We all make mistakes, it’s only human. But as an investor, it’s important to be careful and avoid doing anything that could hurt your investment journey and potential returns. Here are five common mistakes you should try to watch out for.
Mistake 1: Delaying your investment journey
If you’re waiting for the right time to finally dip your toe in the investment world, you may be wasting your time. Because the ‘right time’ may never come and you could be waiting around forever. But more importantly, by delaying your investment journey, you could be missing out on some potential growth. So, if your financial situation allows it, consider taking the plunge when you can. The earlier you start investing, the sooner your money could potentially start growing and benefit from the power of compounding. See when you invest in companies, you may receive some profits, also known as dividends, and you’ve got two choices from there. You can either cash your money in or you can re-invest it by putting your earnings back into your plan. If you go for the latter, your profits could generate further profits. And by repeating this process over the long-term your money could pile up and snowball in an exponential way.
Let’s see what happens when you wait. Say, you’re 25 and decide to invest £2,000 in a Stocks and Shares ISA right now. By the age of 55, you could end up with about £5,8161. Now, let’s imagine that you wait for your 30th birthday to start investing the same amount in your ISA. By the age of 55, you could get about £4,753 – that’s a £1,063 difference2! If anything, this example shows how starting early could help you take advantage of the power of compounding.
Mistake 2: Taking too little or too much risk
Yes, investing comes with risk. But as an investor, you have the power to choose how much risk you want to take, and it’s important to choose the level of risk that’s right for you. If you take too little risk, you may be missing out on some tasty opportunities. On the other hand, if you end up taking too much risk, you could end up losing a lot. So, how do you find the right risk level for you? It all depends on your financial situation and personal preferences.
Regardless of your risk appetite, it could be a good idea to spread your money across investment types and regions. In the investment world, we like to talk about ‘diversification’. Instead of investing in one or two companies and risking all your money, you spread your money across a range of investments and markets, that way if some of your investments perform poorly, they should be balanced out by others doing well, limiting your potential losses as a result.
Mistake 3: Ignoring ISAs and personal pensions
If you’re a UK tax resident and are ignoring ISAs and personal pensions, you could potentially be waving goodbye to tax-efficient returns. With a Stocks and Shares ISA or personal pension, you don’t need to pay UK tax on profits you make, that way you get to keep more of your money. But it doesn’t stop there!
If you’re saving for retirement and decide to put your money in a personal pension, you’ll receive 20% tax relief from the government – this is to compensate for the income tax you’ve already paid. Say you’re a basic rate taxpayer and earn £1,000. You’d typically have to pay 20% tax on your earnings, and this case, you’d be left with £800. Well, if you put £800 in a personal pension, you’ll get back £200 as tax relief – and if you do the maths, £200 is 25% of £800, meaning you effectively receive a 25% top-up every time you pay into your personal pension. Each tax year, you can put as much as you like in your personal pension, however the amount you’ll get tax relief on is limited to £40,000, or 100% of your earnings (whichever is lower) – this is your annual allowance and it includes the combined contributions made by you and the government. Another thing to keep in mind is that your pension money will be locked away until your 55th birthday. You won’t be able to withdraw any funds before you’re 55, so make sure you’re comfortable leaving your money invested over a number of years. Once you turn 55, you’ll be able to take 25% of your pension pot tax-free.
Retirement may be a long way off for you and you probably have other priorities. That’s absolutely fine, but in that case why not look at ISAs? With a Stocks and Shares ISA, not only can you invest up to £20,000 per tax year (subject to change), but you also get to stop the government from dipping into your pot. Each year, you have until midnight on the 5th April to use your ISA allowance, so try to make the most of it before the deadline passes.
Mistake 4: Overlooking investment fees
Whether you invest by yourself using a DIY platform, or have investment experts that do the hard work on your behalf, you’ll need to pay fees. And since they’ll eat into your returns, it’d be a mistake to overlook them as you could end up throwing money down the drain. So, if you want to maximise your potential profits, it could be worth shopping around and having a look at the different platforms or providers and compare their fees and charges. You may think there’s not much difference between an annual fee of 1% and a 1.5% charge per year – after all, it’s only a 0.5% difference. But over time, it can add up. Let’s take a hypothetical example. If you invest £10,000 in a Stocks and Shares ISA and earn a yearly return of 5%. After 20 years, if you’re charged an annual fee of 1.5%, you could end up with a pot worth estimated £19,898. However, if you’re charged 1% a year, after 20 years, you could get approximately £2,013 more at the end (£21,911), which is about 10% extra in your pocket! So, try and spend time shopping around, it could pay off! But don’t forget to also look at the quality of the service providers offer. It’s not all about finding the cheapest offer, it’s more about finding a balance between low-cost fees and a remarkable service.
Mistake 5: Trying to time the market
Many investors try to predict when to be invested to maximise their profits and limit their losses. But guess what? Most of them fail and end up taking a huge amount of risk with their money. For instance, when markets start falling, there’s a breed of investors who are quick to sell to try and avoid further losses. But all they’re doing is making their losses real. And even worse, they could miss out on the better days. Some of these investors will also stand ready to buy the dip (when markets reach their lowest point), so they can make a profit when markets go back up. The issue here is clear. There’s no way to know where markets are going next, they may continue to fall or they may go up, who knows? Unless you have a crystal ball, it’s impossible to predict the future, and relying on gut feeling to make investment decisions is never a wise move.
Financial markets have ups and downs, and nobody knows where they’ll be heading next. So, as an investor, it’s important to learn to live with these unpredictable movements. The second thing you could do is take advantage of your time in the market. How do you do this, you ask? Simply by remaining invested over the long-term. Seeing markets fall can be stressful, but if you stick with your investments, you could end up ironing out the bumps. In fact, studies show that the longer you invest, the more likely you are to make a positive return. People who remained invested in the FTSE 100 for any 10-year period between 1986 and 2019 have had an 89% chance of making a gain – and this is a timeframe that includes some of the worst market crashes, like the 2008 financial crisis3.
References:
1: This is the projected value for a Confident Plan (Medium Risk Plan). This is only a forecast and is not a reliable indicator of future performance. If markets perform worse, your return could be £3,071. If markets perform better, your return could be £11,500. Values correct as of 09/04/20.
2: This is the projected value for a Confident Plan (Medium Risk Plan). This is only a forecast and is not a reliable indicator of future performance. If markets perform worse, your return could be £2,790. If markets perform better, your return could be £8,393. Values correct as of 09/04/20.
3: Data from Bloomberg
The tax treatment depends on your individual circumstances and may be subject to change in the future.
Please remember the value of your investments can go down as well as up, and you could get back less than invested.
