We all make mistakes from time to time, whether it’s withdrawing from an investment just before it takes off, or leaving funds in place for too long during a downturn.
And with more and more ways to dabble in stocks, shares, commodities and cryptocurrencies, the potential for error is greater than ever.
But while nobody’s perfect, there are a few bad habits you can watch out for and try to avoid, which should help you to keep more value in your investments and put more profit into your portfolio.
Here are some of the perils and pitfalls of DIY investing to watch out for when managing your own funds in the future.
1. Buying British
There’s nothing wrong with a bit of patriotism and the FTSE 100 is probably the first brush with stocks and shares that most British DIY investors have in their life, but solely buying British limits your access to emerging markets where some of the highest growth can be found.
It’s worth remembering though that some brands headquartered in Britain do have access to multinational economies – including in the major industries like energy and petrochemicals – so by looking to these you can help to spread your investment over multiple jurisdictions.
While this won’t shield you from a global downturn, it can help to level out any shocks in individual economies, for example relatively isolated political upheavals like the Brexit and Scottish independence referendums.
2. Only Equities
Again, keeping to only one asset class limits your options, so look beyond the obvious stocks and shares to classes including bonds, commodities, precious metals and property.
Multi-asset funds, investment trusts and exchange traded funds (ETFs) are all good ways to expand your access without too much extra complexity in your portfolio, so look for a DIY trading platform that allows you to buy into these if you’re interested in trying them.
Again these kinds of investment vehicles can spread your funds over several different industries or economies, so even with a relatively small DIY portfolio, you can get the kind of access that was historically only achievable with much larger investments.
3. Too Many Transactions
Transactions typically mean transaction fees, and when you’re trying to maximise your profits, that can soon start to eat into your overall portfolio value.
Remember that each transaction fee takes away from the amount you earn through capital gains, dividends and interest.
Good investment is usually a long-term process, putting money you don’t immediately need into a vehicle that will outpace the rate of inflation plus any transaction fees, so that it is eventually worth more in real-terms value.
4. Slump Selling
A long-term investment strategy gives you the ability to weather medium-term downturns, so don’t be panicked into selling up your portfolio when a slump hits.
This is a hallmark of amateur investing and can leave many do-it-yourselfers substantially out of pocket by selling off their stocks and shares just after they have lost a significant percentage of their value.
In many cases – although obviously not always – equities and commodities will regain their value given long enough, so hold your nerve and wait for the recovery before you sell them at a higher value.
Remember you should never invest money that you absolutely cannot afford to lose, because there are very few investments that offer a guaranteed rate of return with zero risks.
5. Peer Pressure
Don’t buy into something just because it is recommended to you. Every investment should be judged on its own merits and an honest assessment of the risk level attached.
As your career as a DIY investor proceeds, you’re bound to be presented with a ‘sure bet’ from time to time by well-meaning friends and family, or by fellow investors at networking events.
You might even find yourself on the receiving end of an investment pitch by a brand or company looking to raise funds, but you’re not obliged to give them your money.
Too many DIY investors are easily persuaded by an emotional pitch or the promise of low-risk, high-reward – so keep an open mind, do your due diligence and avoid anything that looks too good to be true.
6. The Bigger Picture
An added issue with investing in opportunities that are recommended to you is whether or not they are a good fit for your portfolio as a whole.
Instead of only thinking about each investment in isolation, consider how well it fills a gap in your portfolio or how well it balances the other investments you already hold.
You might see a juicy prospect but realise it exposes you too much to one emerging economy, for example, or that too large a percentage of your funds would then be in a single industry or sector.
This doesn’t mean you have to reject the lucrative opportunity in front of you, but it could require you to rebalance elsewhere in your portfolio by selling some of your other assets.
7. Diversify
The running thread through much of the above is diversification, and this is worth mentioning again in its own right.
Even a small investment portfolio can diversify by buying into ETFs and multi-asset funds, or simply through some careful balancing of different equities.
If you’re relying on your investments to derive an income in the future – such as a retirement fund, for instance – diversification is a good way to reduce the risk of any one asset failing to perform.
Combined with a long-term strategy that extracts value at the highest point in the cycle, instead of offloading assets when they are at their weakest, this gives you some of the best chance of seeing ongoing growth in your total portfolio value.
Ultimately that is the aim of DIY investing and over time, you should learn to make these habits second nature so that you barely even need to think about them when reinvesting profits or dealing with a downturn in the future.
Disclaimer: The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
