20 MOST COMMON INVESTING MISTAKES - PART 2
Unpacking mistakes 11 to 20.
In my previous article, I dealt with the first 10 common investment mistakes as identified by the CFA Institute. These mistakes are universal, and although many of them seem like the obvious thing to do or avoid, we as investors often fall into the trap of many of these 20 mistakes.
As I mentioned in my previous article, these comments and USD figures are US-based. I have added more SA centric comments to keep it close to home.
Let’s unpack mistakes 11 to 20.
Not knowing your performance
Often, investors don’t actually know the performance of their investments. Review your returns to see if you are meeting your investment goals, factoring in fees and inflation.
Don’t underestimate the importance of something as small as a 1% return. A 1% additional return per year on R1 million over 20 years results in the following:
At 9% = R5.6 million
At 10% = R6.7 million
At 11% = R8.0 million
At 12% = R9.4 million
At 13% = R11.5 million
Growth in capital is exponential and not a straight line. By getting 3% more return per year, capital growth can be more than double, as can be seen from the figures above when comparing a return of 9% to 12% per year. The difference has a meaningful impact on retirement provision.
Reacting to the media
Negative news in the short term can trigger fear but remember to focus on the long run.
73% = percentage of years the US stock market has had positive returns since 1920. Media hype stirs emotions, and the media knows that bad news sells more papers and magazines than good news, which leads many of them to focus less on good news and more on bad news. Be careful that you don’t become too cynical due to an overload of bad news …
Forgetting about inflation
On average, inflation has averaged 4% annually in the US. In South Africa, the figure is around 6.0% per year.
$96 = value of USD 100 after a year. R94 = value of R100 after a year
$44 = value of USD 100 after 20 years. R 1 = value of R100 after 20 years.
The objective of investing should always be to beat inflation and beat it meaningfully. If you are extremely conservative and happy with a cash-type return, that is fine. It only means that you will have to invest substantially more to achieve the same goal as a higher-return portfolio.
Trying to time the market
Market timing is extremely hard. Staying in the market can generate much higher returns than trying to time the market perfectly.
Timing the market often goes hand in hand with mistake 5, buying high and selling low. Studies done by prominent money managers have shown that investor behaviour results in returns of around 2% p.a. lower on average compared to the actual funds they invest in due to selling and buying trends. Fear and greed are the main drivers in this space.
Not doing due diligence
Check the credentials of your advisor and understand the funds that you invest in. Investors have an obligation to also investigate and make sure they understand their investments. When funds outperform, understand why. And in the same manner, if funds underperform, also understand why. If your advisor cannot explain this, consider getting another advisor …
Working with the wrong advisor
Taking time to find the right advisor is worth it. Vet your advisor carefully to ensure your goals are aligned and that they have the necessary skill set to provide the service you require.
Investing with emotions
Although it can be challenging, remember to stay rational during market fluctuations.
3% = investors’ average annual loss due to emotionally driven investment decisions.
Be careful of listening to the Joneses. Humans like to boast about their achievements but rarely speak about their failures. What you hear and perceive to see is not always the plain truth. Don’t let greed and fear drive your investment decisions. If your portfolio loses value, understand and accept that it is part of the investment cycle. During extended economic crises, losses can remain for extended periods. This is a good time to invest; don’t sell out and cement your loss. Remember, a loss or a profit only occurs the day you cash in your investment. While you remain invested, values moving up and down are just doing what they are supposed to do.
Chasing yield
High-yielding investments often carry the highest risk. Carefully assess your risk profile before investing in these types of assets.
Be very careful of unrealistic promises of returns. Far too often, investors get lured into the excitement of fantastic returns. Walk away, and don’t be fooled by guarantees. Guarantees are just as strong as the guarantor. If the guarantee is not underwritten by a major financial institution, it is worthless.
Neglecting to start
Consider two people investing $200 monthly, assuming a 7% annual rate of return until age 65.
$520 000 = end portfolio value if they started at age 25.
$245 000 = end portfolio value if they started at age 35.
Start investing as soon as possible, irrespective of the amount you invest. It is important to entrench the habit of saving/investing and even more important to kick the habit of dipping into your investments. Give compound interest a chance to work its magic.
Not controlling what you can
While no one can predict the market, investors can control small contributions over time, which can have a powerful outcome.
$1.2 million = end portfolio value from investing $15 a day for 50 years at 7% average annual returns. This may sound a bit unrealistic, but it is the illustration of the figures that are important, and it ties in with my comments in 19.
Many of the 20 points mentioned in the two articles are basic, and I assume many investors do adhere to most of them. These articles are just to remind us to stick to the basics and apply the “KISS” (“Keep it simple, stupid!”) principle.
Investing is simple, but it isn’t easy …
