6 common investment mistakes and how to avoid them

Between you and me, I’ve made many mistakes over my time in my investment portfolio. There are a few choice stocks sitting in my portfolio that I should probably cut my losses on and you can see a love of healthcare and tech in my (not very diversified) selections.

Fortunately, I’m not alone.

You would be hard-pressed to find any investor that hasn’t made a few rippers in their time. Even the Oracle of Omaha has had a few doozies with one of these, Dexter Shoes resulting in a $3.5 billion loss to shareholders.

The truth is, regardless of how talented or amateur we are in our investment journey, we are united by some commonality in the mistakes we make. But, what splits us is how we (or the experts we outsource to) handle those mistakes.

In light of this, I spoke to Alexandra Kalceff, Head of Investment Capability at Wilsons Advisory and Sarah King, Head of Client Care and Advice for Stockspot about the top mistakes they typically see and how they help clients fix these.

Mistake 1: Timing the markets

King notes that there are a range of reasons people might find to delay investing, from thinking the market is overheated to hoping for bigger market falls.

The problem is “most of the things predicted in the media don’t eventuate, and if they do, it can take longer than anticipated. If a big dip comes, you often miss it,” says King.

She recommends that rather than trying to pick the perfect time, investors use dollar-cost averaging – “drip-feeding smaller amounts in regularly”.

It’s a strategy that King also points out can alleviate market nerves when markets are falling.

The other thing to remember is that investing is typically a long-term game.

“Investing is about ‘time in the market, not timing markets’,” says King.

That is, the longer you are in markets, the more time you have to compound returns – that market nosedive starts to look more like a blip in the radar if you are holding more than five years.

Mistake 2: Becoming too attached to a particular view or stock

The attachment means the investor fails to buy or sell when an opportunity changes.

“The client may have had a bad experience in a particular sector with an old management team and is hesitant to consider an opportunity for fear of losing money again. On the other hand, clients who have had a very good experience are reluctant to take profits or exit a position even if the upside is limited or the outlook is uncertain,” says Kalceff.

This may ring a bell for many Afterpay investors. Cettire (ASX: CTT) is also shaping up to be a bloodbath (read more on this in this wire from my colleague Ally Selby).

The solution?

“My priority is to take the emotion out of investing and apply an open mindset to every opportunity,” says Kalceff.

What this means is if the investment thesis has changed, then it’s time to change your positions – even if that means selling at a loss now rather than holding out. It could also mean selling a position at its peak because it has no more to offer you.

Mistake 3: Comparing short-term returns with specific sector returns

“Comparing short-term returns with other investments or savings rates can cause investors to switch to other options unnecessarily when the strategy they have in place currently is very well suited to their goals, risk profile and timeframe,” says King.

For example, King points out that while the cash rate is currently 4.35%, they are 2% on average in the long run and offer no long-term capital growth.

Alternatively, you may look at sector performance. Take technology, which has boomed in the last year and it may lead you to think your diversified multi-sector returns look inferior. They might be on a 1-year basis, but extrapolate over the long term and think about the volatility involved and your mix might not look so bad after all.

“Investing is a long-term strategy. The benefits and growth really kick in after many years in the market. So take a load off and try not to check your returns too frequently or make non-apples-with-apples returns comparisons,” says King.

Mistake 4: Focusing too heavily on yield

It’s always tempting to pick the top-yielding asset for your portfolio, without factoring in the bigger story. For example, on the equities front, high dividends may come at the expense of investing in the future growth of a company, or may simply be unsustainable for a company to continue to offer generally.

“With equity markets, this focus will come at the expense of total returns and more importantly, growth, while in fixed income markets, this focus can disregard the underlying risk of the security in question,” says Kalceff.

The key to avoiding this mistake? Make sure to analyse the overall business fundamentals and yield history before you invest – you want to see stability, consistency and long-term sustainable growth.

Mistake 5: Too much focus on short-term noise

It’s easy to get lost in the 24 hour news cycle – it’s when you start to apply this to your portfolio that things can get dangerous.

“It’s important not to lose sight of the overall objectives of a portfolio by focusing too much on the short-term or what is making the most headlines in markets,” says Kalceff.

I’m sure you’ve heard the stories of people who look at a market fall and make a snap decision to sell down their portfolio. Perhaps you’ve even made that mistake yourself.

Remember “the bigger picture”.

For Kalceff, her “focus is to ensure a client’s investment portfolio is achieving their objectives – this, as well as their risk tolerance, is always front of mind.”

Take the time to truly understand your objectives and whether your portfolio has been constructed to meet them, then remind yourself of this during market volatility. It can also help to talk to an expert to see if you need to rebalance or adjust allocations to continue to meet your long-term goals.

Mistake 6: Not adequately diversified

It’s finance’s free lunch - diversification - and a standout mistake in portfolios.

“It’s common to see portfolios that are heavily concentrated to a single asset class like Australian shares or don’t include any exposure to defensive investments like gold and bonds that can help to reduce risk,” says King.

This can leave investors in a precarious position where there’s nothing to balance out market volatility. After all, not everything goes up -or down – at the same time.

She has also seen investors get hooked on thematic ETFs, particularly in the tech space, and fail to realise the cross-over between underlying assets.

“It’s best to own a mix of investments including Australian and global shares, gold and bonds to reduce risk and offer long-term capital growth,” King says.

She encourages investors to stay broadly diversified to ensure they naturally have exposure to the winners each year.

Final top tips to avoid big investment mistakes

“My advice would be to encourage investors to maintain an open mind to all opportunities. Be curious and only invest where you understand the risk and return on offer. If something sounds too good to be true, it most likely is -so proceed with caution,” says Kalceff.

She also adds that expert advice can be invaluable to juggling markets – investors who seek advice should ensure a good rapport with their adviser to feel comfortable asking questions.

Alongside reiterating the importance of diversification, King says “What goes up, must come down” so “don’t follow the hype”.

Finally, she encourages investors to be patient and disciplined.

“The best investors are the most disciplined and don’t worry about short-term ups and downs,” King says.

Have you made any big investment mistakes? Share your lessons and how you managed your portfolio in the comments.