Even famous investors can make costly errors or losses when it comes to their investment decisions and portfolio
George Soros once lost $2 billion from his Quantum Fund during Russia’s 1998 financial crisis. Warren Buffett also recently admitted that he “overpaid” for Kraft Heinz, where the company’s shares in 2019 were trading at about 1/3 of the share price valuation in 2017.
Isaac Newton once said, after losing a fortune in the South Sea Company, that he could “Calculate the motions of the heavenly bodies, but not the madness of the people.” Given that such fine minds as these can make such errors, it would be tempting to believe that catastrophic loss is inevitable for less experienced investors. Yet whilst unexpected “mistakes with good intentions” are indeed sometimes made by investors, a huge number of investment errors can be traced back to preventable actions, or omissions, which happened earlier on.
In this short guide, we’ll be sharing four of these common, avoidable investment mistakes with you. This content is intended to inform and inspire your thinking, and should not be taken as financial advice. To receive bespoke, regulated financial advice into your financial affairs, please consult a professional financial adviser.
#1 Poor Due Diligence
You might well be looking at a fund with a strong recent history of investment returns. Yet if the fund is built on shaky foundations (or “fundamentals”) or if you do not understand the investment style of the fund manager, it can be easy for costly mistakes to happen.
This is especially true of more unconventional, speculative stocks and funds. A recent example which has dominated the headlines, of course, is Neil Woodford’s UK Equity Fund which has declined to about £3.7 billion in value, down from its peak of £10 billion a few years ago. There are many reasons why this particular fund is in trouble, and the news is constantly developing. However, one of the factors which left the Fund so vulnerable was that it was underpinned by a set of assumptions about how Brexit would transpire, which turned out not to happen.
Of course, no investment is risk-free and informed judgements will always need to be made about where and when to invest. Yet it’s worthwhile trying to understand an investment as much as possible with your financial adviser before committing money to it.
#2 Autopilot Investing
Investing is a bit like setting sail on a voyage. You might start out facing the right direction, but if you simply leave the rudder and sails unattended it will not be long before you veer off course. When it comes to investing, you do not need to be monitoring your investments 24/7. However, neither is it sensible to take a “set it and forget it” approach to your investments. Here, it can be incredibly valuable to have a trusted financial adviser who can help you monitor your investment portfolio, to ensure it does not drift away from your financial goals.
#3 Impulsive Decisions
The aforementioned point needs to be balanced with another one. Whilst you should indeed keep an eye on your investments, it’s crucial to not emotionally react to every short term fluctuation in performance. This is often the hardest lesson for investors to learn, and perhaps the easiest area for investors to make mistakes. Yet simply buying or selling due to a “gut feeling”, or out of panic due to a sudden decline in an investment’s value, is usually unwise.
Here, it can help to have the assistance of an objective financial professional to guide you. After all, emotions can cut both ways and it can sometimes be difficult to discern the right investment decision. For instance, your emotions might compel you in some situations to sell a declining investment, but on other occasions, your feelings might tell you to hold onto a falling asset because it hurts to admit that you “picked a loser”.
#4 Unaffordable Risks
It becomes so much harder to avoid letting your emotions guide your investment decisions
when you are risking money which would be unaffordable to lose. The stress and a heightened sense of panic accompanying this type of investing are typically too much for most people to bear, and the high-pressure situation can lead to buying or selling decisions which are often regretted later when heads are clearer.
Of course, part of the challenge here is separating the objective (i.e. what you can objectively afford to commit towards more aggressive and more defensive investments) and the subjective (i.e. your tolerance and attitude towards investment risk). It’s easy to confuse the two, and so, once again, it can help to seek the counsel of a financial adviser who can assist in separating these more neatly.
The reality is that all investors are likely to make mistakes at some point. Yet that does not mean that you should not seek to avoid those which are identifiable and preventable. Quite often, of course, mistakes can provide a valuable lesson which can refine your investment decisions in the future. This is one good reason to consider starting an investment strategy earlier on in your life and career, which gives you more time to learn whilst granting your investments more time to compound and grow.
The above list of common mistakes is not comprehensive. Indeed, there are many other crucial areas which we have not had time to cover. If you are interested in discussing your strategy and investments with us, then our advisers here at Punter Southall Aspire would be delighted to arrange a consultation with you.