Choosing to start investing is a big decision and shouldn’t be taken lightly. That’s because your money is at risk and you might get back less than you put in — especially in the short term, because investing should always be for five years or more.
If you do your research, learn a bit more about investing and get your finances in order, you could benefit from the rewards that long-term investing can bring. However, if you just jump straight in, then here are some of the catastrophic moves you need to avoid as a novice investor.
Investing your life savings
Savings are important, and it’s good to have an emergency pot to fall back on. If you think you might need to access your investments quickly then investing isn’t for you. It’s also worth noting that investments go up and down in line with the markets, although over the long term they rise. But it does mean that you could get back less than you put in, so it’s not a good idea to invest every last penny you own.
We say you should always follow the three to six months in emergency savings rule before thinking about investing. This way if anything goes wrong – say you lose your job, or your car breaks down – you know that there is a certain amount of money readily available and you don’t have to raid your investments.
Only investing in one thing
Sometimes a particular type of investment gets a lot of hype. Often these bring new investors to the market. But unfortunately, they’re only interested in one thing, and as a result, they don’t diversify their portfolio. And diversifying is as simple as just spreading your money across a few different investment types. Essentially, not putting all your eggs in one basket.
Nothing highlights the dangers of not diversifying like the various cryptocurrency hype that has lured in many unsuspecting and inexperienced investors. Investors have lost millions of pounds on Bitcoin, for example. And while the impact of this would have been significant enough for most people, it’s many times worse if it’s all your invested in.
Ignoring Stocks and Shares ISAs
If you’re still thinking of investing but haven’t considered a Stocks and Share ISA then it could be worth looking into. A Stocks and Shares ISA is a little treat from the government, giving you an annual allowance for tax-efficient investments. Currently, you’re able to invest up to £20,000 each tax year and not pay income tax or capital gains on any profits you make.
This means that if you reinvest your gains, you could build up your portfolio quicker than if you were being taxed on this amount. Less to the government, more to your investments – what’s not to like?
Not in it for the long run
Investing isn’t a fling, it’s a long-term relationship. And for a relationship to work, you need to stick at it, even when times are rough. With investing your money will rise and fall, and while some of the falls can seem scary, that’s when you need to stick at it. For example, if you’d invested in the FTSE 100 for any 10 years between 1984 and December 2019, there was an 89% chance you’d have made a positive return.
And then there’s the phenomenon of compounding. That’s when gains, or dividends, made on your investments are reinvested, providing more potential to make further gains — basically you’re earning interest on the interest you’ve earned. Over time, these dividends really start to build up and snowball, so a long-term investment strategy really pays off.
Pulling out when times are bad
This is a mistake that lots of novice investors are likely to make because it’s almost intuitive. When the price of your investments starts to fall, you get rid of them, right? Maybe not, as doing this makes your losses real. For example, say you invested £1,000, but after six months, your investment drops to £800. At this point, you haven’t lost anything because you would still own the same shares. Maybe the market is in a lull or a dip. If you withdraw now, you’ll have made a £200 loss. But if you stay invested, there’s every chance that the market could pick back up and your investments could potentially exceed your initial £1,000.
Going solo
To invest well requires research, time and understanding. Lots of it. Investing can quickly become a full-time job, monitoring the markets multiple times a day, checking up on world politics, news and cultural movements that could have an impact. This can quickly become overwhelming, and if you haven’t got the time to research, then it could harm your investments. We have plenty of DIY platforms with recommended fund lists and model portfolios to choose from. Use our comparison tools to find the best one for you. Alternatively, you could leave all the decision-making to a professional financial adviser or use an online investment service (sometimes referred to as a robo-investor).
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