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Five investment mistakes and how to avoid them

21 August 2012

Five industry professionals tell FE Trustnet some of the typical errors made by inexperienced investors.

By Pascal Dowling,

Group Editor, FE Trustnet

After a strong summer for equities, many investors will return from their holidays with ambitious plans for their portfolio, but enthusiasm can be intoxicating. FE Trustnet asks the professionals how to avoid the most common mistakes. 


Don’t treat investments as if they are isolated from one another

ALT_TAG "The most obvious mistake, and one which we’re all guilty of now and then, is that people look at an investment as if it is isolated from the others they already own," says Jason Hollands, managing director of business development and communications at Bestinvest. 

"It might be something that’s been tipped, or is high in the performance charts at the moment, or a sector in vogue, but if you don’t consider it in the context of your total portfolio then you may end up taking far too much risk." 

"I saw a lot of this during the technology boom. People would come to us wanting to buy technology funds, not realizing that they were already exposed to technology via their existing UK equity investments. What you really want to avoid is a portfolio which is a museum of yesterday’s best ideas." 


Don’t get carried away by recent performance

ALT_TAG "Following what’s been successful and making your investment decisions based on what has just done well is so common," says Kerry Nelson (pictured), managing director of Nexus IFA. 

"It’s a funny market, so you really need to stick to the basics and not get carried away with chasing performance in really specific areas – because they’re all so volatile." 

"You see people piling into quite a specialised area, like gold for example, and often putting in more money than they would do normally, because the traditional homes for their investment – like UK equities – aren’t satisfying at the moment."

"It’s true you have to consider upping your risk exposure at times, but you can go to far." 


Don’t mistake familiarity for research

ALT_TAG"A lot of people come back with the feel-good factor after their holidays and this can lead to silly decisions," says Graham Spooner (pictured), investment analyst at The Share Centre. 

"I’m quite interested in restaurants. I was eating out the other night in a restaurant, part of a chain, it was pretty full, and I knew the shares were quoted."

"I was thinking about it, and I thought it would be really easy to say, ‘oh well I’ll take a chance on it’, but you don’t know anything about the balance sheet, you don’t know how fast the chain has expanded, you don’t even know if there’s a special event in town that’s making it busy." 

"You should be careful not to think you know a business just because you’ve experienced it." 


Don’t forget to take profits

ALT_TAG "Markets have had a good run of late, so you may want to lock in profits now before something else hits the fan," says Graham Toone (pictured), head of investment research at AFH Wealth Management. 

"It may be time to get out of riskier assets and into a safer haven. It can be difficult, sometimes it’s easier to buy than it is to sell, but you’re not following a football team - this is about cold, hard cash." 

"There’s no rule about when to sell an investment that’s performed well, it’s a personal thing, but you can look at your portfolio and ask yourself if any parts of it have become out of kilter as a result of performance and start trimming your exposure that way." 


Don’t rush in

ALT_TAG"I think it’s important to be aware that September and October are traditionally slightly more difficult for markets," said Thames River's Gary Potter (pictured)

"I’m not saying there’s going to be a crash or anything like that, but the next two months historically have not been great for markets." 

"It would be very easy to come back off your holidays, see things have gone up, pile into some investments and then in a couple of months find yourself down seven or eight per cent. You should be prepared to be a bit more patient."

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Gary Potter

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