11th October 2016

5 traps all investors should avoid

24 June 2016 probably seems like a long time ago now, but a lot has happened since. Markets have performed pretty well recently, with the FSTE 100 hitting an all time high, but there will undoubtedly be more ups and downs on the path ahead.

We’ll be taking the first steps to stand on our own feet after Teresa May confirmed that Article 50 will be triggered by the end of March 2017. Only time will tell how markets will react. Until then we have a lot of other market events to look forward to, not least the Autumn Statement and US election in November as well as keeping a watchful eye on the FSTE 100.

With all this uncertainty you need a tried and tested investment strategy. Here we look at some of the most common mistakes investors may make. Some of them may sound familiar. Don’t worry, even the best investors can fall foul of these traps, so here are some tips to help you avoid them.

1 – You put all your eggs in one basket

Sound familiar?

When you go on holiday, are you one of those safety conscious people who spreads their best clothes across all of their suitcases, just in case one should end up waving ‘bon voyage’ at the luggage carousel? Well, a similar approach can be taken when investing, spreading your money across multiple assets, sectors or markets, to lighten the risk of your investments dropping in altitude when market conditions fly against the wind.

TD’s Tips:

  • Be aware of how much exposure your portfolio has to each asset class (equities, bonds, property, cash), as well as how geographically diversified you are. The UK offers many opportunities but it is also a good idea to diversify your portfolio so it’s more global, including both developed and emerging markets.
  • Consider the level of risk you’re comfortable with and your time horizon. Investing too conservatively when you’re young could mean that your investments don’t grow above inflation. On the other side of the coin, if you invest too aggressively when you’re nearing retirement, you could be more exposed to volatility with less time to recover any losses.

2 – You invested at the wrong time

Sound familiar?

You’ve done your research, you’ve listened to the ‘experts’, you’ve decided to sell off some assets or buy more. But how often have we sold at the bottom (when you get nervous about not getting the returns you’d like) and bought at the top (when you’ve already missed out on much of the gains to be had)?

TD’s Tips:

  • It’s difficult to do, but the aim should be to buy at or close to the bottom and sell at the top
  • Run your winners. This basically means holding on to your investments that have done well, , although it can be a good approach to take some profits – known as ‘top slicing’
  • Don’t be afraid to cut your losses if an investment is clearly not going to gain in value. But remember, you only crystallise a loss if you sell, so if you think the value will rise again, hold your nerve and stay invested. Setting up a regular monthly investment (as much or as little as you’d like) can help you take the emotion out of investing.

Warren Buffet

3 – You got caught up in all the excitement

Sound familiar?

It’s easily done. You forget to focus on your long-term strategy that has been successful so far, and how each investment you make fits with that.

TD’s Tips:

  • Having a clear investment strategy is essential. Martin Cholwill, who runs one of our Recommended Funds, Royal London Equity Income recommends that we go for ‘dull and reliable’ instead of being dazzled by what seems ‘exciting’.
  • If you are investing for growth, it’s normally recommended that you think about a minimum time horizon of five years or more.
  • If you’re looking for income, consider funds which invest in high quality companies which are backed by cash flows, giving them the ability to pay dividends out of cash reserves.

Benjamin Graham

4 – You expected instant success

Sound familiar?

Some people have a “trading” mentality, monitoring markets and changing their positions multiple times a day. That is not an appropriate approach for an investor, however. Investors should adopt a long-term approach, aiming to hold investments for a reasonable period of time and resisting the temptation to trade when markets jump around.

TD’s Tips:

  • Stay calm and stay invested. Remember, it’s about time in the market not timing it! Use regular investing to take the emotion out of investing and not over-commit. Should any opportunities arise, you’ll also be well-positioned to take advantage of them.
  • The most skilled fund managers don’t get trigger happy and expect instant success. When we asked our Best of British fund managers how long they typically held onto stocks for, the average period was three to five years.

Richard Buxton

5 – You believed everything you read

Sound familiar?

We’re consumed by news and opinions 24/7 – if anything we all suffer from information overload. The challenge is what to take at face value and what to investigate further yourself.

TD’s Tips:

  • Don’t believe the hype. Sometimes you may know as much as the ‘experts’. We offer a range of free reports so you can carry out your own research on any stocks, ETFs and funds available on our platform.
  • You can’t ignore a solid track record. Our Best of British Fund Managers List contains some core fund managers who have been there and done it through market ups and downs, riding out difficult times to deliver long-term outperformance.
  • Take your time, think about your long-term investment goals but don’t ignore any opportunities – embrace them.

One bit of advice that underpins all of the tips above is quite simply; learn from your mistakes and don’t repeat them. With the upcoming Autumn Statement, US election, uncertainty around global interest rates and Article 50 being invoked in 2017, our tips will hopefully ensure you don’t fall into the same traps next time.

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