As financial planners we are often asked about the top investment mistakes that people make before seeking professional financial advice.  Here are the top 5 investment mistakes we see novice investors make and how to avoid them:

 

1.  Lack of preparation

As with any important decision, you need to make sure that you do your research first.  Investing is no different.  To be an investor – particularly when you decide to be a ‘DIY investor’ without professional financial planning advice – you need to be committed to taking the time to educate yourself and do you research.  If, for instance, you want to invest in shares, preparation would be researching the various companies as well as the price and value of shares and forming a plan about how your share portfolio should be made up.  Proper preparation takes time and effort which is why many people choose to seek the assistance of a professional financial planner who can assist them in researching and identifying the right investment options from the thousands available.

 

2.  Confusing past performance and future potential

Just because a particular investment has done well in the past, doesn’t necessarily mean that its’ future investment potential is just as good.  This can be a trap for many novice investors who confuse past and future performance.  While past performance is certainly worth reviewing, it is important that you don’t use this information alone when deciding whether to invest.  Remember that when you invest, you’re choosing to do so because you believe that that company or asset will increase in value over the short, medium or long term.  To feel more confident in this belief, you need to base your investment decision on proper research in addition to past performance.

 

3.  Ignoring the rules of diversification

Many people have a particular soft spot for a particular type of asset.  Here in Australia a common one is property.  It’s important though to diversify your investing into different types of assets so that you have a range of asset classes in your portfolio (aka diversification).  The old saying “never put all your eggs in one basket” really encapsulates this top investment mistake.  By focusing all your investment potential into one particular asset type, you open yourself up to increased risk if that asset underperforms in comparison to other asset classes, or worse still if there is a major downturn in that asset (e.g. sharemarket collapse).

 

4.  Keeping liquid

An important part of any investment strategy is to ensure that you retain some liquidity in your investment strategy.  If you have all your savings tied up in non-liquid assets and have a sudden need for cash (say for a family emergency), you may find yourself in a difficult position where you’re unable to sell your assets in time.  Many novice investors make the investing mistake of not keeping this in mind and getting caught short.

 

5.  Trying to time the market

Many novice investors spend a lot of time and effort trying to find the exact right time to invest.  The problem with this is that it is almost impossible to pick the exact right time to invest, and to get out of the market.  Often by the time it becomes clear that it was a good time to invest or sell, the time and opportunity has passed.  Usually the best strategy is to maximise the length of time invested to even out normal market volatility.  Time in the market often provides better returns than timing the market.

 

Learn more about the basics of investing

For more information on investing and expert financial planning advice, contact a Financial Spectrum financial adviser in Sydney on 1300 886 018.  You may also like to download our free Ebook:  Basics of Investing  to learn more about investing.

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