Whether it’s giving up profits you’ve accumulated over years or seeing your less stellar picks lose even more in value, it can be hard to look your portfolio in the face when markets head southwards.
That’s why so many investors become obsessed with trying to time the market. Trouble is, the majority of us are absolutely awful at it — buying at the highs and selling at the lows.
Personally, I think there are far more important things to worry about.
1. Paying exorbitant fees Since research has shown very few fund managers are able to outperform the market on a consistent basis, I’m averse to keeping too much of my capital in (expensive) actively managed funds.
In my view, it’s far better to buy a low-cost passive fund that tracks the FTSE 100, for example, than an income fund that specialises in UK large-cap stocks.
Even if the latter does manage to beat the former, it often becomes a false economy when fees are deducted. And that’s when things go well.
Moreover, the performance of professional investors is judged on a quarterly or annual basis. As a result, they’re often forced to jettison otherwise solid stocks in favour of those that are temporarily outperforming (and priced accordingly).
As a private investor, you only have to justify your decisions to yourself.
2. Being insufficiently/overly diversified It’s no secret that running a concentrated portfolio can be a route to riches. The only condition is that these holdings all perform superbly (or you find the next Amazon (NASDAQ:AMZN) or ASOS (LON:ASOS) that can make up for the losers). That’s a big ask and, consequently, a high-risk strategy for most of us.
But while placing all your hopes in only two or three stocks isn’t part of the Foolish philosophy, there’s also no need to turn the active part of your portfolio into a quasi-tracker fund that has exposure to a huge number, either.
Studies show we only need roughly 20 company stocks to be sufficiently diversified. Any more than this and all we’re doing is increasing our costs.
3. Not using the right account At the Fool, we bang on about how important it is for private investors to take advantage of tax-efficient accounts such as the Stocks and Shares ISA, the Lifetime ISA and the Self-Invested Personal Pension (SIPP).
While differing in terms of how much you can contribute in any one tax year, and when you can get your money back, all of the above allow you to avoid paying any capital tax on your profits and any income tax on dividends you may receive.
The amount you’ll save will really add up over time and, thanks to compounding, could make a huge difference to when you achieve financial freedom.
4. Ignoring inflation While it’s never wrong to keep some cash on the sidelines to take advantage of inevitable market falls, holding a large amount is a huge mistake if you’re investing for the long term.
As long as interest rates remain below inflation, the latter will keep reducing the value of this money the longer it sits in your savings account.
Far better to put any money you won’t need imminently into listed companies that not only grow in value but may also return cash to their owners in the form of dividends.
Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2019