10 reasons why your investments might fail
They say that you learn more from failure than from success.
However, as Shares Editor of MoneyWeek, I know that when it comes to investing, failure can be extremely painful, especially if it involves savings that you’ve worked hard to put together.
So, I’m going to give you 10 reasons why people fail at investing – to save you from having to experience them yourself.
1. Don’t bother to save (or invest)
Let’s be clear, putting money aside for the future, is not easy.
When you’re young and on a limited income, balancing your income and your spending – let alone actually saving money – may seem impossible. Also, why bother given that your retirement may be decades away?
Still, starting to save even a bit of money early can have a big effect later on.
£100 invested (and reinvested) at a 5% rate of return (what you can expect from the stock market after inflation) over 45 years will produce £898. However, if you invested the same amount of money for just 10 years less, you would end up with just £551.
Another way to think about it is that the less you save (and invest) now, the more you will have to save later, in order to receive the same income.
2. Invest in only a few assets (or shares)
As we’ve found out over the last two years, things can suddenly appear, or disappear, out of the blue.
The same applies to investing. Even the most stable company can suddenly run into trouble, while individual shares can be extremely volatile.
As a result, unless you don’t care at all about risk, it makes sense to split your portfolio between various investments, and even multiple assets. While this can’t eliminate all risks, such diversification can help improve the trade-off between risk and return.
Of course, having too many different investments in your portfolio isn’t good either, as it can become hard to keep track of all of them.
The good news is that even a bit of diversification, say 10-15 shares, or 4-5 individual funds, as well as a few other types of assets, like bonds, can do wonders to reduce risk.
3. Invest in something ‘because everyone is doing so’
‘Keeping up with the Joneses’, or the latest fashion, is a big part of life.
Still, when it comes to investing, following the crowd is not always the best idea. Time and time again – ordinary investors and the media have a knack for piling into an investment just after it has peaked.
While there are a few people who’ve made a career from spotting a bandwagon, and getting off just before things start to end, most investors would be better off taking a step back and avoiding the shares and assets that everyone else seems to be investing in.
4. Leave investing ‘to the professionals’
Scandals aside, the idea that everyone who works in finance is a crook out to take your money is obviously untrue.
Indeed, handled properly, financial professionals can add a lot of value to all parts of the investment process. Indeed, for some tasks they’re necessary – for instance, you’ll need to use some sort of platform or service to buy shares.
Still, they aren’t charity workers either – and their fees can take a hefty chunk out of the money that you’ll make. So, the more of the process you can do yourself, the bigger your return.
At the very least, you should treat them like any other service – so check them out, and shop around for the best deal before deciding to go with them.
5. Restrict yourself to individual shares
Don’t get me wrong, picking individual shares is a great way to take control of your portfolio – and some people even find it a great hobby. However, it isn’t the only way to be invested in the stock market – and if you have limited time, or just less interest in the market, they may actually make more sense.
Funds, where groups of investors pool their money together with a professional investing the pool of money on their behalf, can save you a lot of time, as well as help you to access investments that are otherwise closed to ordinary investors. Because funds are themselves split between a range of investments, they can also make it easier for you to be diversified.
6. Buy into ‘closet trackers’
Index funds, which just track the market, are a great, low-cost way to invest in shares.
However, if you want to beat the market, active funds, where a fund manager tries to pick shares that will outperform, are the way to go.
Either way, you don’t want to buy what is known as ‘closet trackers’. These are actively managed funds where the manager just goes along with what everyone else is buying, but still charges the high fees that come with active management.
In effect, it’s like buying a bespoke suit from a tailor, only to find out that it was made in the same factors as Primark.
7. Overpay for shares of fast-growing companies or buy into ‘value traps’
Stock picking is all about finding the best trade-off between value and growth.
While value shares, which trade at a low multiple of earnings and net assets, have done better over the very long run, growth shares have done better over the last decade.
Either way, you need to pay attention to both sides.
So if you’re buying cheap companies – be sure that they’re not ‘value traps’ that are cheap for a reason. In the same way, there’s no point in buying shares in companies that are valued so highly that they’re not going to be able to live up to the expectations the market has for them.
8. Invest in dividend-paying companies that can’t actually pay the dividends
Dividends are great, but a high dividend yield (dividend divided by the price) isn’t always a surefire route to success.
If the firm in question can’t afford to pay then, which at least means making more in profits than its pays out in dividends, it will end up having to cut them, which can be bad news for its share price.
Ideally, you want to invest in a company that not only survives but can also keep growing the dividends year on year.
9. Focus on the outside world at the expense of your investments
It sounds crazy after the last two years, but when it comes to investing, the outside world matters a lot less than you’d think.
True, the FTSE All-Share fell by around a third in the space of a few weeks during February and March of 2020, while the US market fell by even more. But it managed to bounce back quickly – as it has done during previous crises.
What’s more, predicting the future is a lot harder than it looks.
Overall, unless you have a crystal ball, it makes sense to focus on the performance of the companies (or funds) you’re investing in.
10. Put your entire portfolio into alternative assets
By now, we’ve all heard the stories (or seen the emails) about the people who made huge fortunes in bitcoin or built a property empire through ‘buy to let’ or made enough money from spread betting to quit their jobs and go live on a beach.
The problem is that by the time these stories hit the news most of the opportunities have gone.
What’s more, these sectors come with some serious downsides. For example, digital currencies are magnets for fraudsters, most spread bettors lose money and being a landlord can be a nightmare.
So, while there’s nothing wrong with dabbling in these areas, provided you know what you are doing, I would keep the vast majority (at least 80%) of your portfolio in shares and bonds.
To sum up, if you want to succeed, rather than fail, you should do the opposite of the 10 mistakes outlined above. This means, investing and reinvesting a significant part of your income, properly diversifying your portfolio and avoiding the investments that everyone else are making. It also means checking the advice offered by the professionals, considering funds and trusts as well as shares and buying funds with a high active share. When it comes to individual shares, finding a good balance between growth and value and making sure that dividend-paying companies can keep paying their dividends. Keeping your focus on the performance of individual funds and companies, and avoiding alternative assets is also wise.