7 investment pitfalls (and how to avoid them)
Posted by: Brian Dennehy
This blog may be short but the messages are important. It’s worth taking a few minutes to really think through whether any of these apply to you. Changing your approach can mean much better returns for you in the future!
1 - Accumulating an incoherent ragbag of funds
Investors are often seduced by press coverage, adverts or compelling and persistent marketing. New launches (with no track record) are a strangely common motivation for investing.
Antidote? Start with a plan and a process for selecting funds. Apply this with discipline. More on this here.
2 - Selling winners, sticking with losers
Antidote? Understand Momentum investing. This simply means buying winners; in this case buying funds which have performed best in the last 6 months because of the probability that they will continue doing well in the next 6 months. (More detail on how and why this works here).
3 - Believing past performance is not a guide to the future
This is hammered into advisers and investors by overbearing regulators. Does it stand up to scrutiny? No. Past performance provides the most reliable information about how a fund is likely to perform in the future.
Antidote? Don’t believe everything you read. More on how to beat the market here.
4 - Income investors obsess about the volatility of capital rather than the consistency of income payouts.
Antidote? Income investors need to change their mindset away from a preoccupation with capital fluctuations and towards one that focuses on the consistency of income payouts. More on this here.
5 - Invest and forget
Those who “invest and forget” could end up with much worse than even mediocre performance.
Antidote? Without the benefit of a crystal ball you need a process for selecting outstanding funds and to apply it with discipline. More here.
6 - Obsessing over charges
There is a tendency among investors and the financial consumer press to obsess over fund charges and platform fees.
Antidote? Investors should focus on outstanding performance after charges. More here.
7 - Blindly investing in funds of funds
Fund of funds give access to a range of assets or fund managers in one fund. However, care is needed as performance can be lacklustre. Some fund of funds may be appropriate for certain types of investor but many are mediocre and expensive.
Antidote? Do your research. More on this here.