What is the secret to successful investing? First of all, we respectfully suggest that you need to have an idea of what success means to you. This is what we call understanding your investment objective, in terms of the returns you are looking to achieve, the risks you are looking to avoid, and most importantly the timeline over which you are going to measure success or failure. Understanding this should be the key driver in helping you to develop your strategy and then guide you on asset allocation and fund selection. You can then allow the power of time and compound interest to do their thing, while of course as we said here, those regular reviews are critically important.
But often things just don’t go to plan… Probably the biggest threat to successful investing is not external forces such as the economy, market performance or poor asset allocation & fund choices. It’s usually our own personal behaviours.
We place a lot of store on helping our clients to avoid falling victim to their worst behaviours when it comes to investing, through constant guidance and wise counsel. We’ve identified what we’ve come to recognise as The Great Eight Mistakes that people can make, when it comes to investing.
Thinking too Short Term
Overcoming this begins with setting the right investment objectives and then staying focused on them. Investing (rather than trading) is a medium to long-term pursuit. One of the greatest challenges is stopping investors from reacting to short-term events and making careless decisions, undermining their long-term investment plan. One of your advisor’s key roles is in ensuring that you have both agreed the investment horizon over which you are hoping to achieve your objectives, and ensuring you understand and are comfortable with the range of potential paths markets might lead you down along the way.
Not diversifying enough
People get a “great stock tip” or become convinced that a single, narrow asset class such as crypto currencies are sure things, definite winners that they will greatly regret having missed out on … and then go all in on them. Sometimes they win big, more often they lose even bigger. The well-worn practice of diversification has saved many investors from financial wipe-out, when a single asset has significantly underperformed.
Timing markets
No-one has a crystal ball in relation to markets, or knows exactly when they are about to peak or bottom out. It has been proven time and time again that time in the market will almost always trump attempts at timing when to enter and exit markets.
Overtrading
The most active traders consistently underperform against investors who adopt a “buy and “hold strategy. They miss market highs and lows and incur costs every time they trade. According to The Journal of Finance, the most active traders underperformed the U.S. stock market by 6.5% on average annually.
Not shutting out the noise
As the saying goes, “Paper has never refused ink”. Financial commentators have deadlines for columns to write and podcasts to record. In order to create content, they often offer their “expert” analysis on the future direction of markets. Shut out the noise and stay focused on the long-term expectations of returns and risk, when building and following your investment strategy.
Paying too much in fees
A ½ percent here or 20bps (0.2%) there doesn’t sound like much. However fees can have a very meaningful impact on investment performance, particularly over the long-term. Focus carefully on your investment costs, as reducing them is an important driver of wealth generation. If you are paying high fees, make sure you are happy that you are likely to get higher returns than the lower cost options increasingly available through investments in passive funds or exchange traded funds (ETFs).
Buying at the top and selling at the bottom
As we all know, no-one rings a bell when the market hits the top or the bottom. When markets are weak, some fearful investors rush to cash in order to stem their losses, and then inevitably re-enter the market way too late, missing out on a lot of the upswing. When times are good, greedy investors buy more assets that have just delivered good returns (and are therefore more expensive than previously), just before the markets peak and then fall. In what other area of life do you see lower demand when prices are depressed and higher demand when prices are high? As Warren Buffett famously said, “Be greedy when others are fearful and be fearful when others are greedy”.
Having irrational expectations
We all want our portfolios to perform really strongly… but most of us also want to keep a lid on the amount of risk taken. The greater the ambition and expectations, the greater the level of risk needed to achieve outperformance. And so, the greater the level of potential losses. According to recent research from the CFA Institute, investors had an average return expectation from investments in equity markets of 15.6% p.a., while at the same time the average expectation of financial professionals was for returns of 7.0% p.a. Setting out with unrealistic expectations greatly increases the probability of disappointment. A good advisor should ensure that investors are aware of the level of returns that can generally be expected from their investments, and fully understand and are comfortable with, the level of risk they are taking.
Of course, you may be comfortable that you are not falling prey to The Great Eight. However, if not, you might want to consider having a discussion with an independent investment advisor. Advisors aren’t necessarily going to be able to accurately forecast future events or returns. But they should have some insights, and be able to ensure that your investments are appropriate to meet your objectives. They will also help you understand how they may perform in the future, what you are paying for them, and what adjustments you might make in the event of things turning out better or worse than your central expectation.
At Acuvest, we look forward to having this conversation with you.
