Five costly and common mistakes every new investor must avoid making – UK Times

Investing sensibly is one of the best things you can do to achieve financial security over the long term.

It is valuable both on an individual level and for the economy as a whole. The government is well-aware of this and is now seeking to promote greater participation in investing across the population.

When investing, there is no reward without some effort, and risk. It is the risk that puts some people off, and it is true that you can lose money if you make bad decisions.

However, it is also true that it’s straightforward to cut your risk of losses down to very low levels if you avoid common pitfalls, leaving you to enjoy the long-term rewards investing brings. And if you do it inside an ISA, remember all returns are tax-free.

Here are five key mistakes to avoid if you’re just starting out – and expert tips on steering clear.

Avoid ‘FOMO’ – look for value

FOMO, or fear of missing out, is arguably the easiest error to make in investing. It can take varying forms, but essentially it means buying a stock or other asset just because it has risen a lot in value recently.

There are a couple of reasons this is a bad idea. First, you should only invest in something you fully understand and have a thought-out rationale for putting money into.

Second, buying something you believe in long-term that has had a recent dip in price is much more likely to deliver for you over time than chasing the latest trend.

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Lindsay James, investment strategist at Quilter, said: “One of the biggest mistakes new investors make is letting fear of missing out drive their decisions.

“FOMO can lead people to chase whatever is grabbing headlines or soaring in value, without properly understanding what they’re buying or whether it fits their long-term goals.

“Investing based on this can mean buying at inflated prices and being left exposed if sentiment quickly turns. A far healthier approach is to build a long-term plan that is suited to your personal circumstances and goals, and to stick to it.”

Trying to find the perfect time

Whether waiting for markets to rise a certain amount to give you confidence, or to fall to allow a cheap buy, it is extremely hard to time an all-in entry on any kind of investment.

You are more likely to get the timing wrong and either see short term paper losses by buying too high, or be left sitting on your hands as the market rises without you.

Instead, you should feed your money in gradually on a weekly or monthly basis. This is known as dollar cost averaging, or pound-cost averaging for UK based investors.

“It’s tempting to try and wait for the perfect moment to invest your cash, but it’s impossible to know when that will come,” said Charlene Young, senior pensions and savings expert at AJ Bell.

“Markets move quickly, and delaying could mean missing out on the best performing days which can significantly dent your long-term returns.

“It’s best to focus on time in the market, not timing the market,” she added. “If you wait too long to take the plunge, you might never do it. If you’d still rather not begin with a lump sum, drip feeding your cash into the markets might help you feel more comfortable.”

A lack of diversification

This is another easy trap to fall into. It may seem simpler just to pick a couple of stocks or funds but that would be a big mistake.

Diversification, which essentially means spreading your money between a wide range of assets, is your best defence against losing money by investing.

Quilter’s James said: “Diversification is another crucial principle that’s easy to overlook when you’re just starting out. Putting too much money into a small number of individual shares can leave you heavily exposed if one company or sector runs into trouble.

“Spreading your investments across different companies, sectors, regions and asset types helps to smooth out volatility. For most new investors, this can be achieved more simply through well diversified funds rather than trying to select individual shares.”

Not knowing your risk tolerance and timeframe

Before making any investments, you need to be clear on how much risk and volatility you are comfortable with. To invest in the stock market, you must be able to accept that prices fluctuate and may at times fall to lower levels than you bought in at.

In the long-run, well diversified investing in the stock market is highly likely to reward you, but there could be short term falls along the way. If that terrifies you then it may not be appropriate to invest.

You also need to know when you will need to cash out. Investing should be done over multiple years, with money you don’t need in the short run. That will reduce the chance of making any panic-based bad decisions.

Letting fees ruin your returns

Overlooking the costs of making an investment, separate to any rise or fall in the value, is a common pitfall.

All investments incur some form of fee. These include a trading fee to buy or sell any stock, currency fees when buying US or other foreign shares, ongoing management fees on funds, and the platform fee charged by the company hosting your account.

Going for expensive options will eat away at your wealth, so it is important to have a clear picture of all the fees you are paying and look around for the best deals.

“While differences in costs may appear small if they are fractions of a percent, the power of compounding means this can make thousands of pounds worth of difference to the value of your end pot and what you can do with it,” said AJ Bell’s Young.

“The same goes for trading too frequently in the same or similar investments. While there might be good reasons to change investments, you’ll soon rack up extra charges if you’re constantly tinkering with them.”

When investing, your capital is at risk and you may get back less than invested. Past performance doesn’t guarantee future results.