3 of the most costly investing mistakes, and how you can avoid them

June 6, 2023

Investing is a hugely useful tool you have at your disposal to help you reach your financial targets. The ability to invest your wealth in the market can help you:

  • Target growth over time so that your money works as hard as you do
  • Ensure that your money retains its spending power over time
  • Gain greater financial independence.

However, this is all easier said than done, as successful investing requires time, knowledge, patience, and discipline. As a result of the difficulties involved, many investors often make costly mistakes when deciding how to invest their money.

Making any mistakes with your invested wealth can be disruptive at best, and at worst can hinder your ability to achieve your long-term goals.

So, read about three costly investing mistakes that can be all too easy to make, and a few tips to help you avoid them.

1. Setting unrealistic targets for growth

First and foremost, it’s important to invest with a pragmatic outlook and be realistic about your growth targets. If you set yourself unrealistic goals, you’re far more likely to quickly become disillusioned and unmotivated to invest.

It can be difficult to know what constitutes a “good” return. Estimates vary – often hovering between around 3% to 10% a year. However, this is by no means a rule of thumb, and it also depends on other factors such as:

  • What you invest in, and in what combination
  • How long you invest for
  • Wider market performance and economic circumstances.

Ultimately, the rate of return that suits you largely comes down to your personal needs. Knowing what you want to achieve in the market can help with this.

Think about your investment goals and what you’re actually trying to accomplish. Do you want to grow your wealth significantly so that you can afford to retire by 60? Or are you content to target returns that simply keep your money ahead of inflation?

Armed with this information, you can design a portfolio that’s aligned with your specific aims in mind, rather than choosing a high number arbitrarily.

It’s also important to take your investment time frame into account. Consider the performance of the MSCI World, a stock market index tracking large- and mid-cap companies across 23 developed countries.

The data shows that the index has achieved annualised returns of 9.29% over the 10-year period to 28 April 2023.

However, throughout that time, it’s important to consider some of the highs and lows that the index has seen, too. For example, the index returned 28.4% in 2019, while it saw losses of -17.73% in 2022.

All this is to say: remember to take a long-term outlook when setting your target. Don’t become overconfident if you beat it in one year, or disillusioned if your portfolio lags behind it, either.

2. Focusing on past events, rather than progress towards your goals

This market data from the MSCI World also bleeds into the second mistake, which is to focus too much on the past.

While it’s tempting to look at what’s happened over the last 12 months, it’s crucial to keep looking forward and progressing towards your goals, rather than constantly glancing over your shoulder.

Consider the MSCI World index again. As the data shows, 2022 saw a dip of -17.73%. But the figures over the course of the past 12 months to 28 April 2023 show:

  • 9.82% returns year-to-date
  • 2.54% returns over the past three months
  • 1.8% returns over the past month.

The point here is that obsessing over the data like this is not always that useful. With so many numbers to read, it feels almost impossible to make any definitive conclusion about whether you’re on the road to reaching your goals.

Additionally, seeing figures that might feel disconcerting in the short term can wreak havoc with your emotions, especially when they might not even mean anything when considered through a long-term lens.

This is why it can be powerful to keep facing forwards, rather than anxiously looking back at past performance.

That doesn’t mean you shouldn’t sometimes use this information to inform and adapt your strategy over time if you feel that something isn’t working.

Again, investing is about providing returns that help you reach your goals in the long term. So, rather than looking at the past data, it can sometimes be more effective – and less emotionally draining – to focus on progress towards your goals.

3. Making frequent changes to your portfolio

The idea of focusing too much on the past links to the third investing mistake: making frequent changes to your portfolio in an attempt to react to the shifting landscape.

Stock markets have been highly volatile over the past couple of years, so, like many investors, you may have found that your investments have not performed as well as you’d have hoped.

In circumstances like these, it can be tempting to make changes to protect your wealth. Emotions can get the better of you, and it’s all too easy to react without thinking it through. However, you may actually be better served leaving things as they are.

If you try to cut your losses and sell an investment that’s fallen in value, all you might do is “realise” the loss. Investments can recover in value. By selling when an investment has fallen in value, you simply turn a theoretical loss on paper into a real one.

You might find it interesting to know that the market’s worst days are often followed by their best.

For example, as CNBC reports, between 2002 and 2022 the best day for returns on the S&P 500 – an index of the 500 largest companies in the US – was 13 October 2008. Returning 11.6% right in the middle of the 2007-08 global financial crisis.

The second-best day was around the same period on 28 October 2008, while the third was 24 March 2020 – just days after economies around the world announced lockdowns to prevent the spread of Covid-19.

So, rather than panic selling during periods of volatility, it could be more sensible to sit tight. Investing is about targeting returns over the long term, so your portfolio should be designed with this in mind.

That’s not to say that you shouldn’t make any changes at all. Investing over a long period also means there may be adjustments you’ll want to make.

Over time, your life circumstances, investment goals, or even your risk tolerance could change. In these cases, making carefully considered changes could be the right option.

The key is to not panic about short-term disruption and setbacks. Instead, try to maintain a long-term mindset throughout.

Get in touch

If you’d like assistance managing your money so that you can avoid these costly investing mistakes, we can help.

Either contact your financial planner directly, email us at hello@ascentawealth.com or fill in our online contact form to organise a meeting and we’ll get in touch.