Things to avoid when investing
Posted by Rebecca Harbrow on Monday 10th January 2022.
To keep your investments from losing value or slowing the growth of your assets, avoid these common investing mistakes.
There are more risks and opportunities than ever for investors to navigate in today’s rapidly evolving markets. Here are four approaches we believe every investor should follow.
Don’t pile into cash – stay invested
The biggest advantage of cash is that it offers relative safety. Cash can help diversify a portfolio during times of volatility and is easy to access in an emergency. With cash, you’ll be paid interest on the money, which will be tax-free where it’s in an ISA.
You won’t lose any money by putting your money in cash, but it tends to offer lower returns than other asset classes. It’s also important to know about the impact of inflation on your savings and investments as it can make a huge difference to how much profit you make. Cash is seen as a short-term safe haven and should not be held over a substantial period of time to avoid the impact of inflation.
While it’s good to have some cash savings for a rainy day, the spending value of your money can fall over time if inflation is higher than the interest rate you receive. With interest rates on cash investments at historically low levels, and well below the inflation rate, millions have seen the value of their savings eroded in recent years. To make money on your investment you’ll need to find an account or investment that gives you a greater return than the current rate of inflation.
Don’t go chasing fads – think about the long term
Short-term gains can seem appealing for investors, but if you don’t want to lose your savings, it’s best to not believe the hype about the latest investment craze. Choosing the wrong investment can be a costly mistake. Many investors are turning to social media platforms such as Facebook, Twitter, YouTube, TikTok and other unregulated sources for information about investing.
While it may seem tempting to get investment recommendations this way, it puts you at significant risk from volatile stocks or even fraud. It’s easy to jump on the bandwagon, but momentum is typically falling by the time most people join.
Don’t put all your eggs in one basket – diversify
One of the biggest mistakes when investing is putting all your eggs in one basket as it can leave you exposed to fluctuations in the market. If you’ve invested in one stock and something unexpected happens and it plummets, you could find your nest egg suddenly disappearing.
One way to lower risk is by spreading your wealth over a wider range of investments so it’s not concentrated in one place (known as diversification). By diversifying your portfolio, you can reduce the risk that all of your investments will experience the same negative impact at the same time.
Ideally, you should be looking to build a diverse portfolio with a mix of different investments in line with your attitude to risk. A balanced portfolio will contain a mixture of asset classes, such as stocks, bonds, and alternatives.
Sit tight when it’s right
When markets wobble it can be tempting for investors to sell their shares to avoid any further losses. It’s easy to react to short-term losses but the best thing you can do is most often precisely nothing.
Timing the market involves buying and selling investments when you think they will rise or fall at exactly the right moment. It’s a difficult strategy that rarely works and there are too many unpredictable factors.
If you sell into a falling market you will lock in your losses and it could take you years to get back to where you were. While markets can fall sharply, given time they can rebound, so instead make sure you take the long view. Stock markets have a history of recovering from downturns. If you see your investment drop, don’t worry. Just keep your cool and sit tight.
It pays to seek advice
A financial adviser can help you work out how to achieve your long-term financial goals while taking inflation into account so it doesn’t eat up your returns. Your adviser will speak to you about your attitude towards risk and the level you are comfortable with, helping you make the right investment choices.
The value of investments and any income from them can fall as well as rise and you may not get back the original amount invested.
- While you won’t lose any money by putting your money in cash, it tends to offer lower returns than other asset classes, so it makes sense to stay invested.
- Don’t put all your eggs in one basket. Diversifying your portfolio can help reduce investment risk.
- If you sell when the market falls you’ll lock in your losses. Markets always rebound, so make sure you stay invested.