Some mistakes can cost you dear in every walk of life but they can be particularly expensive when it comes to investing.
Simple errors can mean losing a lot of money that could take years to recoup. As US billionaire Warren Buffett, the world’s most famous investor, once said: “You only have to do a very few things right in your life so long as you don’t do too many things wrong.”
Here are some of the moves investors get wrong, and how to avoid them.
1. Failing to plan properly
Too many people dive straight into investing without thinking ahead. They see a stock or fund that takes their fancy and buy it. Then they spot something else, and buy that too.
After a few years, they end up with a mishmash of investments with no strategy behind them. They may have too much in a single country or stock, while ignoring key sectors or regions altogether. This leaves them exposed in a crash.
Demos Kyprianou, a board member of SimplyFI, a non-profit community of personal finance and investing enthusiasts in Dubai, says draw up a plan before you start buying: "Work out why you are investing, your chosen time period, and your attitude to risk.”
If you have high-interest debt, clear that first, he adds. “Then build an emergency fund in cash, to cover at least three months of spending in case of illness or redundancy. Then start seriously investing for the long-term.”
2. Trying to time the market
Every investor dreams of making a big investment call that nets them a fortune. Say, selling up before a stock market crash, then buying back in at the bottom.
You might get lucky once or twice, but Mr Kyprianou says nobody can accurately predict market movements. “Even the best fund managers cannot do it consistently in the longer run, and they work round the clock, all-year round.”
What we do know is that share prices rise over the longer run, and if you invest a regular sum every month, you will reap the benefit. “By investing automatically, you can take the emotion out of investing and avoid putting your ego on the line," he adds.
3. Panic selling in a crash
Anybody who sold in a mad flap after share prices crashed in March will have suffered the double agony of missing out on the subsequent recovery.
Mr Kyprianou says markets often rebound as quickly as they fall, and when investors least expect it, as we saw in April and May: "If you are out of the market, you are likely to miss those sudden gains.”
The other danger is that you then rush back into the market at the wrong time as well. “Keep calm, stay invested, and stick to your plan,” Mr Kyprianou says.
Figures from fund manager Fidelity International show the danger of being out of the market when share prices recover.
If you invested $10,000 (Dh36,700) in the S&P 500 on January 1, 1980, you would have had $659,591 by December 31, 2018, with dividends reinvested. If you had missed the five best days in that time, your final sum would have shrunk to just $427,041. Miss the best 50 days and you would have just $57,388.
4. Failing to diversify
If you put too much of your portfolio into a single stock, sector or country, you will take an outsize hit if it crashes.
Instead, spread your money across different companies, investment sectors and regions.
Christopher Davies, chartered financial planner at The Fry Group, says you should also invest in other asset classes such as cash, bonds, gold and property as “this further diversifies your risk and reduces volatility".
Mr Davies warns that reducing risk by investing in more cautious assets may lower your overall return "but it will give you a much more comfortable investment journey".
5. Losing your balance
As in everything else, if you lose your balance you could be heading for a fall. While your portfolio may have been in equilibrium a few years ago, that may not be the case today. If one stock has been particularly successful, you may have too much exposure to it and you will be vulnerable if it crashes.
Mr Davies says work out the appropriate “asset allocation” for your level of risk, then look to rebalance this annually by "selling strong performing assets in your portfolio and topping up those lagging".
This avoids your portfolio becoming more risky as equity prices rise fastest over time. “You also lock in gains on your best-performing assets and buy into assets at a lower value,” Mr Davies adds.
6. Trading too regularly
Too many novice investors jump from stock to stock, hoping to make a quick profit and move on. This type of hyperactive trading usually backfires. Investing is a long-term game, and you need patience to generate the best returns.
The other danger is that you rack up loads of trading charges, which eat into your returns.
Mr Davies says be particularly careful during moments of extreme market volatility, like now. “If you tinker with your portfolio in the middle of the crisis when emotions are high, you are likely to make mistakes," he adds.
7. Being glued to the news
Following the news too closely is never good for morale, especially in turbulent times like these.
It is the same with investing. If you pore over the latest market news, following every crash and recovery, you will drive yourself mad, and probably make a lot of bad investment decisions at the same time.
Stuart Ritchie, director of wealth advice at AES International, says you need to keep your eyes fixed on the long-term, and ignore short-term volatility. “Despite natural disasters, conflicts, referendums and controversial presidents, markets always bounce back,” he says.
8. Paying too much in fees
The more you pay in fees to your financial adviser and fund manager, the less of your returns you get to keep.
Growing numbers of private investors save huge sums on charges by investing directly in exchange traded funds (ETFs). Instead of paying fund managers fat fees to beat the market, ETFs simply track share prices up and down. Their fees can total as little as 0.07 per cent, against up to 1.5 per cent on actively managed funds, with advisers' fees on top.
If you invest $100,000 in a fund charging 0.2 per cent that grows at an average rate of 7 per cent a year for 30 years, you will have $719,677, with dividends reinvested. If your adviser and fund manager's fees total 2 per cent, you will have just $432,194 after 30 years. That’s an incredible $287,483 less, even though the growth rate was the same.
Mark Chahwan, co-founder and chief executive of Dubai-based robo-adviser Sarwa, says many investors do not realise how much they lose to fund manager and advice fees. “Having low fees is even more important today in today’s uncertain markets,” he adds.
UAE residents must be particularly wary of financial advisers pushing offshore bonds and regular premium investment plans, where the majority of your money will disappear in fees.
9. Failing to invest at all
The single biggest mistake you can make is failing to invest at all. The longer you wait to get started, the harder it will be to save enough to enjoy a comfortable retirement.
If you invest $500 a month at the age of 25 and it grows at 7 per cent a year on average, you will have an impressive $1,371,504 by the age of 65. If you don’t start investing until 35, your $500 a month will give you just $652,112, just half the amount.
Early contributions are most valuable as they have longest to compound and Mr Ritchie says it is always a good time to start investing: "Today is great. Yesterday was even better."