Hoxton Capital Management explores the 9 common mistakes investors make when beginning their financial journey.
1. Not picking the right adviser.
It’s common for first-time investors to use the same adviser as their parent, friend or relative. However, that doesn’t mean the adviser is right for you. Before you choose an advisor, consider your needs and the types of clients they work with. Often we see that expat clients who pick their adviser using the afore mentioned strategy, end up with inappropriate advice due to the adviser typically being based back in their home country and not being aware of the differences or opportunities relating to the offshore markets.
2. Not understanding how an investment works.
Research investments before you make a decision. This is an important step because it ensures you fully understand any risks or reward associated with the investment as well as the exact terms and conditions that come with it. If there is something you don’t fully understand, it is essential to ask until you have complete clarity. A good adviser will want you to do this so they can be sure you are invested in a way that perfectly matches your investment profile.
3. Investing in something “trendy”.
A great example of why this is not a good idea was the recent Crypto currency epidemic. Whilst some people did very well from Crypto currencies, the vast majority of people did not, mostly arriving at the party too late and buying in high.
If the hype is at a high, you are probably too late.
4. Not having a plan.
Creating a plan will help you reach your financial goals. Set a regular time to review your investment plan and ensure that if your financial goals (the reasons you are investing) have changed, your plan can change too. Having a plan will also help you choose your asset allocation for short and long-term goals.
Your plan should be specific and realistic and include information on your risk tolerance, investment strategy, asset allocation and when and how your portfolio should be rebalanced.
5. Not paying attention to fees.
Understanding the fees you pay when you invest is important because they reduce your return. Ask questions before you invest and consider your options. As with anything, cheaper is not always better but knowing what you are paying is essential.
6. Chasing performance.
Past performance is not an indicator of future performance. This is a major lesson for new and experienced investors alike. If an investment did well last year, it doesn’t mean it will do the same this year.
Focus on finding investments that fit well in your overall financial plan and that fit your risk level.
7. Not compounding returns.
You can grow the money you save by investing it to earn a return. You can make your money grow faster if you also invest the money you earn (your return) along with the money you started out with. This is called compounding.
Not reinvesting your returns can limit your ability to grow your savings faster and meet your financial goals when you want to.
8. Not reading account statements.
You should receive monthly or quarterly account statements that show the activity in your account and provide an update on your investments. Most people can tell you exactly what they have in their bank account but very few can tell you what is in their pension, which is usually worth a lot more. It seems obvious, but taking an interest in your money is a smart decision that many people forget to make. The easiest solution to this is to make sure you are having regular review meetings with you adviser.
9. Not understanding ‘Diversification’ properly.
Diversification is holding investments from a variety of different asset categories, industries and geographies. This can help reduce the overall risk in your portfolio. Often we see people attempting diversification through a variety of unorthodox ways, including having multiple financial advisers or a number of managed funds that inadvertently invest into similar things.
If you are interested in investing, speak to us today.
Author: Alan Herbert – Wealth Manager
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