Common mistakes new investors make (and how to avoid doing the same)
This article covers the basics of investing by looking at some of the top investment mistakes that new (and sometimes seasoned) investors make—and how by avoiding them you can get on track to building your wealth over the long term.
Thinking about investing? Already dabbling in some property investment or a few parcels of shares? No matter what you choose to invest in, growing your wealth is a skill that takes some practice. And just like lots of other skills, you may end up making a few mistakes before you get your technique right.
The good news is that other investors have all made investment mistakes at some point—even professional investors. So if you’re careful and learn about the pitfalls and ways to avoid them, you can make your investment journey as smooth as it can be. Here are just a few:
- Trying to time the peaks and troughs in the market
Trying to time the market is a difficult thing to do. Professional investors don’t do it and there’s a good reason why. There might be theories about picking the top of the market to sell out of or bottom to buy into, but none of these theories has been widely accepted.
Think about it—have any of the famous investors you’ve read about made their money overnight? The answer is probably ‘no’. Investing in shares or property typically is a long term prospect—investing for at least 5 to 7 years, or more. That’s how long it takes to ride out the peaks and troughs and make sure you end up on top in the long run.
Take the ASX for example. Over the 12 months to 31 March 2020, the ASX 200 index fell a whopping 24% This period included two bouts of volatility: in August and September 2019 and the big decline in late-February and March 2020.
However, over seven years to March 2020—the minimum timeframe to properly measure equity performance—the Australian share market returned around 2% per annum. Over 20 years to March 2020, the ASX 200 returned around 8% per annum, and over 50 years to March 2020, the ASX 200 returned around 9.5% per annum. Note that this last period’s return includes the long bear market of 1973-74, the Black Monday crash of 1987, the 1998 ‘Tech Wreck’, the GFC in 2008-09, and the COVID-induced fall in February-March 2020.1
The lesson? Investing over too short a time frame or by investing in a lumpy way (investing now and then) by trying to time the market may not lead to the best outcome. Investing for the long-term in a consistent manner will help ride out the inevitable market fluctuations and ensure that compounding (accumulated returns) can do its job.
- Getting emotional about your investments
The best investors remain calm and level-headed even when the market is melting down. Those who do not panic, who look for investment opportunities amid the market ‘noise’, are usually the most successful investors. Fear and greed drive the share market, but being hostage to these emotions can lead to failure for investors if they are jumping into and out of stocks rather than investing in a skilful, considered manner over the long term.
- Not understanding your risk tolerance—and not spreading your risk
Even when new to investing, it’s important that investors understand their risk tolerance. That means truthfully acknowledging how much risk to take and when to take it. Diversification—spreading your investments across different assets or (say) stocks—is one of the best ways to moderate risk, though it’s not the only way. Investing regularly and for the long-term may also help to mitigate risk. That said, aside from cash, no investment is risk-free.
- Not understanding what you’re investing in
It seems obvious, but understanding what you’re investing in is crucial. Do you know what the company you’re buying shares in does? Do you know its cash flows, its competitors and its products? Do you understand the true yield of a prospective investment property? After all, it’s your money you’re investing so it pays to do your homework, even when investing in an index fund or super fund. With your super, some basic questions you might want to consider are: Are you comfortable with how your super fund invests? Do they take too much/not enough risk? What is their long-term investment track record? And are they well rated by independent research agencies?
Learn, be humble
Making mistakes in investing is a normal part of the process of becoming a more experienced, better investor. We all have wins and losses! The problem is not learning from your mistakes despite having the facts, evidence and learning lessons before you. The great news is that simply by being aware, humble, patient, positive and long term-focused, you’re already well down the track to building your wealth for a better retirement.
Ready to learn about your investments and avoid making the basic investment mistakes? There are lots of options for you to explore at VicSuper that can help you do just that:
- Learn more about your super investment at one of our seminars
- Get personal advice from our financial planners to help you meet your financial goals
- Learn how VicSuper invests your super and why we’re delivering solid long-term returns.
Learn more about our advice services.
This is general information only and does not take into account your specific objectives, financial situation or needs. We recommend you seek professional advice for your own circumstances. Contact us to make an appointment to see one of our representatives. When members receive advice, they receive it under our financial planning business Aware Financial Services Australia Limited’s own AFS licence. Aware Financial Services Australia Limited ABN 86 003 742 AFSL 238430 is wholly owned by Aware Super Pty Ltd as trustee of the fund. You should read their Financial Services Guide before making a decision. Issued by Aware Super Pty Ltd ABN 11 118 202 672, AFSL 293340, the trustee of the Aware Super ABN 53 226 460 365.