When investing, you naturally want to maximise the returns delivered as much as possible. But the markets can be volatile and at times, you’re likely to see the value of your investments reduce, as well as climb. Watching portfolios fall in value can be a stressful experience but holding your nerve and knowing when to act is one of the key fundamentals of investing that is essential for long term success.
Outlined below are the investment ‘pitfalls’ we come across regularly. However, when you are faced with perceived investment losses it is easy for them to slip the mind and to make rash decisions that could harm your financial security in the long run. So, it is always worthwhile keeping in mind the following common mistakes, whether you are new to investing or a veteran of the markets.
1. Trying to beat the market
Everyone wants to achieve above average returns but trying to time the market isn’t advisable. There are so many factors that influence the value of stocks, many of which can be uncertain and unpredictable. Accurately taking them all into account is impossible. Just a glance at some of the influential elements of 2018 highlight this. Brexit, for example, was labelled an uncertainty, but few would have thought Theresa May’s deal would be rejected several times over and, a month past 29th March 2019, we’d still be none the wiser when or how the UK will leave the EU.
Of course, that doesn’t stop people trying to ‘beat the market’. It is a term that the media uses all too frequently and articles that claim to unveil the funds that will deliver ‘market-beating returns’ have probably caught your eye at some point. However, while these funds may have delivered above-average returns over the last quarter or year, what’s to say that they will continue to do so?
Setting out a realistic target return that reflects your risk profile and overall goals is far more important than trying to beat the market. Focussing on beating the market could lead to you choosing investments that aren’t right for you and history shows that last year’s best performing fund is highly unlikely to be this year’s.
2. Worrying about short-term volatility
When you check on investments and see that the value has dipped, it can be worrisome. You might be concerned about how it affects plans you have made and whether you should withdraw money now before it falls any further. But while the instinct to take action is normal when you suffer a loss, it is typically better to step back and try not to be overly concerned about short-term volatility. This is where looking at the long term is crucial. Historically, when you look at the bigger picture, investment markets have recovered, even when they suffered significant losses.
When you first set out your investment goals, you wouldn’t have been thinking ‘I want to make 5% returns next month’. Instead, you may have decided to invest to create a nest egg to pay for a child’s university fees in ten years’ time or to help create an income for retirement that’s still two decades away. Keeping these initial goals in mind can help put the short-term dips into perspective. A long-term financial plan should have considered short-term volatility and accounted for this when setting out expected returns.
3. Making knee-jerk reactions
Nobody wants to make a loss on their investments. But it’s important not to make knee-jerk decisions should you see the value of investments fall. Remember, withdrawing your money from an investment only crystallises your losses. Before this point, the value has fallen, but there is still an opportunity for values to bounce back and continue to rise. Taking your money out of stocks and shares means you lose the chance to benefit from a market rebound.
There are times when it’s right to sell investments you hold, but these should always be carefully considered. Reacting to falling values can mean you ultimately lose out.
Reviewing your investments
Rather than responding to market volatility with rash actions and worry, take the time to review your investment portfolio in the context of your wider financial plans:
- Are you still on track to meet your goals?
- How have you considered short-term volatility?
- Is your risk profile still appropriate?
- Have your goals changed?
It’s a task that can help give you confidence in your financial future and provide a greater understanding of how your portfolio is positioned to minimise the effect of volatile markets in the long term. If you are worried about the performance of your investments or your situation has changed, please contact us. Our goal is to help you build an investment portfolio that accurately reflects your long-term aspirations.