Top 10 investment mistakes and how to avoid them

Discovery Invest looks at the most common investment mistakes, and how they can be avoided.

1. Not having a financial plan

   Probably the most common mistake is not having a financial plan and clear investment goals. Research has shown that investors with a financial plan are more confident and optimistic about their future. They save more and have less financial worries.

   Expert advice is an important part of financial planning and helps create a healthy financial future. Not discussing your investment needs with a professional can have a negative impact on your financial plan. Financial advisers help you determine your financial needs, identify your level of risk, and will recommend appropriate investment products. They are also there to guide your investment journey and ensure you are getting the most out of your investments.

2. Not understanding your risk profile

   It is important to understand your risk profile and tolerance for risk. As an investor, you will typically fall into one of the following categories:

   • Conservative - you are very risk-averse, possibly near retirement, and you cannot afford to risk your capital.
   • Moderate - you have some appetite for taking risk and hence can tolerate moderate levels of volatility in order to get higher returns.
   • Aggressive - you are looking for high returns and you are not concerned about short-term volatility. You probably have a long time to invest so any capital loss in the short term can be caught up in the future.

   Understanding your risk profile will help you choose investment goals that are appropriate and match your needs, and it will guide the types of funds you choose, and investments you make as part of your financial plan.

3. Not understanding your investments

   It sounds obvious, but you should never invest in anything you don't understand. If you are going to invest in a unit trust fund, take time to learn about the manager, the assets he/she invests in, what the fees are and how the fund has performed. If you choose another investment vehicle, such as Exchange Traded Funds (ETFs), make sure you understand how the fund works and the risks you face.

4. Overlooking fees

   Investors often focus on a fund's performance, which is very important, but they overlook fees when considering how well their investment has done. It is important not to underestimate the impact of fees on your investment. Whatever the performance of your investment, fees are deducted before your investment earns a net return. Reducing fees is a simple way to get more out of your investment.

   You can measure the fees on a unit trust by referring to the fund's Total Expense Ratio (TER), which is a measure of all the fees for that fund expressed as a percentage. By law, all unit trust funds must show a TER and this usually appears on the fund's fact sheet or MDD (minimum disclosure document).

   You should also consider other fees such as administration fees and financial adviser fees. Discovery Invest offers you ways to reduce administration, fund management and financial adviser fees so that you can get more from your investments.

5. Getting the diversification balance wrong

   Diversification simply means not putting all your eggs in one basket. It is a way of creating a portfolio that includes different types of investments to reduce your overall investment risk. Investments don't perform in the same way during certain economic conditions. When one investment doesn't perform well, other investments may outperform to give you overall good returns.

   A balanced portfolio will typically contain a blend of equities, property, bonds and cash based on your investment risk profile:

   Equities	Often provide the highest investment growth over the long-term.
   Property	Generally provides protection against inflation over the long term and outperforms inflation.
   Bonds	Are usually lower risk than property or equities, but with a corresponding lower return.
   Cash	Provides portfolio security and stability, but has the lowest long-term return potential.

6. Having unrealistic expectations of investment returns

   The most important benchmark for investment returns is your own financial plan, which is unique to your circumstances. The investment return you are looking for, will differ from other investors and is based on your needs, risk profile, disposable cash and time to retirement, among other things.

   You also need to consider what is happening in the wider economy. The investment returns you can expect in a recession are considerably different to what you can expect in a bull market environment. Interest rates also play an important role. Typically, when interest rates rise, the performance of the stock market comes under pressure and vice versa.

   Often the most important measure of a reasonable investment return is whether your investment is keeping up with inflation. Regardless of your risk profile, your investment should keep pace with inflation to protect the "real" value of your money.

7. Withdrawing your investment at the wrong time

   Investors cash in their savings and investments for two main reasons: they need money or they are reacting to market movements.

   Withdrawing your savings and investments because you need money ties back to effective financial planning. With a well-structured financial plan, you will have contingency money to fall back on, which means that you aren't forced to exit your investments when it may not be a good time to do so.

   Reacting to market movements is a common investment mistake with investors typically selling when the market is at its lowest point. This means they lock in those losses and do not have time to recoup them as they might if they stayed invested.

   It can be difficult to keep your nerve when markets are down and your investment is decreasing in value. But it's important to remain focused on the long term or the bigger picture. Markets move in cycles and will recover. Having a close relationship with your financial adviser will help you understand the markets and what to expect in times of volatility. Your financial adviser won't recommend investments that aren't suitable for your risk profile.

8. Not monitoring your portfolio appropriately

   Many people make an investment, and then fail to monitor it regularly or worse, monitor it too regularly and want to make short-term reactive changes. Your investment profile changes over time, which means your needs in your 20s are likely to differ greatly from those in your 40s. Review your investments regularly to make sure they are performing well, and continually align your attitude to risk with your financial goals. However, don't over-analyse your portfolio and react to each negative news story.

9. Waiting too long to invest

   The younger you are when you start investing, the better off you will be. Waiting too long means that you miss out on the significant benefits of compound interest.

   Investing early has four significant benefits:

   Allows you to take risks	With time on your side you are able to recover from losses, should they occur. You can afford to take more risks, which may give you higher returns.
   Builds discipline	By getting into the habit of saving, you are learning to "pay yourself first". This results in disciplined spending habits as you focus on your budget and cut unnecessary expenses.
   Earns compound interest	Compounding is the effect of earning interest on top of interest. The longer you save, the more interest you earn.
   Gives you a stable financial future	You are investing in your future. You will have peace of mind knowing that you have that extra funding to depend on after you have stopped working.

10. Not recognising that time affects the value of money

    The main principle of investing is to make a real return in order to increase the purchasing power of your investments over time. Many savers make the mistake of keeping their money in accounts that pay them rates below the rate of inflation and they lose the "real" value of their money. It is best to invest your money while also making sure that your investment keeps up with inflation.

    To find out more about investing with Discovery, please visit www.discovery.co.za.

    Disclaimer

    This article should not be taken as financial advice and is meant for information purposes only. For all advice related matters please contact your financial adviser.

    Discovery Life Investment Services Pty (Ltd) branded as Discovery Invest is an authorised financial services provider. Registration number 2007/005969/07.