10 investment mistakes and how to avoid them during Isa season
Here are 10 top mistakes investors should avoid to try and boost their portfolios:
If you've not invested before, make sure to read our article 'A beginner's guide to investing in the stockmarket.'
Putting too many of your eggs in one basket
Every investor has to start somewhere and to begin with this will often involve buying one share or fund. Ensuring you pick a global fund provides diversification at the start of your investing career.
As the portfolio grows, so does the need to diversify. To be successfully diversified means investors should have exposure to bonds, shares, property and commodities, as well as a spread across the world and different areas of business from shops to healthcare to technology.
To achieve this, a portfolio should have no more than 10 per cent in any one fund and hold between 10 and 20 funds.
Not using your tax breaks
The golden rule for any investor - new and experienced - is to always take advantage of your annual tax wrappers such as the Isa and pension allowance.
Any investment held in an Isa will not incur any capital gains tax on capital growth, nor is there further tax to pay on income generated by share investments.
Whilst contributions to a pension can mean you benefit from income tax relief at your marginal rate, possibly more.
From the 6 April you will get a new Isa allowance also of £15,240.
Having high expectations
Many investors make their first investment hoping to beat the market and make huge returns. They try to pick the one stock looking to turn their £1,000 into £10,000 overnight (a 10 bagger).
The reality is much more prosaic. Investing is about getting rich slowly, whilst gambling is for those looking to get rich quick, but willing to risk losing all their stake.
Not looking after your portfolio
Over time your portfolio should and will change shape. Different investments will perform at different times with some growing faster, while others may fall in value.
In addition, the world does not stand still, fund managers change jobs, personal circumstances also change. As such your attitude to risk changes and the suitability of funds needs reviewing.
Review your portfolio at least once a year to make sure your holdings are still right for you. Ideally do this at the same time you are considering investing new money.
Some investments may require more attention, individual shares for example.
Following the herd
This is probably the biggest mistake all investors make, whether they are professional or otherwise.
A rising stock market builds confidence and more people invest as they see the returns others are getting. The result is investors end up buying when the market is high.
Ignore short-term noise and focus on your goals and longer term objectives. Invest for the future and not based on past performance.
Trying to time the market
Trying to time the market is almost impossible and even the most experienced investors get the timing wrong.
Investors are driven by human behaviour and often sell only after the market has fallen, when they are at their most cautious or fearful.
It often takes a long time for confidence to return and investors usually only come back after the market has recovered.
Trying to time the market requires getting a lot of decisions right. Instead, you should focus on the longer term, as over time the short-term volatility of markets is smoothed away. Investing is for the longer term.
Read our article 'Why you shouldn't time the market' for more infomation about this.
Not recognising your investment mistakes
One of the most difficult things to admit in investing is that you got it wrong and made a mistake.
However, if you are able to sell a poor investment before it gets worse you will preserve your money and may be able to reinvest into a better investment. Likewise no-one ever lost money taking a profit.
The best fund managers recognise their mistakes quickly and get out, they also sell their successes once they think the investment has become expensive, even though the share price might continue to rise.
Not reinvesting dividends
Dividends continue to be under appreciated by investors. Companies that pay dividends tend to be well managed, have good cash flow and are more shareholder friendly.
In the last 10 years, an investor who reinvested dividends in the Footsie would have got a 46.54 per cent return, whilst one who didn't reinvest dividends would have seen their capital rise by only 1.54 per cent (although they would have got some income each year).
Making new investment decisions in isolation
Pundits and commentators do not judge a fund with your portfolio in mind but on its own merits. It is important for you to consider any new investment in the context of your other investments.
If you don't you could end up with a very risky portfolio which is biased to a particular asset class, sector or full of high-risk smaller companies.
Following a trend or fad
Investing is full of trends and certain investments come and go out of fashion.
For example, mining shares have been unpopular for several years and have been shunned by investors, whilst over the past few years' biotechnology companies had been the flavour of the month.
The trouble with chasing trends is you need to know when to get off, you don't want to be the last one off as all you'll do is end up losing money. Focus instead on the valuation of a business, not its popularity.
Adrian Lowcock is head of investing at Axa Self Investor.
The term is interchangeable with stock exchange, and is a market that deals in securities where market forces determine the price of securities traded. Stockmarket can refer to a specific exchange in a specific country (such as the London Stock Exchange) or the combined global stockmarkets as a single entity. The first stockmarket was established in Amsterdam in 1602 and the first British stock exchange was founded in 1698.
A catch-all phrase that can range from assessing the price of a property or vehicle before offering it for sale or the net worth of assets in an investment portfolio to the prices of shares on a stock exchange.
There are limits to how much you can invest in any tax year. For 2011/12, the limit is £10,680. Of that, the maximum you can invest in cash is £5,340 and the balance of £5,340 can be invested in shares (individual company shares or investment funds). If you don’t take the cash ISA allowance, you can invest up to £10,680 into a stocks and shares ISA.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
A term applied to raw materials (gold, oil) and foodstuffs (wheat, pork bellies) traded on exchanges throughout the world. Since no one really wants to transport all those heavy materials, what is actually traded are commodities futures contracts or options. These are agreements to buy or sell at an agreed price on a specific date. Because commodity prices are volatile, investing in futures is certainly not for the casual investor.
The familiar name given to securities issued by the British government and issued to raise money to bridge the gap between what the government spends and what it earns in tax revenue. Back in 1997, the entire stock of outstanding gilts was £275bn; by October 2010 it had surpassed £1,000bn. Gilts are issued throughout the year by the Debt Management Office and are essentially investment bonds backed by HM Treasury & Customs and considered a very safe investment because the British government has never defaulted on its debts and this security is reflected in the UK’s AAA-rating for its debt. Gilts work in a similar way to bonds and are another variant on fixed-income securities.
Capital gains tax
If you buy an asset – shares, a second home, arts and antiques – and then sell it at a later date and make a profit, that profit could be subject to CGT. You don’t pay CGT on selling your main home (which is why MPs “flipped” theirs so regularly) or any securities sheltered in an ISA. Individuals get an annual CGT allowance (£10,600 in 2010/2011) but if you have substantial assets it’s worth paying an accountant to sort it for you.