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Four mistakes to avoid when investing

Published Nov 6, 2021


By Lynn Bolin

Investors sometimes make mistakes that can be avoided. For example, selling an investment out of fear, or switching between different funds too often. These are just two examples out of many but ultimately, human emotions – especially fear and greed - are your main enemies when it comes to keeping your investments on track.

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Fortunately, it’s not all doom and gloom if you know what to keep in mind. Here are four moves that, if you’re forewarned about, you should be able to avoid:

1. Starting to save too late for retirement

There is a reason that saving for retirement starts long before you retire. You need all that time in the market to accumulate a meaningful amount of money to live on when you’re no longer earning. If you start late, the years of lost compound interest on your retirement savings can cost you dearly. Even small contributions count and can really add up over time. If you’re behind, the frightening reality is that you’ll probably have to save much harder to have enough when you retire, or maybe work for longer than you’d like.

2. Checking your investment performance too often

Market volatility and your emotions don’t mix well. The truth is, you often need to sit still and ignore your emotions to reap long-term investment gains. Checking performance every day, or even more than once a month, is likely to only frustrate you – or worse, frighten you into switching between funds, or cashing out altogether. Investing for retirement or for acquiring costly assets like a house or car is a longer-term process that requires patience and trust that you have a sound plan in place, regardless of short-term market moves. That being said, it is important to check your portfolio’s progress and asset allocation every 12 months to ensure you’re on track, and that it’s still aligned with your investment goals and objectives – and then rebalance where necessary.

3. Investing without considering your goals

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If you’re blindly hoping for the best when you invest, it’s almost the same as driving at night without headlights. Not only are you unable to see where you’re going, but you’re likely to crash. Investments aligned to financial goals – over the shorter, medium and longer-term – have a better chance of success. It can be challenging to keep working towards a goal, but having one in the first place provides motivation and a benchmark to measure your progress against, making it more likely that you’ll get there in the end. It’s important to re-evaluate your financial goals regularly – at least annually - to ensure they still meet your needs.

4. Depleting your discretionary investments

Discretionary investments (investments you make at your discretion using after-tax income, as opposed to retirement-fund investments) are there to help you when an emergency arises, or for an important expense such as a deposit on a home. It’s important to be intentional about how you use your discretionary investments, as they’re supposed to be there as a safety net. If you do take some savings to cover an unforeseen cost, ideally you will need to make ‘paying yourself back’ the amount that you took out a new priority. If you still need to start an emergency fund, a discretionary unit trust is well suited to emergency savings. You need safe exposure to growth with access to your money whenever you need it.

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Working with a trusted financial adviser can make the journey of investing feel a lot more grounded, as well as more rewarding. They are also there to be an emotional anchor during tough economic times, to guide you safely to reaching your goals.

Lynn Bolin is head of communications at Prudential Investment Managers.


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