins” investors need to watch out for. We see these and many more each day.
If you recognise any of the faults I’ve described in your own investment behaviour or fear that your portfolio strategy isn’t going quite to plan, don’t delay in taking professional advice. We really have seen it all before and can swiftly help you get your investments back on track.
When it comes to your financial future, burying your head in the sand really is the worst sin of all!
Seven Investment Management LLP is authorised and regulated by the Financial Conduct Authority. Member of the London Stock Exchange. Registered office: 55 Bishopsgate, London EC2N 3AS. Registered in England and Wales No. OC378740.