1. Making knee-jerk investment decisions
Many investors going it alone sell assets when they are falling in value, simply because they feel the need to “do something” and gain some measure of psychological comfort – however damaging that may be to their investment returns if the falls turn out to be a temporary blip.
There will be times when you should indeed exit rather than endure further falls. However, while it may feel counter-intuitive, sometimes doing nothing can be the better option, rather than making paper losses into real ones. Recent research has proven that those staying the course ended up significantly better off than those who dumped poor performing funds for seeming winners during the first wave of the crisis, for instancei.
You cannot eradicate emotions when investing, but you can make sure they don’t cloud your judgement with a professional acting as your wealth coach and tackling any behavioural biases that may emerge
What Oxford Risk has called the “Behaviour Gap” – buying high and selling low – costs 1.5%-2% a year over time. In fact, emotional investing generally costs 3% in returns long term, it says.
You cannot eradicate emotions when investing, but you can make sure they don’t cloud your judgement with a professional acting as your wealth coach and tackling any behavioural biases that may emerge.
2. Relying too much on historical returns
A recent surveyii found the biggest mistake millionaire investors around the world had made was setting too much store by historical returns. This was cited by 38%, even above not having taken financial advice (35%).
As funds research highlights, outperformers are often already “past their best” while underperformers are set to recover, meaning that those who rely too much on scorching past figures can often get burned.
Spotting the winners of the future early on, rather than investing while looking in the rear-view mirror, is the key. For all but the most avid amateur, this calls for professional research capabilities
The eternal truth of the disclaimer “past returns are not a guarantee of future performance” should always be borne in mind – and particularly so now that the world is changing so rapidly. Technology was the standout of 2020, but many see the sector now running out of steam and facing regulatory pressures, for example.
Spotting the winners of the future early on, rather than investing while looking in the rear-view mirror, is the key. For all but the most avid amateur, this calls for professional research capabilities.
3. Seeing safety only in cash
Statistics show many people retreating to cash in the face of continued uncertainty and a natural desire for safety. Their instincts are understandable, but they need to be clear that several factors are diminishing the appeal of large cash holdings.
First is that rock-bottom interest rates – and possibly even negative ones before too long – powerfully erode the value of cash holdings over time. If your money is not growing at least in line with inflation, which itself might start to rise, then you are essentially losing money year after year.
The cost of a reluctance to invest is around 4% to 5% a year over the long term, according to Oxford Risk, so factor those potential losses into your calculations
While it must be hoped that banks will not resort to charging for deposits (although they might!), savvy savers have to consider their options. There are many for even the most risk-averse, and you will often find that an investment portfolio is a far more appealing strategy once you have talked things through with an expert. The cost of a reluctance to invest is around 4% to 5% a year over the long term, according to Oxford Risk, so factor those potential losses into your calculations.
We have all been guilty of some kind of error in our financial judgement, and hopefully most of these will be with relatively less significant sums early on in our wealth journey, rather than with critical pots when it is too late to make up losses. We take professional advice to help us be “our best selves” in every other area and it makes sense to get some coaching to get the best from your wealth too. See how much you could earn by avoiding common errors in investment strategy.
4. Not seeing through the lens of time-horizon
Your time-horizon – how long before you need your investments to bear fruit – should be a key plank of your strategy as it drives your risk-profile to a large degree. Those with longer to recover from any bumps along the way can generally afford to take on a more aggressive stance. Similarly, someone very close to retirement will need to deploy their retirement funds in a very different manner to someone who is nearing the end of their life and is eying Inheritance Tax.
If you are getting the sense that your investment strategy should be revised (and possibly completely overhauled) throughout your life, well then you are correct. Any change in your circumstances or objectives should trigger a review
If you are getting the sense that your investment strategy should be revised (and possibly completely overhauled) throughout your life, well then you are correct. Any change in your circumstances or objectives should trigger a review.
You may wish to receive financial planning advice separate to the management of your investments, but in either case you should ensure that adequate notice is being taken of your time-horizons (and you are likely to have several for different elements of your plans).
5. Flying solo when it’s no longer fun
We can all remember starting off as investors and many people will have felt the satisfaction that comes from growing a significant portfolio as a self-directed investor. However, as I can attest, there can rapidly come a point when it is no longer fun and the risks become very real indeed.
We’ve been matching investors to advisors at record rates ever since the COVID-19 pandemic began, because people are seeing the need for expert oversight in a world that is getting harder to interpret by the day. DIY investing is positioned as being the more cost-effective option, but when you factor in the superior returns – and risk management – you get with a professional managing your investments, then it is often a false economy to persist. It is no coincidence that two-thirds of wealthy people take professional financial adviceiii.
You will also gain immeasurably in peace of mind. I don’t envy anyone trying to manage complex portfolio that represents a significant portion of their wealth by themselves today.
ii deVere Group
iii University of Toronto