The Eight Mistakes that could Kill your Wealth

Let us face the fact that we all make mistakes. When it comes to mistakes in relation to our investments a mistake can have catastrophic consequences.

Some investment mistakes are obvious, while other are not so obvious but all can leave you with despair and disappointment.

Here we explore the most common mistakes:

1: Portfolio Concentration

One of the biggest mistakes you can make as an investor is having your portfolio concentrated in a small number of holdings, or a single asset class – in simple terms, putting all your eggs in one basket. This means the fate of your entire portfolio depends on the performance of a small number of investments. Typically, a property investor with 5 properties all in the same city or a share portfolio comprising of BHP, Rio Tinto, Wesfarmers and Qantas could be at risk of concentration risk.

To avoid this, you need to diversify your investments. Diversification is distribution your investments across multiple geographic regions, industry sectors and asset classes. By doing so, you spread your investment risk and reduce the impact on your overall portfolio if one part of the portfolio underperforms.

2: Failing to Compound.

Compounding refers to earning returns on both your original investment and on subsequent returns. To reap the benefits of compounding, you should consider reinvesting the income from your investments.

Simply put, the sooner you start putting your money to work, the more you’ll benefit from the compounding effect and the less you’ll have to save to reach your goals.

3: Regular Contributions

An effective approach is to invest on regular basis, in a strategy known as dollar cost averaging. This involves investing the same amount of money at set intervals (for example monthly or quarterly) over a number of years, whether market prices are up or down.

When prices are up, your fixed dollar amount will buy fewer units. When prices are down, your regular investment will buy more.

The point of dollar cost averaging is not to try and pick whether the market is going to rise or fall, but rather to remove timing from the equation.

4: Emotional Investing

Our emotions can affect our investment choices – and usually not for the better. As we enter market upturns, the optimism and excitement of rising values can lead us to think that making gains will be easy.

These positive emotions can lead us to increase our level of risk at a time when we should be more cautious.

On the other hand, when markets are in a downturn, panic and fear may prevent us from investing, cause us to reduce our risk levels, or even lead us to exiting markets altogether – at precisely the wrong time.

It is important to ask yourself whether your investment decisions are rational, or are being driven by your emotions?

5: No investment goals

If you are going on a journey to a new destination, you are likely going to need a map to ensure that you don’t get lost along the way. This also applies to investing.

Be clear on what you are trying to achieve. For example, are you saving for a deposit on a house? Or are you saving for retirement?

It is important to be able to articulate your goals as these will largely direct your strategy and the level of risk you are comfortable taking on to reach these goals.

6: Record Keeping

Each time you buy or sell an investment, you’ll receive material that you’ll need at tax time to work out your capital gains or losses. At the end of the financial year, you will also receive information regarding the distributions from any investment you hold, which need to be reported in your annual tax return.

Misplacing this material will cause a major headache, so ensure that you keep it in a safe, easy-to-find place.

7: Fees.

One thing you can control is the amount you are paying in fees. The lower the fee, the better, as management costs are measured as a percentage of your investment.

8. Dunning Kruger

May people with a low ability to perform a task (in this case investing) who massively overestimate their ability to do so. 

This referred to the cognitive bias of ‘illusionary superiority’.    Like most cognitive biases, it means they are generally unaware that their investment decisions are being impacted by these forces. 

Summary

Even the most successful investors make mistakes along the way. But being aware of these common investing mistakes can help you to avoid them and keep you on track to building a successful investment portfolio.

If all else fails, remember to diversify your portfolio, take advantage of compounding, make rational decisions, set clear goals, keep your records safe, and keep an eye on fees.

In fact, it might well be worth considering outsourcing your investment management to a professional. Mistakes avoided means more wealth creation success.