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The most common blunders made by investors of all ages

20 November 2023

Investing can be tricky but people make it harder by making basic and avoidable mistakes.

By Tom Aylott,

Reporter, Trustnet

There is a lot to consider when deciding how to invest your money, so many people are rightly overwhelmed at first. However, there are some simple but impactful mistakes that Bestinvest managing director Jason Hollands sees time and time again.

Here, he shares the most common blunders and gives tips on how to avoid making them.Last week, Killik & Co’s head of financial planning Will Stevens revealed the most frequent money mistakes people make that are costing their savings.


Not setting goals

Too many people rush into investing without considering why it is they are doing it, according to Hollands.

“This is a little bit like embarking on a journey without a destination,” he added. “Having a goal – or set of goals – like retirement, buying a property, or saving for education fees, helps focus the mind on a timescale, the level of return needed to achieve the goal and the amount of risk that might be appropriate.”

He finds that many are keen to get stuck in, but having an end goal can lead investors down very different routes to achieve them. Ultimately, establishing a target before you set off can help decision making.


Ignoring asset allocation

Diversification is key to the security of a portfolio but many people overlook this crucial step, Hollands said. Spreading investments across a range of asset classes, regions and styles ensures that a portfolio is not overly concentrated in one area, thus protecting it from downside risk.

He noted: “A common mistake by DIY investors is to overlook asset allocation entirely in the clamour to pick funds or shares. This can unwittingly expose them to unnecessary – and sometimes insufficient – levels of risk.”


Making ad-hoc decisions

It is human nature to change our mind, but investors have a tendency to make off-the-cuff decisions without considering the impact on their wider portfolio.

When annual markers such as the end of the tax-year or ISA allowance deadline roll around, people buy whatever funds are most highly rated at the time without considering how they will work alongside their existing holdings.

Hollands said: “These ad hoc purchases can gradually add up to create museums of best ideas rather than a well-designed portfolio.

“I believe that before investing any new money, it is wise to look at your current asset allocation. This will help identify the areas where new investments might be made.”



Focusing on past performance

It can be tempting to access a fund’s strength on its past performance but making an investment decision based solely on this factor is a mistake many people make, according to Hollands.

Just because a fund did well in the past does not guarantee it will perform well in future. Styles come in and out of favour and a fund that outperformed in the investment-friendly environment of the past decade may struggle to reach those same highs if interest rates and inflation remain high.

“It would be risky to take a car journey and stare solely in the rear-view mirror at the expense of the road ahead,” Hollands explained. “Unfortunately, that is the way some people go about selecting their investments.”


Letting emotions drive decisions

Most people can be swayed by emotion to make illogical investment decisions, especially in volatile markets. When shares are roaring, investors buy in as prices are peaking before a downturn. In downward markets – a scenario more relevant today – people get cold feet and sell down their investments at a loss.

This goes against the basic rules of investing but Hollands said it can be easy to fall into this trap when surrounded by bad news.

“When your life savings take a sharp fall in value, it is difficult to overcome the pull of emotions and stay calm,” he said, “During times of volatility and uncertainty, confidence in investment decisions often wanes.”

The best way to avoid these detrimental reactive moves is to make regular payments, which ensures consistency regardless of the wider market environment.



Not rebalancing regularly

While some investors are led by emotion to make too many changes, others do not maintain their portfolios enough, according to Hollands.

Many clients he comes across put a lot of effort into building their portfolio when they first set off investing, but the job does not end there. Once people have initially set up their portfolio, they make  the mistake of leaving it alone and not making adjustments over time.

Hollands said: “Different markets and asset classes won’t all move ahead at the same pace. This means, over time, carefully selected weightings to each will drift and so the risk profile of an investment portfolio can gradually change, potentially no longer being appropriate for the investor’s goals.”


Having too many holdings

Not rebalancing often leads to a portfolio with too many funds. Hollands said that many people add exciting new funds to their portfolio on an ad-hoc basis every year without looking back and considering whether they still deserve a place there.

Investors could find that many funds they’ve added over the years no longer align with their goals and having too many of them can water down the overall performance of their portfolio.

“It is hard to keep an eye on a portfolio with too many holdings,” Hollands added. “While diversification is important, you can also be over-diversified too

“Some investors can be reluctant to switch out of funds or shares that have disappointed, hoping they will eventually come good again because they have become emotionally invested in their choice and would rather not admit it was a wrong one. In reality, they may be better able to make up lost ground by moving elsewhere.”

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.