The top 3 mistakes investors make and how to avoid them
Investing your money is one of the best ways to save for the future. Unfortunately, many investors end up losing more money than they make because of a few fundamental mistakes.
Today, I’m looking at the three main mistakes all investors make and how you can avoid them, so that you can keep more of your hard-earned money.
Firstly, overtrading is possibly the most costly mistake investors of all experiences tend to make.
It is so easy to over trade, and it has only become easier over the past few decades thanks to low-cost online share dealing.
Overtrading can hit your returns in two different ways. It increases your costs, and you are more than likely to be selling (or buying) at the wrong time (more on this later), which hits your returns.
Figures show that over the past two decades, the world’s leading equity indexes have produced high single-digit annual returns. However, investors themselves have generated average annual returns of around 0%. This return gap is entirely about the costs associated with overtrading.
Selling at the bottom
Average investor returns are so poor because we are generally pretty bad at picking market tops and bottoms.
Research has shown that on average, rather than buying low and selling high, investors tend to sell low, when they can’t take the pain of losses anymore, and buy at the peak, when sentiment is at its highest.
This crowd-following is hugely detrimental to returns. When you add in the cost of trading as well, it quickly becomes clear why most investors underperform the market over the long term. Buying high and selling low is a consequence of overtrading and the best way to avoid it is to choose an investment strategy and stick to it.
When it comes to investing, we are our own worst enemy. Our minds want us to be active, but to achieve the best long-term returns, it pays to be lazy and make as few trades as possible every year.
Counting the cost
The third and final mistake investors make is to ignore high fees. Investment fees might not seem like a big deal at first, but over the long term, a fee of just 1% per annum can cost you tens of thousands of pounds.
For example, a £10,000 investment in a fund that follows a hypothetical index producing a return of 10% per annum, with an annual cost of 0.1% will grow to be worth £169,797 over an investment period of 30 years. Total fees paid will amount to just £4,698. On the other hand, a similar investment in a fund following the same index, but this time charging 1.1%, would yield a return of £129,072. Total fees paid over the period would be £45,422.
Put simply, just by shopping around for a better deal on fees, you could earn an extra £40,000.
Everyone makes mistakes, and sometimes these mistakes are unavoidable. However, in the world of investing there are some mistakes that are easier than others to avoid. Those listed above all fall into this bracket. Avoiding these three mistakes could, quite literally, give you a windfall worth many thousands of pounds.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.