Not making good returns? That could be down to just five common investment mistakes. Stephen Bland explains what they are and how to avoid them
1. Risk: don't leave it to chance
It may seem an obvious point, but risk is something that many small investors don't consider properly. Suppose you gave the same sum of money to two different managers to invest for a year. After the year is up, they show you their results and both have made the same return. You might think there is nothing to choose between their investment skills until one tells you that the money was placed in bank deposits and the other says it was in penny shares. Now your view has to change. The deposit money involved no risk, but the penny shares portfolio fluctuated violently during the period, and could have ended up worth almost anything from zero upwards.
It's all too easy to be tempted by the potential ten-baggers' you see tipped in the financial pages every weekend. But before you know it, you can end up with a portfolio stuffed with do or die' stocks, which is not the way to build a pension pot unless you are happy to accept the very strong possiblity that you'll end up with much less than you hoped for.
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2. Don't trade too often
In my experience with investors over the years, and brokers confirm this, those who trade the most tend to make lower returns, whereas those who trade very infrequently usually make more money in the end. Yes, a few traders do well in the long term, but such skill is very sparsely distributed in the population.
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Far more commonly distributed is the mistaken belief that one can be a good trader a delusion which is confined largely to male investors. It's a macho thing. Few like to admit they're no good at trading, but almost all are not and would do better by trading far less. Women tend to be far more sensible and prefer buy-and-hold approaches to trading. They seem to know their limitations far better than men and don't feel they have anything to prove. So if you're a man, get in touch with your feminine side.
3. Ignore the news
There is far too much information out there about shares, particularly with the rise of the internet. But almost all of it is of no consequence. Journalists have to fill space and will pick on anything to do so, but this can give the impression to some investors that what is being said is important, when mostly it is ephemeral and irrelevant. If you pay too much attention, that can lead to premature selling or just loss of sleep. The remedy is to stop following your shares every five minutes and find something more rewarding to do with the time instead.
4. Know your history
The fund adverts tell us that past performance is no guide to the future. They say that because they have to but it's not entirely true. I found years ago when researching certain funds that past performance was actually rather a good guide to the future. In these cases, success was down to following a logical strategy where past performance would likely be repeated.
If an approach has been shown to work over the long-term past not through back-testing, but through actual results then I believe it will probably deliver into the long-term future. The main condition is that it should have a logical investment strategy which the manager sticks to, making it unlikely that success was down to good luck.
5. Be realistic
You almost certainly won't grow very rich from investing in shares Warren Buffetts are thin on the ground. So don't worry about making your fortune. Instead, aim for comfort from your shares set a goal such as achieving an independent retirement, with your investments under your control, not at the mercy of the government. By setting your sights realistically, you are more likely to hit your target.
If you aim for, say, 12% average compound growth over many years, that is within the grasp of the disciplined investor. Set it at 30% and you have a much higher chance of failing to make it but worse still, you will also fail to make even the 12% you could have made from a lower-risk, steadier approach.
I'm not saying you should never gamble. Most of us like to take a punt on some high-risk, potential-high-return venture at times. But keep that to a very small part of your portfolio. With the bulk of your long-term investments, forget about making lots of money.
How can you avoid making these mistakes? The key point is to consider the level of return you want, find a strategy you think will deliver it, and stick with it. I believe my High Yield Portfolio strategy, featured in a recent MoneyWeek cover story, works well, but there are other cheap, low-hassle methods, such as buying low-cost index-trackers, which should deliver solid, sustained returns in the long term.
Stephen Bland writes The Dividend Letter, based on his successful High Yield Portfolio' investment strategy.
