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    Classic Investor Pitfalls to Avoid

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    Investing for your future is not necessarily an easy thing to do. The last 12 years can well be described as “rollercoaster” for many with pensions, ISAs, onshore and offshore bonds and other forms of tax-efficient investments, if the money has been held in equity-related funds. For example, using the S&P 500 or FTSE 100 as the yardstick for the “market”, you will have seen:

     

    • Your investments peak at an all-time high around the first quarter of 2000
    • Then you would have been carried down and seen your investments almost cut in half some 3 years later
    • The next 4 years (upto mid/late 2007) were a relief to you as you would have felt the surge back to the dizzy heights “from whence you came” i.e. close to the all-time highs again
    • However, in just the next 14 months (to 2008/9) you saw an-almost vertical drop of, yes you guessed it, approximately 50% again!
    • Then, finally, you’ve been on the rise again during the current financial crisis (oddly enough) but this time with it being an extremely bumpy and stomach-churning ride.

     

    How, on earth, is anyone meant to stay level-headed when all of these events seem far from rational?

    Behavioural Finance has identified a number of pitfalls waiting for the retail investor. Here are just a few of the main ones:

    1. Herd Mentality – “Bandwagons” are good if you know how to ride them! Most of us, though, have neither the time to know when the vehicle is slowing down or is going so fast that we don’t realise it is actually out of control. Don’t copy the behaviour of other investors, even unwittingly. The “safety in numbers” principle does not apply to herding.
    2. Avoiding Loss Altogether – In short, losses can’t be avoided. This point may seem self-evident but like we said, markets are not wholly rational. (After all “markets” are made up of people and it goes without saying that we are not wholly rational creatures!) Although we understand in our head that losses cannot be avoided, as soon as the investments suffer a major loss, people withdraw their money and forget the long-term ability of the market to recover. If an investment has not fundamentally changed, stay put. Losses are part of the journey.
    3. Over-Optimism, Over-Pessimism – The aim is to be neither. Instead, the goal is to be neutral and to only invest using the known facts relating to the investment e.g. what assets are being invested in, how much money is allocated to each asset class and what are the economic prospects for the region. If you have been successful in the past, this could result in over-optimism. If you have been unsuccessful, it could lead to unnecessary pessimism. Hence, be neutral. Successful investors are.

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    If you would like some help making investment choices without the confusing “noises” of the market, contact us without obligation by telephone, email or submit a request for Investment / Financial Advice here.

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