Classic Investor Mistakes, Part 3

March 25, 2016 Leave a Comment

In this last of three videos, I cover three more investor mistakes which I see all too often. Of course, I also suggest ways you can avoid these mistakes!

For the previous videos, check out: Classic Investor Mistakes Part 1, and Classic Investor Mistakes Part 2

Classic Investor Mistakes

Mistake number 7 – Letting the tax tail wag the investment dog

Eh? What? This simply means doing something for tax reasons that you wouldn't ordinarily be comfortable doing.

Let's say you're a cautious investor, but you have a tax problem. I could arrange a Venture Capital Trust for you, and these are super tax-efficient, but the underlying investments are generally pretty risky. You'd be taking uncomfortable risks, just to save tax.

You can avoid getting in this pickle by planning ahead. Very often tax problems can be headed off with a bit of careful forethought. Engage with a good accountant or a good financial planner, and they'll cover fees many times over by saving you tax and sleepless nights.

Mistake number 8 – Coming over all emotional

If only we could make all our financial and investing decisions in the cold light of day, with no influence from our emotions. Unfortunately, you're not Mr Spock, so that's pretty unlikely. It rarely, if ever, makes sense to make a hasty financial decision on the strength of greed, fear, excitement, worry and other such emotions. So how can you avoid doing so?

Firstly, you can decide on a framework for decision making to reduce the chances of making a rash decision. Decide that you will never make a money decisions in the evening after a hard day at work. Instead, you will think things through on a Saturday morning, after going to the gym, when you're nice and fresh.

Or, if you're in a relationship, decide that you will always make decisions together, or that you will always sleep on a decision and let it percolate overnight.

Then, invest your emotions into long-term financial planning, rather than short-term decision-making. That way, when decisions must be made, you can make them in the context of your plans, not in the heat of the moment.

Mistake number 9 – Not having a plan

Following on from that, I would say that most people do not have a plan for their investments. Instead, they amass investment plans, policies, pensions and all sorts over the years, and do it piecemeal.

You'll find that this way, your rudderless portfolio will drift over time, becoming riskier and probably incurring unnecessary costs.

By taking the time to put a plan in place, you will have a track to run on. You will be able to make decisions in the long-term context of your overall financial situation, not just what is going on with you right now.

This last mistake is the grandaddy of all my classic investor mistakes. Having a plan reduces or eliminates the chances of making many of the other mistakes I have covered in this series.