Four mistakes newbie investors make – from following fads to gambling away your savings
FOLLOWING FADS
There are lots of esoteric areas of investment which sound fascinating and it’s easy to believe you have stumbled upon the next big thing – especially if performance has been good lately. I regularly hear from people with little saved who’ve invested in areas such as corn or liquid natural gas. Those niche areas may do well, but they’re complicated and risky. It’s more sensible to focus on well-known and easily understandable areas such as UK, US and European shares and well-established investment funds in other conventional areas.
“Investors often jump into funds or asset classes which have strong short-term performance, believing that this out-performance will continue and they can benefit from it,” says Patrick Connolly of Chase de Vere.
“We’ve seen this in recent times with biotechnology funds, which produced stellar returns for a few years. Then, as more people started investing last year, these funds have fallen heavily. The Axa Framlington Biotech fund is down 35 per cent since its peak in July 2015,” he adds.
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The best investments tend to rise slowly over time. Both the popular press and fund websites have guidance on the best conventional investments. Make use of these, and be patient.
INVESTING IN TOO MANY FUNDS
Enthusiastic savers often end up with an Isa that’s invested in too many different areas. This is particularly a problem with funds. As each fund is invested in 20-100 companies’ shares, people with lots of funds in their portfolio have a small amount of money spread across many different businesses.
Each fund has on-going charges which are costly, and with savings spread thinly good performance in one fund won’t make much difference to your portfolio. “Some investors hold so many different assets or funds that the impact of any individual part of their portfolio is diminished,” says Darius McDermott of Fund Calibre.
So how many is too many? “For portfolios of £10,000, you won’t benefit from having more than three or four funds in your portfolio,” says Mark Dampier of Hargreaves Lansdown in his book, Effective Investing.
Five to seven funds is sufficient for a £200,000 Isa, while larger sums could be invested in 15-20 funds. “You will rarely need more than that number, even if you have millions to invest,” Dampier adds.
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It’s better to keep it simple, perhaps by choosing a single multi-asset fund which will be invested in a balanced range of areas.
“If you are new to investing don’t jump in both feet first. Pick one fund to do the legwork for you, giving you time to build up experience and knowledge. A multi asset fund is a great starting point,” says Adrian Lowcock of Axa Wealth.
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JUMPING IN AND OUT
New investors often try to spot up and coming areas before selling out once the investment has risen a little. This is known as “timing the market”, and while it’s fun to think about, it is notoriously difficult. Even professional investors get this wrong all the time.
“The reality is much more prosaic. Investing is about getting rich slowly, while gambling is for those looking to get rich quick, while being willing to risk losing all of their stake,” says Lowcock.
Connolly adds: “The right approach is to have a long-term investment strategy and stick with it through good times and bad, taking profits from areas which have done well and reinvesting into those which have done badly.”
You'll also miss out on regular dividends, which will make a huge difference to a portfolio over time.
BECOMING ATTACHED
People often become emotionally attached to decisions and struggle to let go of their original opinion – even in the face of overwhelming evidence they were wrong. It’s a troubling tendency in investment, where holding on to poor decisions costs money.
“One of the most difficult things to admit in investing is that you made a mistake. If you are able to sell a poor investment before it gets worse you will preserve your money,” says Lowock.
MOST POPULAR FUNDS FOR ISA INVESTORS
C.F. Woodford Equity Income
Marlborough Special Situations
Fundsmith UK Equity
Jupiter European
CF Miton UK Value Opportunities
Rathbone Global Opportunities
Henderson UK Property
Franklin UK Mid-Cap
Legg Mason Japan Equity
Polar Capital Healthcare Opportunities
L&G UK Index
Source: Chelsea Financial Services, The Share Centre.