We all make mistakes. But when it comes to investing, mistakes can hurt your ability to grow wealth over time. So to help you stay on track to meet your financial goals, we’ve put together a handy list of 10 common investment mistakes and how to avoid them.
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No clear investment goal
Before you start investing, it’s vital to have a clear goal in mind. For many people, it’s financial security in retirement. For others, it’s a college fund for their kids. And for some, it’s simply a lump sum that they can use to create more opportunities for themselves and their families as life progresses.
The time horizon you’re working to will have a direct impact on the risk profile of your investments, so whatever your goal, it’s helpful to sit down and formalise it in advance. One way of doing this is with a Systematic Investment Plan.
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Too much focus on short term performance
Markets go up and down. By focusing too much on short term performance, you risk missing out on the underlying growth in markets that drives wealth creation. Between 1980 and 2015, the S&P 500 fell on average 14.2% at least once per year, but nonetheless ended up delivering a positive return in 27 of the 36 years. The market was positive 75% of the time, demonstrating that downturns don’t last forever and markets tend to make back their losses over time.
It takes patience and perspective to zoom out and take a long-term view on the market. This is a skill, one that takes practice to perfect.
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Paying too much in fees and commissions
Excessive fees charged by brokerages and traditional investment advisors erode your investment returns and wreak havoc on your ability to build wealth through the power of compound interest.
Your first priority as an investor should be finding an investment platform that enables you to invest in a way that’s low cost, efficient and easy to manage. Robo-advisors do precisely this, and Sarwa is leading the charge for investors in the Middle East.
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Trying to time the market
Even the most successful professional fund managers struggle to time the market. Truth be told, the number of variables at play when investing in stocks makes it almost impossible to know when to buy and sell on a daily basis. Trying to time the market also leads to increased transaction costs, which eat into your returns.
So, market timing is best avoided. Instead, seek to automate your investments to ensure you remain invested over the long term and restrict your ability to make counter-productive adjustments to your portfolio. Time in the market is what matters.
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Letting emotions affect your decisions
Human beings are emotional creatures. But emotions and investing don’t mix. When we let emotion into the investment process, it typically leads to bad decisions.
When markets are falling, we might become fearful and panic sell investments that have the potential to perform very well over the long term. Likewise, when markets are skyrocketing, we might take undue risk by committing too much capital into investments that are flavour of the month.
Again, by automating our investments we can mitigate this problem and remove emotion from the investment process.
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Going with the wrong advisor
There are many great investment advisors out there. There are some bad ones, too. In order to succeed with your investments, it’s critical to find the right advisor for you.
We’re all different, and some people have highly bespoke needs when it comes to investing. But the vast majority of people will benefit from a low cost, automated approach to investing that gives them exposure to long-term growth in markets whilst keeping fees to a minimum.
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Not understanding your risk appetite
Risk is a funny thing. Too much of it, and you might harm your returns. Too little of it, and you also might harm your returns! Understanding your risk appetite is an important element of investing, one that can help you stay calm and invested in markets over the long term. As entrepreneur Omar Al Busaidy says, “Know your risk appetite. If you prefer to play safe, risk little but earn a consistent return then do so. Don’t be swayed by a sudden trend or the investment choices of other people.”
The best investment advisors and platforms take time to understand your risk appetite and construct an approach that’s right for you.
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Buying high and selling low
If there’s one sure-fire way to lose money, it’s buying high and selling low. But this is surprisingly easy to do, since people often become attracted to stocks when they have performed well in the market. By the same token, it’s tempting to sell stocks when they have fallen in price, rather than adding to positions in order to take advantage of cheaper prices.
Rather than getting sucked into this destructive pattern of behaviour, try to ignore the highs and lows and focus on investing over the long term.
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Not diversifying investments
Risk is inevitable when investing, but it can be managed.
One way you can lower the risk of your portfolio is by using diversification. By not putting all of your eggs in one basket, you give your investments a better chance of growing over time.
Traditionally, diversification was a time-consuming process that involved juggling multiple investments. But now technology makes it easy.
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Failing to start
Perhaps the most common mistake when it comes to investing is not starting at all.
To the uninitiated, investing seems complicated, unaffordable and intimidating. But it doesn’t have to be that way. Investing is a journey, and all journeys start with a single step. For some, that might be picking up the phone to talk with an advisor. For others, it might be visiting a website and filling out a form.
Robo-advisors like Sarwa make it easy to get started and manage your investments going forward. So get in touch if you’d like to find out more.
Ready to invest in your future?