Research by international financial consultancy deVere Group into the top mistakes made by high-net-worth investors has highlighted the value of good financial advice, selecting asset managers prudently and sticking to an investment strategy.
What are the most common investment mistakes, and how can you avoid them?
Mistake 1. Not diversifying your portfolio properly
The importance of a well-diversified portfolio cannot be underestimated in an uncertain economic environment. One type of asset manager may flourish in a specific economic environment, whereas another may not. The same is true for asset classes. Allocating your investment across several different asset classes, industries and financial instruments reduces your overall investment risk. In addition, you can diversify your investment by allocating it across asset managers with different investment strategies and styles. This further minimises the risk that you will not achieve your objectives, because you are not relying on one asset manager.
Investing in a multi-managed unit trust fund is a good way to achieve diversification, because multi-managers deliberately try to mitigate risk by diversifying portfolios across multiple investment styles.
Mistake 2. Not starting to invest earlier
Many people cannot retire comfortably because they started to save and invest for retirement late in their careers. Delaying contributing to a retirement fund for even five years can have a huge impact on your final fund value, particularly because you miss out on the power of compound interest.
For example, if from the age of 25 you start investing R500 a month in a fund that earns an average annual return of 10%, you will have accumulated R3 162 039 by the time you retire at 65. But if you delay contributing until you turn 30, you will accumulate R1 898 319.
The actual outcome will differ from fund to fund, and from person to person, so you should obtain professional advice before making any investment decisions. The important thing to remember is that your investment outcome depends on how much you invest, how long you stay invested, and the growth your investments generate. The more you save and the longer you save, the greater the reward when your investment reaches maturity.
Mistake 3. Focusing on the short term
Some investments are designed to meet their targets over the long term, whereas others have a shorter time horizon. Your investment goals and appetite for risk will determine whether you choose a long-term or a short-term investment.
Shorter-terms goals, such as a holiday in December, may require a different approach than saving for your daughter’s wedding in 10 years, or your retirement in 20.
A low-risk, low-return investment that allows you to access your cash easily is different to a higher-risk investment that requires you to remain invested for a number of years before you see the gains.
Typically, investments with longer-term horizons are more volatile over the shorter term, but the returns should smooth out over time. If you focus too heavily on short-term fluctuations in value, and hop from one investment to the next in an attempt to time the market, the chances are that you will do more harm than good.
Reputable asset managers factor in volatility when making investment decisions, so the key is to think long term and stick to your investment strategy.
Mistake 4. Being emotional about investments
When we encounter difficulties, our natural reaction is either “fight” or “flight”. We may react the same way when our long-term investments encounter turbulence. But in most cases, our immediate reaction should be: do nothing. Reacting emotionally could result in buying or selling investments at the wrong time, destroying investment value unnecessarily.
We suggest that investors who have a tendency to react emotionally and are susceptible to the herd mentality should take two preventative measures:
• Enlist the services of a qualified and experienced financial adviser who puts your investment objectives at the centre of the advice process. Financial advisers tend to bring objectivity to decision-making and can coach you to adhering to a long-term plan.
• Set up a recurring monthly debit order. A recurring contribution reduces the temptation to try to time the market, and you receive the benefits of cost averaging, which lowers overall unit prices. By investing a fixed amount at regular intervals over a long period, you spread risk and avoid the temptation to buy only at inopportune times.
Your investments should help you to achieve your goals and dreams. Once you establish what your goals and dreams are, it becomes less difficult to design a financial plan and find a suitable investment. Don’t be afraid to enlist professional support, as long as your adviser is accredited and reputable. And ensure you stick to your investment strategy, and review it as you move from one life stage to the next.
Tandisizwe Mahlutshana is the executive of marketing at PPS Investments.