When it comes to investment outcomes, patience is almost always a virtue. This is especially true for long term investors who are prepared to ride the sometimes considerable waves of share market volatility.
In this article we consider fundamental investing strategies and five common investment mistakes to avoid.
As financial advisers, we spend a lot of time discussing wealth generation strategies with our clients and this inevitably leads to discussions about investing.
While we like to focus on the positives of ‘professionally-advised’ investing and the considerable wealth benefits a personalised investment strategy can bring, we also take the time to discuss five common investing mistakes.
1: Asking a mate
There are many preconceived ideas about investing and the type of investments an individual feels they should be considering. These ideas are often influenced by the media, friends and family. While share market successes are often enthusiastically shared, poor returns or losses on what may have been considered a sure thing, are rarely mentioned.
Expectations borne of someone else’s experiences is a common mistake.
Investing is complicated and it takes a lot of time, knowledge and research to know which investments, and investment approach is right for your circumstances.
In our experience it’s rare than any two investors to have exactly the same attitude to risk, amount of funds available to invest, tax implications or plans for the future. These, and a raft of other financial and personal circumstances affect individual investing decisions and outcomes.
2: No clear investment goals
Investing requires a clear purpose. Sure, everyone wants to make money, but that’s a fairly open-ended goal.
Successful investors generally have an endgame in mind that needs to be walked back to the planning and implementing stage which should be decided based on answers to questions that must be asked pertaining to each set of circumstances. This will include, among other things, establishing how much an investor has (or can afford) to invest, identifying the likely risks and rewards of different investment strategies and the time frame for achieving investment goals.
3: Impatient trading
When it comes to investments impatience is a curse. Chopping and changing your investment approach can be expensive, and in more ways than one.
Administratively, there is usually a fee for each fund or share trade transaction, while selling funds before they have a chance to mature within a longer-term strategy will very likely mean they are denied the opportunity to deliver what could have been a higher return.
Timing the market is very high risk, not to mention nerve-wracking!
The key is to stay the course, however if a change in circumstances dictates an urgent sale, rather than attempting to time the market and sell the lot at the highest price, it may be wise to consider an incremental dollar cost averaging sale approach.
Selling investments incrementally using a dollar cost averaging approach can take advantage of price fluctuations. Investors selling at regular intervals (even when markets are currently trending downward) can achieve a positive outlook with the comfort of knowing while some funds are sold at a lower price, others may sell at a higher price at a future date.
Of course, dollar cost averaging is a common and effective method for purchasing investments as well. It can remove decision making paralysis or nervousness trying to time transactions while building a portfolio of quality funds of which a greater quantity can be purchased when the price fluctuates lower.
4: Too many eggs…
Putting all your investment eggs in the one basket can result in overexposure to a single sector or asset class while not enough can mean opportunities for good returns can be squandered.
Building a balanced investment portfolio is no easy task and requires research backed investment advice specific to an investor’s individual financial circumstances and risk profile.
Understanding risk is important, especially in terms of stage of life circumstances.
For example, a high earner in the prime of their career will likely have a higher tolerance of risk knowing they have ample years of paid employment ahead. Compare that to an older investor who may already be retired and has no income alternative in a worst-case investment loss scenario.
5: Reacting to media
Throughout history there have been market corrections, which is a polite way of saying booms and busts, and both situations can end up as headline news.
Those who react to this type of hyperbole, often make poor decisions. Decisions that can range from jumping on the bandwagon and splashing cash at an investment ‘fad’ or if the news is gloomy, knee-jerk selling rather than allowing the market to correct and trade into more positive territory.
And correct it does!
Market Index has tracked 122 years of the Australian share market (1900 to 2021) revealing only 23 negative return years in more than a century of share trading.
Interestingly, and despite a lot of uncertainty, the COVID years 2019 to 2021 were among the 99 positive return years.
The point is, history shows the share market does correct and for those who hold their nerve and ride the waves of volatility will usually stand to benefit, while those who decide to jump-ship effectively lock in their losses.
To learn about financial planning that includes strategic investment approaches, please contact Matthew Lane or Alec Winter on 07 3720 1299 or email admin@wealthfundamentals.com.au
Lane Moses Pty Ltd ABN 56 092 186 117 trading as Wealth Fundamentals and its advisers are Authorised Representatives of Fortnum Private Wealth Ltd ABN 54 139 889 535 AFSL 357306.
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