(AVOID THESE INVESTING MISTAKES)
July 10, 2024
Hello everyone,
We all make mistakes, right?
But if you can avoid making very painful mistakes, you can save yourselves a lot of time and money.
So, let’s look at the most common ones to avoid.
Buying overlapping ETFs
Many people like to buy a basket of stocks, which are nicely packed into an exchange-traded fund (ETF). That’s all well and good, but what happens is sometimes investors buy several ETFs without checking which stocks are held in each one. The result can often be you are buying overlapping ETFs, which have a higher allocation to a particular region or industry than you originally thought. Your vision for the long term should be a diversified portfolio, not a concentrated focus in one area.
Buying what you don’t understand
Investing in things that are beyond your understanding can be like stepping into a minefield.
If you cannot understand the asset, you will find it difficult to consider the risks, and possible returns, how to mitigate these, and whether they fit into your investing plan.
You will be vulnerable to scams. Sharks are always lurking in the investment world. They have malicious intent and show no empathy for their potential victims. A lack of understanding of any investment will make you easy fodder for dark knights who are marketing their too-good-to-be-true schemes.
Investing decisions should not be ruled by your emotions. Ask yourself - Why are you investing? Are the expected returns reasonable? Am I being rushed to decide? Step back and take time to consider your choices and make sure they are based on a solid understanding.
All we like sheep – don’t be caught up in panic selling. Understand why you are investing, so you won’t be influenced by the crowd.
Not rebalancing your portfolio
Leaving a portfolio to its own devices can be a mistake. Over time you will find there are assets that no longer align with your intended investment strategy, risk tolerance, and financial goals.
It can result in a portfolio overweighted to an industry that is doing well in the short term, but that may not serve you in the longer term.
Rebalancing your portfolio will bring it back on track to your desired target allocation. Typically, this is done by buying and selling assets within the portfolio.
Of course, it must be remembered, that transaction costs (brokerage fees) and CGT (capital gains tax) implications will apply when you rebalance.
Having unrealistic expectations
Unrealistic expectations can come from a lack of understanding, overconfidence, or being influenced by stories from friends, family, or social media.
Expecting high returns in the short term is unrealistic.
An assumption is that there will only be positive returns. Underestimating risk and the possibility of a downturn can see many people unprepared for it.
Overconfidence. Many believe they can time the market and pick the perfect stocks at the perfect time. Even professionals are burnt by this notion.
Investing is for the long term. It’s not a get-rich-quick scheme. People who want to invest in the market must understand the realistic returns and must be able to sit comfortably with the volatility in the market. Your risk tolerance and appetite to stomach volatility will certainly influence your decisions when choosing your allocation of assets.
Not talking about money
Does it really need to be pointed out that the more you discuss money and financial tools, instruments, and investments, the more educated you become? It should be a compulsory subject in school, and financial institutions should do more to educate the public. (It was only after the 1987 crash that stock market investing and the financial industry started to become more transparent. My family was invested in the stock market at this time and didn’t sell despite the panic. I was also invested in a gold fund, which I have held).
Not understanding the tax implications of selling
We are all familiar with the saying “buy low and sell high”. But are we all familiar with the tax implications of selling out at the highs? Although you receive a 50% capital gains discount on shares held longer than 12 months, there is still planning that needs to be done around when you sell and how that will affect your taxes.
Returns earned from selling shares will be included in your taxable income, which may affect the tax bracket you’re in or any subsidy you might be receiving from the government (such as paid parental leave or childcare subsidies). Any profit or losses from options must also be reported in your tax statement.
It can be prudent to look at what structures you have in place. Do you have a retirement account, a superannuation, a trust? All of these can be used to minimize tax.
Not starting to invest because you think it’s too hard and complicated
Every day you are not invested is an opportunity lost. Time is something you cannot get back. Take small steps and stop procrastinating.
QI CORNER
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Something to think about…
Cheers,
Jacquie
