How to become a better investor
by Personal Finance Journalist, Ruth Jackson
To become a better investor, you may need to change your investment behaviour. There are a few expensive mistakes that many investors make time and again.
Learn to avoid those mistakes and your investment portfolio should benefit.
1. Not knowing your goals
“Setting your goals is the first step to successful investing,” says James Pearson, investment propositions manager at NFU Mutual. “Your target might be to save £20,000 to help pay for your children to go to university, or £100,000 in your pension pot to help fund your retirement."
Once you have a clear idea of what you are aiming for you will be able to think about how long your money has to grow to that level. Knowing how much you want to have and by what date will help you decide how much risk you are prepared to take.
“It is important to understand the level of risk you are comfortable with,” says Pearson. “Traditionally, the greater the risk you take with your money, the greater the potential for growth.”
You need to make sure you understand the risks involved in the investments you are considering and that you are comfortable with them.
2. Chasing last year’s winners
When you are looking for something to invest in, don’t be too swayed by short-term past performance. “Investing in a fund which has performed well in the past does not necessarily mean it will perform well in the future,” says Danny Cox, a chartered financial planner at Hargreaves Lansdown.
You could end up jumping onto the band wagon just as everyone else jumps off. “Too many people invest at the top of the market after strong performance has already been achieved and then sell out nearer the bottom when losses have already been made,” says Patrick Connolly, a certified financial planner at Chase de Vere. “This approach can lead to people making sizeable losses and having a thoroughly miserable experience.”
Instead you need to understand your investments. This means doing your research and learning why they have performed as they have in the past, and what is likely to drive them in the future. That way you can make an informed selection.
3. Trading too much
“Buying low and selling high is the aim of traders the world over. However, investing is not the same as trading,” says Rob Morgan, pensions and investments analyst at Charles Stanley Direct.
Many investors make the mistake of constantly trading shares and funds as they try to spot what the next big thing will be.
“With investing the aim should either be to use time and patience to multiply your wealth over a long period, or to generate an income from a capital sum. Both these aims are usually best met by staying invested rather than habitually trading in and out of assets,” says Morgan.
4. Taking a short-term view
Most people invest in the stock market because they believe that the returns will beat those offered by safer investments like cash. Historically, this is believed to be true, but it takes time.
“Don’t expect stellar returns from day one,” says Morgan. “Significant market falls are a natural part of investing and, sadly, notoriously difficult to predict. It is worth remembering that the longer you invest for the greater your chances of a positive return.”
Some experts say you should invest in the stock market for at least five years. That should allow enough time to smooth out any peaks and troughs in market performance.
5. Putting all your eggs in one basket
“Diversification is the cornerstone of sensible portfolio management,” says Morgan. You need to put your money in more than one type of investment in order to protect yourself from a sudden fall in that market. For example, don’t put all your money in property or internet shares – a shock to those industries could wipe out your savings.
“The best way to diversify risks is to invest into a range of asset classes which don’t all rise and fall together,” says Connolly. Spread your money across shares and funds investing in different geographic regions and different types of assets such as equities, property, cash, bonds, as well looking at some of the innovative new ways to invest such as P2P lending.
6. Not rebalancing your investments
Once you’ve chosen your investments you need to keep an eye on them. Don’t watch them like a hawk buying and selling at the first signs of movement. But, do check them from time to time to make sure your portfolio isn’t becoming unbalanced.
As time passes some of your investments will perform better than others. You need to rebalance your portfolio to make sure you don’t end up overexposed to some investments.
“This involves selling some of your investments which have performed well and now represent a larger proportion of your portfolio and reinvesting in those which have performed poorly and are now a smaller amount of your portfolio,” says Connolly. “This will help to get you back to your starting position and so control the amount of risk you’re taking.”
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