When it comes to successful investing and improving your portfolio, minimising missteps can be just as important as chasing the next big thing. Rather than following trends or hot tips, it's essential to take a calm and considered approach.
Here, we explore some of the most common investment mishaps and look at the principles that underpin a strong and successful portfolio.
Trending shares
Every so often, there are industries or shares that are all over the media, and you may begin to worry that you are missing out on something. Jumping on every trend is like trying to catch a wave, you might ride it for a bit, but you’ll eventually fall off. That’s because the hot tips and ‘buy now’ rumours often don’t pass the fundamentals of the investing test.
The key is to keep calm and remember that the real winners are often the ones playing the long game.
Not knowing your ‘why’
What do you want your investment portfolio to achieve? Understanding your motivations and goals will help you to choose investments that work best for you and your goals.
If you want to build wealth for a comfortable retirement, approximately 20 to 30 years down the track, you can afford to invest in riskier investments to play the long-term game. If you have already retired and plan to rely on income from your portfolio, then your focus will be on investments that provide consistent dividends and less on capital growth.
Timing the market
Timing the market involves buying and selling shares based on expected price movements, but at best, you can only ever make an educated guess and ultimately be lucky.
As the world-renowned investor Peter Lynch wrote in his book, Learn to Earn: “Far more money has been lost by investors trying to anticipate corrections than lost in the corrections themselves”.
Putting all your eggs in one basket
This is one of the classic investing concepts but is worth repeating because, unless you regularly review your portfolio, you may be breaking the rule.
Diversifying your portfolio allows you to spread the probability when one particular share or market isn’t performing as well.
Diversification can include different countries (such as adding international shares to your portfolio), other financial instruments (bonds, currency, real estate investment trusts, exchange-traded funds), and industry sectors (ensuring a spread across various sectors such as healthcare, retail, energy, information technology).
Avoiding asset allocation
While diversification is key, how do you achieve it? The answer is by setting an asset allocation plan in place and review it regularly.
How much exposure do you want to diversify into defensive and growth assets? Within them, how much should be invested in the underlying asset classes such as domestic shares, international shares, property, cash, fixed interest and alternatives?
Making emotional investment decisions
The financial markets can be unpredictable and often lead some investors to make decisions that in hindsight may not have seemed like the best outcome. During the COVID-19 pandemic, on 23 March 2020, the ASX 200 was 35% below its 20 February 2020 peak. By May 2021, the ASX 200 crossed the 20 February 2020 peak. Many investors may have made an emotional decision to sell out during the falling market in March 2020 but then would have missed some of the uplift in the following months.
Next steps
Quality and trustworthy financial advice can help you achieve the best for your investments.
Speak with your trusted Nexia Adviser today to discuss options for growing your portfolio to help you navigate towards your true potential.
