According to ASX data, 2020 saw an influx of first-time investors into the Australian share market, as uncertainty saw many looking for new ways to protect and grow their finances. Investing for the first time can open up many opportunities, but there are some common mistakes to watch out for. In fact, some of the most common mistakes are easy traps to fall into, so it pays to be across them, whether you are a novice or an old hand.
Here are some of the common mistakes we see in our industry and a few tips for avoiding them.
#1 Making emotional investment decisions
Putting emotion into the mix when investing will rarely (if ever!) lead to positive outcomes. Your investments should be about keeping you on track to achieve your long-term goals, so check your emotions at the door.
We saw some of the impacts of emotional decision-making at the height of the COVID-19 pandemic, where nervous investors made panicked moves; for example, selling shares they should have kept or moving superannuation into cash at the bottom of the market, simply locking in losses.
It’s important to remember that some price fluctuation is normal, and if you have the right long-term strategy and a portfolio to match, it’s often about staying the course.
#2 Focusing on short-term gains
While there is nothing wrong with looking at your portfolio on a daily basis, your investment strategy should be about long-term gains, so you shouldn’t be making regular market moves without good reason.
If you are making regular changes looking for quick wins, you aren’t an investor; you are a trader. While trading is a valid form of investment, it’s one that takes extensive expertise and infrastructure and can be incredibly high risk. It isn’t usually something the everyday investor should consider because, without the necessary in-depth knowledge, it’s going to be more like gambling than investing.
#3 Trying to “time the market”
If the volatility of 2020 taught us anything, it really reinforced that trying to time the market is incredibly difficult. Of course, every investor wants to buy in and sell out at the right time, but if you focus on working toward your long-term goals rather than timing the market, you’ll likely have a higher success rate overall.
Research shows that less trading is usually more beneficial than more and that a buy-and-hold investment strategy,whereby you keep investments in your portfolio for a long time, is the best way to manage risk.
#4 Picking yesterday’s winners
When we see a share price skyrocketing, it can be easy to get caught up in the hype but joining the bandwagon too late is a very real risk. It’s important to remember that there are no guarantees, and yesterday’s winners could just as easily be tomorrow’s losers. The best strategy is to set a long-term plan and stick to it, focusing on quality assets that you plan to hold for some time.
#5 Investing in something you don’t understand
This sounds simple, but it’s an easy one to get caught up in. If you are making a decision on whether to buy shares based purely on investment performance without understanding the underlying value, cash flow and stability, you’re essentially investing blind.
Understanding the ‘why’ behind investment performance is a critical step in determining whether it’s a good long-term investment that will help you meet your goals. If it’s so complex that you can’t understand it, it’s probably best left alone. Of course, this is one of the areas where your financial adviser can really support you, providing expert advice and helping you to understand whether and why an investment is right for you.
#6 Straying outside your risk profile with risky ‘term deposit alternatives’
This is another one that sounds self-explanatory, but it’s on the rise. With today’s low cash rate, it’s understandable that people are looking for alternatives to grow their funds, but it’s important to understand what you are actually investing in, and how it differs from a term deposit.
One of the term deposit’s biggest advantages is that it remains your money and is guaranteed by the government. You will get the money you put in back at the end of the agreed term with any interest (although today, the returns will be low).
This group of investments being sold to investors as “term deposit alternatives” do not come with this guarantee or any guarantee at all. They are often very high risk and promise high returns, but we have already seen people losing their money in these schemes, so it pays to proceed with caution.
Of course, in a low-interest environment, it can be wise to look at alternatives to help you reach your goals, but it’s also important to stay true to your risk profile.
#7 Going it alone
Whether you are a new investor or an experienced one, having an expert in your corner can ensure you stay on track with your long-term goals, understand what you are investing in, and are able to make clear-headed decisions.
Apt Advisers are supported by an investment team who have extensive experience, expertise and relationships with research houses across the globe. They combine this information with their in-depth knowledge of your circumstances, risk profile and life goals to help you live for today while planning for tomorrow. Ready to get started? Get in touch today.
General Advice warning
The information provided in this blog does not constitute ﬁnancial product advice. The information is of a general nature only and does not take into account your individual objectives, ﬁnancial situation or needs. It should not be used, relied upon, or treated as a substitute for speciﬁc professional advice. Apt Wealth Partners (AFSL and ACL 436121 ABN 49 159 583 847) and Apt Wealth Home Loans (powered by Smartline ACL 385325) recommends that you obtain professional advice before making any decision in relation to your particular requirements or circumstances.