As we approach All Hallows Eve Paul Zoltowski shares some investing scare stories.
2020 was a nail-biting year for many of us in many ways, not least the spread of the pandemic. In the investment world, we had to hold our nerve with stock markets experiencing near-constant volatility. Many turned their attention to their finances, whether through uncertainty, furlough, or even worse, job losses, some wishing they’d done so much earlier.
At times like these, it’s easy to panic with finances and make mistakes, however well-meant. With Halloween just around the corner, here are some scarily common mistakes investors make:
1. Investing without identifying financial goals
Whether investors are looking to save for school fees, pensions, marriage or buying a house, it’s crucial that they know their objectives before they invest. The time horizon over which they are looking to save will dictate how much they may need to invest and into what types of investments. For example, a twenty-five-year-old saving towards their pension will have a different risk/reward profile than a fifty-five-year-old approaching retirement. Those looking to grow a pot to pay for school fees won’t want to take on too much risk either given the fees are a fixed cost and perhaps not that far off.
Investors are likely to want a steady income stream in retirement and some investment vehicles simply do not offer this. Other investment vehicles might not allow access to money at the time it is needed.
Understanding financial goals from the start gives direction to the appropriate investment options and helps create an optimum asset allocation based on risk appetites, presumed rate of return and time horizon.
2. Going it alone
Perhaps the most nail-biting mistake some investors make is to take the plunge into the head-spinning investment world without professional guidance. The internet is a fantastic resource for researching investment performance, but last year’s saints could easily be next year’s sinners and high returns can sometimes be followed by high losses further down the line.
Advice might come at a small cost now but, aside from giving investors peace of mind, it could save greater costs later on. Trying to time equity markets – buying at the bottom and selling at the top – is a challenge at the best of times.
Equally, taking investment advice or ‘tips’ from friends might prove foolhardy. Friend’s waxing lyrical about Tesla, Bitcoin or (insert name of latest ‘hot tip’ here) over dinner, might be well-meaning but could easily see investors’ fingers burned by a stock tip heading in the wrong direction. Our advice? Keep your friends close, but your wealth manager closer.
3. Too focused on one asset class
While it’s tempting for investors to pile all of their hard-earned savings into the next ‘hot’ stock, single asset class or even Bitcoin, the risks in doing so are high. There are a number of factors outside investors’ influence that could affect the price of a stock and even the stock market itself (as we saw with the global financial crisis and, more recently the Covid-19 pandemic).
Equally, holding too much in cash just simply won’t help investors reach their savings or retirement goals. After all, with interest rates sitting at 0.5% in the UK and inflation around 3% (and potentially rising further from here), the value of cash is steadily being eroded.
Invest too cautiously and investors won’t get the returns they need to reach their goals. Invest too aggressively and they’ll lose sleep at night.
By allocating savings across asset classes – equities, bonds, cash, property, for example – investors should mitigate the risks associated with holding just one of these and could provide smoother, more consistent returns over the longer-term.
4. Ignoring liquidity
The liquidity of an asset or security is dependent on how easily it can be bought or sold in the market. It basically describes how quickly something can be converted to cash.
Liquidity risk became a greater concern for investors following the Global Financial Crisis of 2008, where investors sought to cash in investments (and, indeed, withdraw their cash from banks) en masse. This created a problem for certain markets and asset classes where the ability to easily exit a position was severely diminished. Investment in physical property (as opposed to a property fund) is often cited as being less liquid than some other securities. While the asset clearly has value, realising that value is likely to take longer than say, selling a share.
This could be an issue if investors want access to their cash when needed most.
5. If it sounds too good to be true, it probably is
When it comes to investing, in order to achieve the set financial goals, it’s crucial to stick to the fundamentals. There is value in keeping things simple and investment ‘opportunities’ citing high potential returns with low risk are extremely rare so investors should proceed with caution.
The simple rule here is high returns generally come with higher risk; ultimately, that could be a total loss of capital. Even if performance can be proven over a period of time, there is no guarantee that it will continue. High returns can often be followed by a period of equally high losses. Buyer beware!
6. Treating it like a competition
Recently, the Financial Conduct Authority (FCA) has expressed concern that many young investors are going into high-risk investments like cryptocurrencies in order to compete with friends – and this activity is often driven by social media.
The stakes are high here and there is no ‘get rich quick’ solution when it comes to investing. Stories of cryptocurrency millionaires are not as common as you’d think, in fact, many investors have lost a great deal with markets fluctuating wildly. Aesop’s tale of the Hare and Tortoise comes to mind and we all know who won that race in the end….
The contents of this article are for information purposes only and do not constitute advice or a personal recommendation. Investors are advised to seek professional advice before entering into any investment decisions. Please also note the value of investments and the income you get from them may fall as well as rise and there is no certainty that you will get back the amount of your original investment. You should also be aware that past performance may not be a reliable guide to future performance.