August 2022

3 common investing mistakes and how you can avoid them

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Investment titan Warren Buffett is famed for once having said, “investing is simple, but not easy”.

It’s straightforward to see what Buffett means. Conceptually, investing is indeed simple: you put your money in the market, it rises or falls in value, and you receive the returns. However, whether you’re a novice or a seasoned investor, staying ahead of the market isn’t always as easy as it seems!

A lot of the time, success comes not just from doing the right things, but from stopping doing the wrong things.

Read on to learn about the three investing mistakes you are potentially making and how to avoid them.

1. Not investing early enough

Research by banking and investment firm Charles Schwab claims that the best strategy for retail investors is to buy as soon they can. Their analysis shows that the cost of waiting for the perfect moment to invest typically exceeds the benefit of even perfect timing.

As timing the market – buying at the lowest point and selling at the highest – is all but impossible (more of this in a moment), the best strategy for most people is to make a plan and invest as soon as possible.

Of course, this doesn’t necessarily mean throwing all your available funds at a young, start-up company. This could incur high levels of risk that might see you lose value on your investment.

A way to balance this dilemma is to invest little and often. Often referred to as “pound cost averaging”, this method involves spreading investments over smaller, more frequent purchases. This aims to achieve a lower average buy price than going “all in” at one point.

Doing this can prevent you from overcommitting to an investment too soon, while allowing you to make an early commitment to an investment you have a high conviction in.

At the same time, during market downturns, you will still have capital available to invest. You would also have the opportunity to increase your holdings at a lower cost.

In combination, this shows the value of investing sooner rather than later, even if it’s with a smaller upfront investment.

2. Not diversifying your portfolio

Next is the importance of diversifying your portfolio.

This stops you from “putting all your eggs in one basket”, which could make your position more vulnerable. Having your investments in different sectors, industries, and geographical areas can help to offset any negative impacts that one of them may experience.

In this case, your investments that are appreciating could help to offset the ones losing value.

For example, imagine that you were exclusively invested in pineapple companies, and the entire world pineapple crop was destroyed by bad weather. If this happened, all your investments would be in danger of losing value at once.

Meanwhile, spreading your investments over different industries – or fruit, in this case – could weaken the blow of heavy losses by limiting your exposure to that asset.

In fact, Barclays asserts that diversifying your portfolio is a way to spread risk and help to protect your savings.

There are plenty of ways to diversify your portfolio: you can be diversified across industries, instruments, assets, sectors, and more.

Speak to an expert if you’re not sure how to diversify your portfolio.

3. Trying to time the market

Perhaps the most tempting mistake of all is the desire to time the market.

Trying to predict how and when to invest in the market is an extremely difficult task that even professionals often get wrong. It’s important to remember that no amount of analysis can guarantee the future performance of assets.

It can be difficult not to get caught up in the desire to maximise profits by hitting the optimal entry or sell point.

On the contrary, history shows that simply investing immediately and remaining patient throughout any dips in value is often a more successful strategy than trying to time the market.

According to research by investment platform Nutmeg, the historical probability of profit or loss is often influenced by how long you hold the investment, not by when you make it.

In fact, looking at developed equity markets between 1971 and 2021, the data shows that the historical probability of loss on any randomly chosen equity fell to 0% after 14 years of holding it.

This, of course, does not mean that past performance will indicate future performance and you can never guarantee the behaviour of any investment.

Even so, there is still some historical precedent for the power of remaining invested throughout difficult markets. Indeed, as the old adage goes: “it’s not timing the market, it’s time in the market”.

Work with a professional

If you’d like help from a professional to secure your investments, please get in touch with us today at Holborn Financial.

We can help you design an investment portfolio that works for you, your goals for the future, and your tolerance for risk.

Email info@holbornfinancial.com or call 020 8946 8186 to speak to us.

Please note

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.