by Erika Jonsson Whether you’re new to the world of shares and exchange-traded funds or you already have an established portfolio, it pays – literally – to be aware of the pitfalls that can trip up even experienced investors. Here are seven of the most deadly sins of investing and some tips on how to avoid making them.
1. Timing the market
There’s a saying that time in the market is more important than timing the market – and at Six Park we agree wholeheartedly. Passive investments such as exchange-traded funds regularly offer greater returns than active fund managers who pick stocks and time the market. That’s why Six Park uses quality ETFs for our portfolios. Rather than second-guessing the market, add regularly to your investment and make sure your portfolio reflects your time horizon and appetite for risk.
2. Following the crowd
A common mistake investors make is to panic and sell near the bottom of a market cycle, then re-enter the markets after they’ve started their natural recovery. Equally, it can be tempting to buy a hot stock when everybody else is – but that means you’re buying something that’s already surged in value. Using a digital investment service such as Six Park can allow you to bypass emotionally charged decisions which are often a formula for losing money.
3. Failing to review your portfolio
Investing can be exciting in the beginning, but many people end up with a “set and forget” mentality to financial matters. Your portfolio needs to be rebalanced to make sure that the investments it includes haven’t drifted from your intended target asset allocations. Six Park investment accounts are regularly rebalanced to make sure your investment is always faithful to the strategy you’ve selected.
4. Failing to harvest winnings
Just as it’s tempting to sell when others sell and buy when others buy, it’s human nature to hold onto things that other people want. When stocks soar in value, most people resolve to hold onto them forever, assuming they’ll retain that value. However, it’s often prudent to harvest some of the gains of your valuable stocks – something that happens through rebalancing trades that help you “buy low and sell high”, as you harvest some of your gains to purchase assets that have underperformed, a form of dollar cost averaging that has been shown to help optimise investment returns.
5. Failing to diversify
Making sure you don’t have all your eggs in one basket is one of the most effective ways to reduce risk, preserve wealth and improve returns. If your portfolio is narrowly invested then a change in conditions can have a drastic impact on your returns. But if your investment “eggs” are spread across different sectors and asset “baskets”, your exposure to risk is spread around too. Exchange-traded funds offer low-cost diversification that spreads your investment into literally thousands of companies – read more about Six Park’s philosophy on diversification here.
6. Paying high fees
High fees can cripple returns. Advisor fees, platform fees, entry/exit fees, managed fund fees that typically underperform their benchmark indexes, hidden administration fees: these can all easily add up to over 3%. If your portfolio returns 6% for a given year, you’re giving away 50% of your investment gains to fees. Also, if you’re paying for trading and brokerage fees, you have even greater incentive to hold your investment rather than chopping and changing. Some firms also charge for rebalancing. Make sure you know what activities will incur a cost so you have the power to make informed decisions.
7. Investing without a plan
The amount of time you plan to be in the market has a dramatic effect on your investment. If you’re saving for retirement, your investment horizon is different to saving for a house deposit in five years. This investment horizon and both your appetite and capacity for risk all have major impacts on the investments that are suitable for you, so make sure you’re clear about how you feel about risk as you consider your strategy.
And, because we always try to give you more than you expect, here’s an eighth deadly sin, and it’s a cracker.
8. Being disengaged
Your investment needs you – it represents your hard work and your dreams, so don’t forget about it as soon as it’s invested. You don’t have to be making changes to take an interest, and when you understand what can affect your money you have more power to make the right decisions. At the very least, catch up with whoever’s managing your investments every year or so to make sure your portfolio reflects your current situation and needs. If anything changes – baby on the way, changes to employment status, that kind of thing – talk it through with your adviser.
If you’re with Six Park, your investments will be automatically rebalanced, which is good. But you can also read our monthly performance reports or log on to find out just how your assets are going. And, of course, you can email, call or start a LiveChat if you want more information. Also, we touch base with you at least once a year to review your life situation and risk profile. This way, we help make sure that your investment strategy remains appropriate for your situation over time.
This article may contain general financial product information but should not be relied upon or construed as a recommendation of any financial product. This information has been prepared without taking into account your objectives, financial situation or needs.
For further details on our service please see our Financial Services Guide at http://www.sixpark.com.au. Past performance is not a reliable indicator of future performance.