Asia’s rising star

From ignoring inflation to forgetting your tax allowances or failing to build a ‘rainy day' fund can all have a negative impact on an investment portfolio over time and can ultimately affect the size of a client's retirement pot in later life.

Here are ten common investment mistakes to discuss with clients and help them avoid:

1. Ignoring inflation

Many people assume that investing is riskier than holding cash and therefore keep all their money in a savings account. However, if the interest rate on your savings is below inflation, its ‘real' value will gradually erode over time. There are several ways to lessen the erosive impact of inflation, but history shows us that, over long periods, none have been as consistent as investing in the stock market.

2. Failing to build a ‘rainy day' fund

While investing gives your money the opportunity to grow, it's important to set aside a ‘rainy day' fund to pay for emergencies. It's generally wise to have around six months' worth of essential expenditure in an easy access account. If your boiler breaks or you receive a large, unexpected bill, your rainy-day fund will help you avoid resorting to loans or selling investments that have fallen in value.

3. Forgetting your tax allowances

Investing through a tax-efficient wrapper like an ISA or pension could provide a significant boost to your finances. Income and gains on investments inside an ISA are completely tax free, and you can withdraw the money whenever you like without paying tax. Pensions offer 20% tax relief on personal contributions, meaning a £100 contribution only costs you £80. Higher rate and additional rate taxpayers can claim further tax relief of up to 20% or 25%, respectively.

4. Failing to diversify

You've probably heard the expression, ‘Don't put all your eggs in one basket'. When it comes to investing, these are wise words to live by. Spreading your money across different asset classes, including cash, shares, and bonds, as well as across different sectors and regions, can help to minimise your losses when one type of investment underperforms. Creating a diversified investment portfolio isn't easy to do on your own, and this is where an investment manager can help you get started.

5. Taking a short-term view

The stock market can be volatile, with share prices moving up and down from one week to the next. This is why you should approach investing with a long-term view and invest for at least five years or more. Investing over the long-term gives your money the chance to recover from stock market downturns and grow in value over time.

6. Making rash decisions

When stock markets tumble, it's easy to panic. But knee-jerk reactions could leave you in a worse place financially. Selling investments that have fallen in value risks crystallising losses. And if the market suddenly recovers, you could miss out on subsequent gains.

7. Refusing to take a loss

On the flip side, another common mistake is refusing to take a loss and choosing to hold onto an underperforming stock in the hopes the share price will recover. If the investment circumstances have changed, leaving your money tied up in a company with poor prospects rather than reinvesting into something where the prospects are brighter could really cost you in the long term.

8. Following the herd

We all suffer from FOMO (fear of missing out) at some point in our lives, but copying the investment choices of your friends, neighbours or colleagues could backfire. Many investments become overhyped, only to come crashing down months later. Even if the investment does seem solid, it might not be right for your individual circumstances. 

9. Confusing brains with a bull market

When stock markets are flying, making money feels easy, but it is important to realise that a good couple of months in equity returns does not make you Warren Buffett. Investing is complicated and to do it well requires a great deal of time, research, and knowledge. Given what is at stake, it's often wise to seek financial advice.

10. Not learning from mistakes

Many of us may look back on previous investment decisions and realise that we were not as correct as we might have liked to have been. Failure can be a difficult thing for investors to admit, but it is essential that you examine your failures as well as your successes. This will help you avoid making the same mistakes again.

When it's done right, investing could help you build a more secure financial future; when it's done wrong, you risk losing money and jeopardising your long-term plans. Seeking professional financial advice can help you feel confident you're doing the right thing with your money.

Get in touch

brewin.co.uk/intermediaries
salesupport@brewin.co.uk
020 3504 7595

Important Information:
The value of investments, and any income from them, can fall and you may get back less than you invested. Investment values may increase or decrease as a result of currency fluctuations. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. Information is provided only as an example and is not a recommendation to pursue a particular strategy.