Eight costly savings and investment mistakes to avoid
Mistakes are easy to make when investing your money. Here are some of the major blunders to be wary of.
1. Having too much in cash
With savings rates so low, holding cash could be one of the biggest mistakes you can make.
The stock market generally provides a greater return than cash over a 20-year period.
So you should keep enough cash for emergencies and short-term spending and see if you can do better in the stock market.
And, of course, make sure any cash you do hold earns the best possible rate.
2. Chasing 'hot' stocks or funds
Possibly the worst thing you can do with your investments is to pile it into the latest 'red-hot' shares, because today's stars frequently become tomorrow's dogs. The worst-case scenario is to pour your money into a share that your mate Dave recommended down the Dog & Duck.
The same advice applies to hot funds, because they too can quickly go stone-cold. Remember how everyone piled into dotcom funds in the late nineties, only to lose their shirts when the technology market crashed in 2000?
For example, take the first six months of 2014, when UK investors poured £7.3 billion into the top-10 best-selling actively managed funds during 'Isa season'. According to investment firm Wealth Horizon, £4.7 billion of this total went into funds that underperformed for the remainder of the year.
In short, just because a share or fund is popular does not mean that it will beat the market. So rather than focusing on funds and shares that are being heavily marketed and recommended, focus on building a portfolio that meets your specific goals and attitude to risk.
3. Piling in all at once
Another fundamental mistake that investors make is to mess up the timing of their Isa investments.
Instead of drip-feeding money in over a period of time, millions of us throw lump sums in on a single day, often just as the end of the tax year looms.
The big problem with piling 'all in' at the end of March or April is that you can easily become a victim of one of the stock market's seasonal effects. It is a well-known phenomenon that the London stock market often rises in late March and early April, pushed up by a flood of cash flowing into Isas as tax years roll over.
A far less risky approach is to spread out your Isa investing throughout the year, taking advantage of market weakness to top up your holdings. Also, to automate the entire process, why not divide your ISA allowance into 12 chunks and then invest monthly?
4. Having too few eggs in your basket
One of the oldest and best ways to lose money from investing is by having a heavily concentrated portfolio.
In the good times, having a highly focused portfolio can bring bumper returns, especially during one of the market's periodic bubbles. However, when bubbles burst, far better to have a well-diversified portfolio than to be nervously holding a basket with one giant egg in it.
Indeed, research conclusively shows that diversifying your portfolio produces better risk-adjusted returns in the long term.
5. Not 'de-weeding'
Poor performing funds can hold back how well your portfolio does and can cancel out the good work done by the right choices.
So make sure you regularly review what's doing well and what's not and take action.
6. Ignoring the rest of the world
Although the UK has the world's sixth-largest economy, we Brits account for only a thirtieth (3.3%) of world output and are a mere 0.9% of world population. So by having heavily UK-centric portfolios, British investors risk missing out on possibly superior returns on offer from other developed and developing nations.
For example, according to financial data company Moneyfacts, the average stocks and shares Isa has returned 7.4% in 2014/15. However, among the standout markets for Isa funds during 2014/15 was North America (18.9%), Japan (17.3%) and China (16.8%) – all of which have thrashed returns from UK-focused funds.
Therefore, when investing, don't overlook the opportunities available in the rest of the world.
7. Mismatching income and growth
Another tip to create a properly balanced portfolio is this: don't buy growth investments when you need income, and vice versa.
If you want a regular income, look for investments that are likely to pay a dividend. If you want capital growth over time, seek out investments that look undervalued.
8. Making things complicated
If you have been investing for a while it's likely you've built up a portfolio that is spread across a lot of different funds and providers.
But these can be hard to manage and keep track off. So consolidating can help you get a grip on your investments.
Danny Cox, Chartered Financial Planner, Hargreaves Lansdown said: "The easier your pensions and investments are to manage, the more likely you are to take good care of them, and make better, more timely, investment decisions. Create a single bird's eye view of your portfolio by consolidating your investments into one place, making them considerably easier, quicker and often cheaper to manage."
Compare stocks & shares ISA options at loveMONEY.com
