Classic Investor Mistakes, Part 1 – MMV304
There are several mistakes (well, nine actually), that I see investors making all the time. In this first of three videos I cover the first three of these investor mistakes, and give simple steps on how to avoid them.
Classic Investor Mistakes
The problem with these investor mistakes is that very often, we don't know we're making them:
1. Trying to time the market
Timing the market, or trying to, is a mug's game. This manifests in two main ways:
- Getting out of the market at the wrong time, and
- Waiting too long to get back in, thereby missing the upward trend.
We can never, ever get this right, so why even try? Instead, avoid falling into this investing trap by setting up your portfolio well in the first place, Spread the money around, stick to passive investments and it should all look after itself for the most part.
Sure, if you are approaching the time when you need access to the money, consider de-risking the portfolio over time as you get close, but don't try to do that every time the market dips.
2. Insufficient Diversification
Or, in plain English, not spreading the money around widely enough. Again, I see this showing up in two primary ways:
- Holding too much of a portfolio in the UK, and
- Venerating a particular fund manager or house.
Though most people watching this video will be based in the UK, our stock markets only represent about 8% of the world's markets by value. there is a world of value out there, waiting to be tapped!
And as for those who think one star fund manager always has the magic touch – yes, there are some superb managers out there, but that doesn't make it smart to dump half your portfolio into their control.
The way to avoid making this mistake is to spread the money around (spotting the theme here?!) into all kinds of different asset classes, and geographical areas. Have many baskets with eggs in, and when one asset class grows to become a too-large part of the portfolio, sell some and buy something else.
3. Switching funds too often
We all like to follow our investments and see how they're doing. But what if the fund you chose a couple of months ago based on a recommendation from a friend is performing badly?
First of all, performing badly relative to what? Its peer group of similar funds is what you should be comparing with, if anything. But even so – two months? Give your fund manager a break and give her time to work her magic. If you choose instead to switch out into an alternative fund, and then in another couple of months that one suffers, what will you do?
Back off mister. Give your fund managers space to work. Set aside time once per year, or at most once every six months, to take a high level view and check your individual funds' performance. Make sure you're using useful benchmarks, not arbitrary ones. And always consider the wider context of a fund's performance. Is it really the fund which is struggling, or its underlying asset class?
Don't switch too often. You could incur costs and you'll always be chasing your tail. You'll never be able always to identify the best funds, so why bother? My preference is to track markets using passive funds, which removes the need to check your funds altogether. I like an easy life. 😉
More to come
There are three more classic investor mistakes to come next week, so stay tuned…