The Biggest Investing Potholes
The longer one is involved in the investment sector the more you realise that being
a successful investor is 20% market nous and 80% avoiding stupid mistakes. As legendary investor Warren Buffett put it; investing is simple, not easy.
With that in mind, Here are some of the more common potholes that continue to trip up investors.
Having unrealistic expectations
Shares have been the best performing investment over the past 60-70 years and have returned around 10% a year. During periods when inflation is low and rising returns tend to be more like 8% a year.
Investors gunning for returns of 15% plus will have to take huge risks to get there by putting all their money on a few shares or properties, or by using debt to gear their portfolio. The higher return you aim for, the higher the chances that you fail. As they say, aiming for the moon can mean you end up in a black hole.
Falling for con artists
There are many unsavoury characters out there that play on peoples gullibility and greed by offering unrealistic returns. Do not get sucked in. If it sounds to good to be true, it will be. I have seen return projections of 20%, 50% and even 150% a year offered to investors. Such returns are complete nonsense. They simply defy the laws of gravity. Consider $100,000 invested today and earning 50% a year. If you manage to earn this return every year you will be a billionaire in 23 years. You will then overtake Bill Gates as the worlds richest person after 35 years. Do you really think this is going to happen? High returns are simply unsustainable over long periods of time and the people offering them are guessing, at best.
Putting too much emphasis on market predictions
Within the investment industry there is an army of very smart investment analysts,economists, strategists and fund managers all getting paid to eyeball markets and come up with the next best investment idea.
Although this research is usually very interesting, and often backed up with very nice colour coded charts, much of the time it is wrong. What trips up all of these experts is not their analysis, but the fact that they are dealing with future events. The future is 100% unpredictable and even the most robust research can be proved worthless by a completely unforeseen event.
Smart investors recognise that nobody can predict the future direction of investment markets and that it is dangerous to put too much stock in such predictions.
Following the crowd
Investors have a fatal habit of chasing whats hot. Unfortunately, past performance has no bearing on future performance and in fact, last years winners can often end up as next years wooden spooners.
Lack of balance
The biggest investment tragedies happen when people have their portfolio excessivelyconcentrated on one investment, or one investment sector. The golden rule of investment is to have a good spread of investments across the main sectors; cash, bonds, shares, property and overseas investments.
Fees
This four-letter word has spelled disaster for generation after generation of investors who put their faith in such traditional savings products like whole of life policies and super schemes.
The costs involved with these funds have decimated returns leaving almost nothing for the investor.
Fees are arguably the biggest threat to an investors long-term returns. For instance, a super fund that earns 8.0% on its portfolio will have management fees of at least 1.5% then deducted then tax of 2.0%. Take off another 1.5% for advisory fees and 2.5% for inflation the investor at the end of the food chain is left with a return of just 0.5%. Reduce fees by investing directly into markets wherever possible.
by: Cam Watson
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