Guaranteed Ways to Lose Money in Investing
Chief Executive, PSG Asset Management
In the world of investing, there are no guaranteed ways to make money. However, there are some guaranteed ways to lose money, and unfortunately far too many investors still fall prey to some of these avoidable errors. The current market environment of poor growth and uncertainty is often a catalyst for these classic mistakes – make sure you’re not caught out this time around.
1. Constantly Switching from the Fund you are in to the Latest Number One
At the root of this kind of behaviour is the regret of having missed out on last year’s winner. Investors often feel compelled to switch to the most recent top performing fund to neutralise their sense of loss. The dilemma is that some top performing funds do indeed continue performing for many years. However, almost all funds with excellent long-term track records have at some point experienced periods of under-performance, sometimes for a year or longer.
The investors who stuck it out would have been well off in the long run and avoided a capital gains tax event which would have eroded their capital base unnecessarily. Rather make sure that your investments are diversified across a few funds managed by credible asset managers with long-term track records and strong shareholders.
2. Focusing on Short-Term Performance
With unit trust funds pricing daily and a constant drip-feed of information coming our way, it is easy to forget that the more short-term and regular the information is, the more randomness and noise it contains. Performance should only be assessed over the appropriate measurement periods, which means you have to have a financial plan that takes into account your own horizon and match that to the funds you are invested in.
3. Selling out of a Long-Term Investment in the Middle of a Market Correction
Often investors sell out of an investment when the market is down. This provides a short-term sense of relief, but can also lead to losses being locked in. Remember, until you actually sell your investment your losses are only on paper and you have the opportunity to benefit from future growth in that investment.
If you and your adviser are genuinely concerned about markets, there are other ways to manage the risk of a temporary market setback. If you have many years of monthly contributions ahead of you, this in itself will reduce the impact of market volatility on your investment over time. So you can either continue taking this measured approach, or you can invest future flows, at least for a while, into something less volatile such as a stable fund.
4. Trying to Time the Markets
Despite so much evidence to the contrary, many investors believe that they can time the market. Keeping a lump sum aside, waiting for the mythical “right time” to invest, is a sure way to lose out on the powerful effect of compounding that results from being invested in growth assets over a long period of time. Make sure you have a plan, and consider phasing in gradually when things are uncertain.
These are four ways in which the average investor can be pretty sure of losing money in their investment portfolios. On the other hand, by avoiding these common mistakes you’ll put the odds in your favour for achieving better long-term financial outcomes.