Investing can be nerve-wracking and requires extensive research, deep market knowledge and experience. Here, our private banking partners – Arbuthnot Latham – have compiled a list of some of the common mistakes investors make. If you recognise yourself in any of these, you are not alone, although it might be time to review your investment strategy.
- Emotional attachment to a losing position
Holding onto an inherited stock can be tempting but small losses can become big losses. Many people make the decision to wait until they break even but remember a 50% loss requires a 100% gain to break even, and many stocks never bounce back.
- Putting all your eggs in one basket
Simply put, diversification is key.
If you hold 100 stocks and one goes to zero, you lose 1%. If you invest in 10 stocks and one goes to zero, you suffer a 10% drop.
By investing in a mix of asset classes, your capital is considered to be more ‘protected’ over time than if you invested in a single asset class over the same period.
- Assuming a stock with a low price is undervalued
It is human instinct to assume when a stock price falls, it will bounce back. Like a moth to a flame, many watch the price fall from $100 to $90 and believe it is a good time to top up.
But some stocks never bounce back. Share prices are not a real reflection of the true value or opportunity in a company. The company behind the share price is.
- Not knowing your batting average
Being wrong is normal – it happens to the best investors in the world. Getting it right 60% of the time is a good batting average.
What’s important is looking at overall historical performance and making sure that, on average, your investment professional is right more often than they are wrong.
- Underestimating your time horizon
By starting early, people in their 20s and 30s can invest for 30-40 years, amassing a large retirement pot through capital gains in equity markets and benefiting from compounding.
If you invested $100,000 in the S&P 500 at the beginning of 1991, you would have about $2.7 million at the end of 2021.
So, start early, build a balanced portfolio, don’t get emotionally attached to stocks, be wary of overconfidence and don’t confuse luck with skill.
Regularly review your investment strategy in line with your own changing circumstances. If your income, health or family circumstances change, it is time to review your strategy.
Arbuthnot Latham are offering McClarrons Affinity clients a complimentary Portfolio Review. Get in touch to find out more by emailing affinity@mcclarroninsurance.com or calling 01653 602634.
Author: Adam Gentry, Business Development Manager
Email: adamgentry@arbuthnot.co.uk
