Achieving success in investing and enhancing your portfolio often involves minimising errors just as much as seeking out the next big opportunity. The key is to adopt a thoughtful, measured approach rather than simply chasing trends or hot tips.

The Wealth Creation team discuss some common investing mistakes and how to avoid them.

Chasing hot + trending shares

Every so often there are industries or shares that are all over the media and you may begin to worry that you are missing out on something. For example, there was the ‘dot com’ bubble in the early 2000s, the social media hyped ‘AMC’ shares in 2020 or the lithium shares in 2022. Jumping on every trend is like trying to catch a wave; you might ride it for a bit, but you’re bound to wipe out sooner or later. That’s because the hot tips and ‘buy now’ rumours often don’t pass the fundamentals of investing test.

The key is to keep a cool head and remember that the real winners are often the ones playing the long game.

Not understanding ‘why’ you are investing

What would you like your investment portfolio to achieve? Understanding your motivations and goals will help you to choose investments that work best for you.

If you want to build wealth for a comfortable retirement, say 20 to 30 years down the track, you can afford to invest in riskier investments to play the long-term game. If you have already retired and plan to rely on income from your portfolio, then your focus will be on investments that provide consistent dividends and less on capital growth.

Trying to time the market

Timing the market involves buying and selling shares based on expected price movements but at best, you can only ever make an educated guess and then get lucky. At worst, you will fail.

As the world-renowned investor Peter Lynch wrote in his book Learn to Earn: “Far more money has been lost by investors trying to anticipate corrections, than lost in the corrections themselves”.

Putting all your eggs in one basket

This is one of the classic concepts of investing and something that you have probably heard many times. But it’s worth repeating because, unless you are regularly reviewing your portfolio, you may be breaking the rule.

Diversifying your portfolio allows you to spread the risk when one particular share or market is performing badly.

Diversification can include different countries (such as adding international shares to your portfolio), other financial instruments (bonds, currency, real estate investment trusts, exchange-traded funds), and industry sectors (ensuring a spread across various sectors such as healthcare, retail, energy, information technology).

Avoiding asset allocation

While diversification is key, how do you achieve it? The answer is by setting an asset allocation plan in place.

How much exposure do you want to diversify into defensive and growth assets? Within them, how much should be invested in the underlying asset classes such as domestic shares, international shares, property, cash, fixed interest and alternatives.

Then review your asset allocation from time to time to rebalance any over or under exposure that may occur due to market movements.

Making emotional investment decisions

The financial markets are volatile and that often leads investors to make decisions that in hindsight seem irrational. During the COVID-19 pandemic, on 23 March 2020 the ASX 200 was 35 per cent below its 20 February 2020 peak. By May 2021, the ASX 200 crossed the 20 February 2020 peak. Many investors may have made an emotional decision to sell out during the falling market in March 2020 but then would have missed some of the uplift in the following months.

Some of the other common investment mistakes include reacting to the noise in media, trading too much, over-diversification, not reviewing your portfolio regularly to ensure it still aligns with your goals, not doing enough quality research and not working with a professional.

Seeking out quality and trustworthy financial advice can help to minimise investment mistakes. Give us a call if you would like to discuss options for growing your portfolio.

Thinking about investing? Read our other articles about financial advisors and sustainable investing: the importance of financial advice + sustainable investing on the rise.

Sources:
Fear of Crashing – Peter Lynch
Australian Securities Marketing through the COVID-19 Pandemic

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Published September 2024.
The information provided in this article is general in nature only and does not constitute financial advice.