David Liddell, CEO of IpsoFacto Investor
Investment is not necessarily easy and there are all sorts of distractions and hurdles for the novice investor to overcome. Not having a plan is a common mistake; make sure you are clear about what you are trying to achieve with your investments, work out how much money you can put aside for a long time and be cautious about the likely returns you will make.
Having formulated a plan, there are a number of pitfalls. In the first place, the investment industry is good at selling things –and the easiest assets to sell are those that have already performed well. So following fashion can be a mistake- most obviously in the dotcom bubble of early 2000s but also in the commodities boom of 2010 as everyone became fixated with China. Avoid this by being sceptical of new funds- if they are in an area that has already performed well. As ever, the advice is do some research before investing.
Related to this is ignoring valuations. If a share or market is at an all time high, be suspicious. In March 2000 Vodafone was trading at a price of £4.40; the price earnings (P/e) ratio was a staggering 94 times (the average P/e for a share over time is more like 12x); no doubt many piled in but the price has never been anywhere near that level since.
Investing lump sums. Don’t rush in to investment – regular investment of smallish amounts can help avoid buying markets which are too expensive. Missing out on dividends – these can form a large part of the overall return from equities and reinvesting them is a great way to ensure you are investing regularly.
Insufficient diversification – don’t have all your eggs in one basket. Have a portfolio of investments diversified by sector and geography. By and large it is better for the smaller investor to use Funds or other collective investment schemes such as investment trusts, which will be diversified themselves. You do however still need to check that your funds don’t all own the same sort of investments. Don’t have all your investments in equities, the right allocation will depend on circumstances and risk appetite. Find out what your pension fund is invested in and treat this as part of your portfolio.
Successful investing is a bit like gardening; you need to get the balance right between pruning and letting your investments blossom. Falling in love with your investments is a great mistake. Be ruthless, if a stock or fund has already performed very well for you, the chances are that it won’t do so going forward. Take some profit-reduce your holding and reinvest elsewhere. But also watch your losers carefully; if a stock is falling and it is over-indebted, recovery chances are often small. On the other hand listening to too much investment noise and over-trading is also a danger. Trading costs are significant, as can be the cost of advice – very few people have the skill to trade in and out of investments successfully. By and large investment should be a long term game and done so as to avoid costs being too high.
Paying too much attention or too little attention to your investments. Again there is a balance; constantly worrying about what is happening to prices is both unnerving and likely to be counterproductive as it can lead to overtrading as above and bad decisions. On the other hand you do want to review your investments reasonably regularly to see how they are performing and whether they are on course to meet your objectives.
Finally panic – don’t! Markets are forecasting mechanisms and often will have already reflected current economic news in the prices. But also markets are made up of a collection of individuals who are themselves prone to get carried away both on the upside and the downside. Markets nearly always overshoot their fundamental ‘fair valuation’ in both directions. The time of maximum gloom and doom, when the world seems to be ending, is often a great time to buy!
For more information please visit www.ipsofactoinvestor.co.uk
