Following on from last week, when I highlighted some of the most common investor mistakes, I want to highlight a further three of the mistakes that we frequently encounter.
Not diversifying - As a rule of thumb, investing in any single asset is more risky than spreading your investments across different assets. If something goes wrong, your entire portfolio is at risk.
Diversification is a good way of reducing investment risk, and can be used for building a portfolio of any size. Investors diversify their portfolios by allocating portions of their money to a variety of assets, sectors, markets and geographical regions. The allocation would normally depend on the investor’s personal circumstances, such as time-span and risk tolerance.
Not investing - “Not investing” may seem a little bit obvious, but many people repeatedly postpone their first investment for years, or even sometimes forever. One of the key benefits of investing is the power of “compounding”, which helps investments grow considerably over a longer period of time. By starting with smaller sums sooner rather than later, you will benefit from compounding for a much longer period. It simply means that, in total, you need less money to reach the same goal in the distant future (such as at retirement) if you start now than if you start in ten years.
Losing control over your fees - Most investments come with a charge; it’s important to keep your charges at a reasonable level, because they reduce the gains you make on your investments – the more you pay, the less you effectively gain. In some cases, where you are getting good service or good performance, higher charges can be worthwhile; the key is understanding what the charges are, so that you can make sure you are getting good value for money. One charge to look out for is bid/offer spreads. When you buy an asset, for example a share or a unit trust, there is usually a difference between the selling price and the purchase price. This difference, called the bid/offer spread is an effect charge, which can be difficult to notice when it’s in place. Another charge to look out for is commissions. If you have an investment (including a pension) that was set up before January 2012, it is likely that you still pay commission to the person that set it up.
Exit charges are a third charge to look out for. Many companies have in the past put an exit charge on their investments. This means that if the investment is poor, you are penalised for getting your money out, which hardly seems fair.
David Hill is a chartered financial planner and Independent Financial Adviser at Hills Financial Planning, 15 Agnew Street, Larne 028 2827 6814 email: firstname.lastname@example.org