Common investment errors that are losing you money
For all the fire and fury about institutional investors and corporate executives destroying long-term value by failing to think beyond the next quarter, perhaps it’s ordinary savers that have the greater problem.
Despite more and more people enjoying lengthy periods in retirement, and funding that retirement increasingly being a responsibility of the individual, HSBC Global Asset Management research suggests that retail investors are worryingly short-termist when it comes to planning for old age. HSBC asked consumers what they thought “long-term investing” actually meant. Fewer than 10 per cent said 20 years or more, nearly half said five to 10 years, and incredibly over 10 per cent said just three to five years.
This matters not only because it means many investors are choosing investments that will not give them the returns they need (while overreacting to volatility), but because time in the market is more important than timing the market.
According to Fidelity, Steady Eddies who started putting £1,000 a year into the FTSE All Share in 1986, and increased their annual investment by £1,000 each decade until January 2016, would have turned an original investment of £82,000 into £233,800. Even Good Timing Gary, who achieved the near-impossible feat of only putting the same investment into the market when it was at cyclical lows, would have been left with nearly £45,000 less.
But failing to appreciate the benefits of compounding is by no means the only common problem. We have a peculiar attraction to cash despite its failure to maintain its value in real terms over time. Aversion to losing the nominal value of any investment has prompted many to hold excessive deposits in easy-access accounts that pay pitiful rates of interest.
Yes, central bank policy is the cause of those, but low interest rates are intended to make it relatively more attractive to take risk, and savers only have themselves to blame if they don’t respond to such incentives.
Part of the problem is that many people don’t invest with a clear idea of what they’re seeking to achieve, and so don’t work out what they need to do to get there: whether it’s saving more in the first place, choosing one tax-efficient product over another, or taking on more risk or less. The result is often undersaving, poor returns, and disappointment. As one adage goes, “if you don’t know where you’re going, you’ll probably end up somewhere else”.
But there is also a cultural element to this. Beyond that British favourite house prices, discussing money is taboo and too many people are afraid to admit yawning gaps in their financial knowledge – particularly young people. Millennials may moan that they lack the money to save for retirement, but when 70 per cent say they don’t understand pensions, according to Barnett Waddingham, perhaps they should go out and ask someone who does.