4. Trying to pick the market top or bottom
It’s fair to say that most investors would love to have a crystal ball that can predict when a market will bottom out, signaling exactly the right time to buy shares, or reach its peak, signaling the right time to sell. However, even the most experienced fund managers can’t pick market tops and bottoms – and guessing wrong can cost dearly.
A solution to this issue is dollar cost averaging, which involves drip feeding your savings into your chosen investment at regular intervals over a period of time, instead of investing all your money in one go.
Dollar cost averaging reduces the risk of incorrectly picking the bottom of the market and removes the emotion from your investment decision-making.
However, it is not a substitute for identifying good investments, so you will still need to do your research to ensure you are investing in stocks that are right for you before undertaking such a strategy.
5. Failing to rebalance your portfolio
Another common investing mistake is failing to rebalance a portfolio in line with your investment strategy.
As an example, let’s look at an investor, Jess, whose strategy is to hold 70% growth assets such as shares and property, and 30% defensive assets such as cash and bonds. If share and property markets fall and bond markets rise, Jess could quickly find herself holding 60% in growth assets and 40% in defensive, making her portfolio more conservative than she intended.
Having an asset allocation that is out of sync with her long-term investment strategy could mean Jess misses out on market gains when they occur. Remember, a bad year in share markets is often followed by a good one.
In order to rebalance her portfolio, Jess would either need to sell some defensive assets and purchase some more growth assets, or, invest more into growth assets from her savings. This would ensure she is sticking with her long-term strategy.
You can choose to rebalance your portfolio at set time points (quarterly, semi-annually or annually) or after a certain event, such as a fall in the share market, when you may wish to take advantage of cheaper share prices.
We recommend rebalancing at least semi-annually, to avoid the risk of your portfolio becoming out of kilter with your long-term plans.
It’s important to note that of all the investment decisions you make, asset allocation has the biggest impact on your overall portfolio return. By ensuring you maintain the right balance of asset classes, you can put your portfolio in the best position to ride out market volatility and changing economic conditions.
Mistakes are part of the investing process – and they are very common! Knowing what they are and how to avoid them will help you succeed as an investor.
To avoid committing the mistakes we have listed here, develop a thoughtful, systematic plan and stick to it – then watch your portfolio reap the benefits over the long term.
Remember Bell Direct’s investment principles from part one of this series:
- Focus on an investment goal
- Decide on a timeframe
- Keep costs low
Top three take outs
While it can be difficult, sticking to your investment plan and goals is the best way to grow your wealth
Think with a long-term view and don’t be distracted by short-term volatility
Mistakes are easy and common so don’t stress if you’ve made some – we all have! Chalk it up to experience, positioning you for a simply better future
Important Disclaimer- This information is for educational purposes only and is of a general nature. It has been prepared without consideration of your specific financial situation, particular needs and investment objectives. This information does not constitute financial advice and you should consider your own financial circumstances in assessing the appropriateness of this information.