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Investment Tips and the Most Common Investment Mistakes

By: Kevin Dowling BA (IMC) - Updated: 15 Oct 2012 | comments*Discuss
Investing Investment Equities Market

Oscar Wilde once wrote: “experience is the name everyone gives to their mistakes”. And when it comes to investing, a great many people have accumulated a lot of experience.

Investing is not an exact science – if it was then we would all be millionaires, but there are some common mistakes that can be avoided if you want to try to maximise your returns.

Understand the Risks Involved

One of the most common investing mistakes is to fail to understand the risks you are taking on. Remember that there is no such thing as a truly ‘risk-free investment. Even Government bonds could default if the government who issued them was unable to repay the debt.

If you invest in equities you need to remember that if a company goes bust the likelihood is that you will lose your investment. If you invest in a company’s corporate bonds, then there’s a greater chance that you will recover part or all of your investment.

Most investments are subject to changes in market sentiment, for example stock markets are often sensitive to negative economic data or fears of a recession. If you understand the risks fully then you will be in a better positive to make an informed investment choice.

Don’t Rely on Past Performance

Whenever you spot an advertisement for an investment, at the bottom you will see a small disclaimer, pointing out that ‘past performance is not a guide to future performance’. This is a legal requirement, although most investment companies often like to trumpet just how good their past performance has been.

No one can predict the future, so it’s a natural response to use past performance as an indicator as to how good an investment might be, but as Warren Buffett, the billionaire US investor known as “The Sage of Omaha’ says: “the investor of today does not profit from yesterday's growth.”

As well as past performance and fund manager reputation, you should also consider other important factors, such as the aims and objectives of the investment, the fund manager’s attitude to risk and the costs of investing.

Take a Long-Term Approach

Many investors start off with the intention of investing for the long term, but then find that with returns less impressive than they had hoped, they can put their money to better use elsewhere. This is a classic mistake.

Investing is for the long term, and if you think that you might need your money back in less than five years since you start investing, then you should be putting your money in a Cash ISA or other short-term account.

Try not to get discouraged too soon. Most investments do not reach their full potential for a few years. Also, during the early periods of investing your return could be eroded by initial charges, and if you decide to cash in your investment early you could be left with less than what you originally put in.

Diversify your Investments

It’s always tempting to aim for high returns by investing in the more risky areas of the equity market, and allow yourself to believe that markets will continue to rise indefinitely. But as we have seen this year, markets are unpredictable and not dictated by logic.

Sometimes you need to think about adding some more steady and consistent performers into your portfolio, such as corporate bonds and Gilts, to help diversify and spread your risk. That way, if some of your higher risk investments suffer heavy losses, you can take some comfort in the knowledge that your safe and unspectacular holdings have managed to weather the storm.

Don’t Always Run With the Herd

The dotcom bubble in the late 1990s taught investors a harsh lesson. If an investment idea seems too good to be true, there’s a strong possibility that it is just that. Sometimes market sentiment can become wildly positive – taking share prices up to unrealistic levels, or can be extremely pessimistic, dropping values down well below their fair value.

Just because everyone is investing in the next big thing, it doesn’t necessarily mean that it will continue to make money. Sometimes it pays to think about doing the opposite of everyone else. As Warren Buffett says “try to be fearful when others are greedy and greedy when others are fearful.”

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