Investing in financial markets is complex and full of potential hazards for investors. That’s why Fisher Investments’ founder and Co-Chief Investment Officer Ken Fisher often refers to the stock market as “The Great Humiliator.” If you’re a long-term investor, understanding and avoiding common investor pitfalls can enhance your ability to reach your long-term financial goals. In this article, Fisher Investments UK reveals eight of the most common investment mistakes and how to avoid them.
1. Mistake: Letting emotions influence your investment decisions
Strong market fluctuations can cause investors to make portfolio changes based on emotions like fear or greed. Letting emotions drive your investment decisions could result in a strategy that lacks cohesion and discipline, which could jeopardize your long-term financial objectives. For example, if you’re a long-term investor who needs growth to reach your financial goals, selling out of stocks after a sharp market drop could mean locking in losses and missing out on the potential rebound. If the market bounces back while you’re not invested, that could be a potentially huge opportunity cost! Your own feelings can be deceiving and counterproductive in investing. If you have a long investment time horizon (the amount of time you need your portfolio to last), it’s important to keep a long-term view in mind—patience and discipline during turbulent market periods can be highly important tools.
2. Mistake: Trusting industry rules of thumb
People tend to trust longstanding industry practices. Trusting rules of thumb may help in other parts of your personal and professional life, but investing rules of thumb often ascribe over-generalised rules to your portfolio that don’t account for your individual goals and personal situation. For example, some money managers might suggest that your age alone should dictate your equity allocation, such as “subtract your age from 100 and that’s your optimal equity allocation.” However, this kind of rule completely ignores the fact that two individuals with the same age may have completely different investment time horizons, personal situations and financial goals! Rather than relying on over-generalised rules, it’s prudent to personalise your long-term portfolio strategy.
3. Mistake: Not accounting for your investment goals in your portfolio strategy
Some investors never take the time to identify their long-term investing goals and fail to build appropriate portfolio strategies for themselves. Investors often make the mistake of trying to avoid equities’ short-term volatility altogether, even though they may need equities’ long-term growth potential to meet their long-term financial objectives. While opting for a long-term, low-growth strategy may sound safe and prudent, it could increase your risk of not reaching your long-term investing goals. Your optimal portfolio strategy should take into account factors such as your personal situation, health, cash flow needs and long-term financial objectives.
4. Mistake: Ignoring the creeping effect of inflation
When investing money for retirement, you should not underestimate the long-term effect of inflation—even if there is a prolonged period of low inflation. A minimal increase in inflation can still significantly affect your portfolio’s purchasing power over the long run. Your own personal inflation rate can also be much higher than the average if you spend more on high-inflation goods and services. Over long periods, inflation can cause a gradual decline in purchasing power and potentially impact your standard of living. Ensure that your retirement plan can keep pace with rising costs and don’t underestimate inflation’s creeping effect.
5. Mistake: Investing in just a few securities
If you create a portfolio that focuses on just a few companies in the same industry, country or sector, you may increase concentration risk. That means if something goes wrong in the category you’re heavily invested in, it could have an outsized effect on your portfolio compared to a more diversified approach. You should consider spreading your investments across companies, countries and sectors to mitigate risk and increase the likelihood of achieving your long-term financial objectives.
6. Mistake: Equating income and cash flow
Unknown to some investors, there is a difference between income and cash flow. Cash flow refers to the money you withdraw from your investment portfolio. Income is a subset of cash flow, as it refers to the money paid out by your investments—such as dividends and interest. While you may wish to create cash flow to cover your living expenses, you don’t necessarily need to invest only in income-generating securities—like high-dividend equities and fixed interest securities—to cover your expenses. Investing only in dividend-paying equities or fixed interest could leave you overly concentrated in certain types of equities or result in an asset mix that is inconsistent with your financial goals. Depending on your situation, you may consider generating cash flow by strategically selling securities and withdrawing the proceeds—a practice Fisher Investments UK refers to as creating “homegrown dividends.” Focusing on a total return approach (capital appreciation plus income) could help create a more efficient retirement cash flow strategy.
7. Mistake: Underestimating your investment time horizon
Many investors underestimate their own life expectancies and investment time horizons—how long they need their portfolios to last. Given ongoing advances in medicine and health science, it may be prudent to overestimate your investment time horizon. Not planning for long enough could mean running out of money too early, potentially leaving you, your spouse or other dependents in a dire situation.
8. Mistake: Ignoring foreign equity markets
The UK equity market only accounts for a small percentage of all equities worldwide. You put your portfolio at additional risk if you only expose it to the macroeconomic and political situation of your home country. Instead, investing across many different countries expands potential growth opportunities and reduces the risk that a new law, natural disaster, regional conflict or other issue in your home country has a hugely negative effect on your investments.
How to avoid investment mistakes
To avoid investment mistakes, financial education and planning are essential. You can find educational resources online or work with an investment professional who can help you in turbulent times. In general, many of these classic investing mistakes can be prevented by identifying your long-term financial goals, tailoring your portfolio strategy to your personal situation and staying disciplined to that strategy—resisting the urge to make investment decisions based on emotions like fear and greed. Of course, all that is easier said than done, even for experienced investors.
Investing in financial markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance neither guarantees nor reliably indicates future performance. The value of investments and the income from them will fluctuate with world markets and international currency rates.
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Fisher Investments Europe Limited, trading as Fisher Investments UK, is authorised and regulated by the UK Financial Conduct Authority (FCA Number 191609) and is registered in England (Company Number 3850593). Fisher Investments Europe Limited has its registered office at: Level 18, One Canada Square, Canary Wharf, London, E14 5AX, United Kingdom.
Investment management services are provided by Fisher Investments UK’s parent company, Fisher Asset Management, LLC, trading as Fisher Investments, which is established in the US and regulated by the US Securities and Exchange Commission. Investing in financial markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance neither guarantees nor reliably indicates future performance. The value of investments and the income from them will fluctuate with world financial markets and international currency exchange rates.