Five common mistakes new investors make

This article was originally published in Money Magazine, on September 30, 2022. 

Keen to avoid some common pitfalls? Here are the top five traps that can catch out new (and not-so-new) investors.

Investing in shares is easy and affordable thanks to online investment platforms.

But if you’re just starting out, it’s worth avoiding a few common mistakes. Even seasoned investors can pick up some tips from the list below.

Mistake #2 – Not spending time on research

Investment research doesn’t have to be long or complicated. But when one of the world’s most successful investors – Warren Buffett, advises, “Never invest in companies you don’t understand”, it’s worth taking notice.

Investing in shares means becoming a part-owner of a business. Seen through this lens it makes sense to have an idea of the company’s point of difference, how it fends off competition, and what sort of shape its industry is in?

Here too, it pays to look for a low cost investment platform that provides user-friendly research.

Mistake #3 – Trying to pick the ‘best’ time to invest

We’d all love to invest in shares just as the market is about to take off. The reality however, is that trying to pick the best time to invest is a tough ask. Even the professionals don’t get it right.

A more sensible strategy is taking a long term approach. Frankly, that can mean thinking in decades not days. But it works.

As the table below shows, $10,000 invested in US shares back in 1992 would be worth $182,376 today. The same $10,000 invested in Aussie shares would have grown in value to $131,413 by 2022. Meanwhile, an investor who tucked $10,000 into a savings account back in 1992 would have seen their investment reach just $35,758 today.

These results are a great argument for taking a long term view. Sure, there will be times when your shares dip, and times when they soar in value. However, with a long term outlook, the inevitable market highs and lows are evened out to deliver healthy overall returns.

I realise that for plenty of investors 30 years is a long investment horizon. So let’s tighten the timeframe. Over the last 10 years, US shares have delivered total returns averaging 12.17% per annum. For Australian shares the figure is 8.37%. Both results are close to the 30-year figures.

Mistake #4 – Not diversifying

We’ve all heard the expression ‘don’t put all your eggs in one basket’. When it comes to investing, it’s a good rule to live by. Spreading investments across asset classes, industries and even countries reduces risk and smooths out returns.

Selecting a investment platform that allows you to easily and cost-effectively diversify is a sensible strategy for all investors.

For the record, the Australian sharemarket is very concentrated from both a stock and sector perspective, which makes exposure to overseas markets even more important.

Mistake #5 – Acting on emotions

Almost everyone makes emotionally charged investment decisions at some point. It’s hard not to – after all, your money is at stake.

Be prepared to acknowledge that your emotions will play a role in investing. That’s normal. But don’t let those emotions override the framework you built up in the beginning (remember Mistake #1?).

If you have clear goals and a strategy to make decisions, backed by long term thinking, it’s a lot easier to override emotions, especially during those short term blips when the market isn’t going your way. If you can stay the course, you’re well-placed to benefit from the next upswing.

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