By Natasha Etschmann and Ana Kresina
In the world of finance and investing, small mistakes can end up costing you a lot over time.
While you don’t want to get caught up trying to avoid making mistakes completely (they are a normal part of the journey), there are a few painful ones you should do your best to avoid.
In the world of finance and investing, small mistakes can end up costing you a lot over time.Credit: Getty
Here are some of the most common ones to avoid.
Owning the same companies by buying overlapping ETFs (exchange-traded funds)
Beginner investors often have analysis paralysis when it comes to investing, thinking that buying all is better than buying one.
However, it’s valuable to look at which companies are held within the ETFs to see if they contain any of the same companies.
While it isn’t the end of the world if you buy overlapping ETFs – you’ll just have a higher allocation to a particular region or industry than you originally thought – it’s an important consideration when investing over the longer term.
Buying things you don’t understand
Investing in things that you don’t understand can be a mistake for a number of reasons:
- Not being able to evaluate risk and returns without fully understanding the asset. It’s hard to consider the risks, possible returns, how to mitigate these and whether they fit into your investing plan.
- Vulnerability to scams. Unfortunately, the investment world is full of scammers, and a lack of understanding makes it easy for scammers to exploit people with their complex and too-good-to-be-true schemes.
- Emotional decision-making. Without a solid understanding of why you’re investing and whether the returns you’re expecting are reasonable, it’s easy to make emotionally driven decisions.
- Panic selling. You might panic and sell during a market downturn if you don’t understand why you’re investing in something.
Not rebalancing your portfolio
Leaving your portfolio to its own devices as it grows can be a mistake as it can also lead to an asset allocation that no longer aligns with your intended investment strategy, risk tolerances and financial goals.
It can result in a portfolio overweighted to an industry that is doing well in the short term, but that may not serve you in the longer term.
Rebalancing is when you realign the asset allocation within your investment portfolio to bring it back to your desired target allocation. Typically, this is done by buying or selling assets within the portfolio.
When rebalancing your portfolio, it’s important to remember that transaction costs (brokerage fees) and CGT (capital gains tax) implications will apply.
Setting unrealistic expectations
Having unrealistic expectations can lead to poor decision-making, increased risk-taking and potential (or very likely) disappointment.
Unrealistic expectations can come from a lack of understanding, overconfidence or being influenced by stories from friends, family, Reddit forums or social media.
Following are some common expectations:
- High returns in the short term. Markets can be volatile and unpredictable in the short term, and expecting high returns is often unrealistic.
- Assuming there will only be positive returns. A common mistake is to underestimate risk and the possibility of a downturn and consequently not be prepared for it.
- Overconfidence. Some investors believe they can time the market and pick stocks, which has proven to be very difficult, even for professionals.
Investing isn’t a get-rich-quick scheme; it’s actually a slow and long process. Understanding the realistic returns and how volatile the market can be is something worth grappling with when choosing your allocation of assets.
Not talking about money
The “keeping up with the Joneses″ phenomenon can have a big impact, but you don’t know the truth of someone’s financial life until you peek under the surface.
Talking about money can be both illuminating and a chance to learn new things. There are a few reasons why:
Natasha Etschmann and Ana Kresina, authors of How to not work forever.
- Conversations around money can be educational. You can learn about how others are doing things and why. It can also be good to get different perspectives on the various ways of managing and viewing finances.
- Financial taboos. Not talking about money continues the idea that money is a taboo topic, which can lead to increasing the financial literacy gap.
- Money can be stressful. Talking about it with others can help alleviate stress.
Having regular money conversations can increase financial literacy for you, your family and friends, while also creating a support network as you navigate financial decisions. In fact, talking about money can be empowering.
Not understanding the tax implications of selling
There’s the saying “buy low and sell high″, but really, we should add a whole caveat about how if you sell, you should talk to your accountant or financial planner, as it can have a massive impact on your taxes.
Although you receive a 50 per cent capital gains discount on shares held longer than 12 months, there’s still planning that needs to be done around when you sell and how that will affect your taxes.
Returns earned from selling shares will be included in your taxable income, which may affect the tax bracket you’re in or any subsidy you might be receiving from the government (such as paid parental leave or child-care subsidies).
Not starting
The biggest investing mistake we see is people procrastinating and just not starting to invest. The opportunity cost on investing can be huge.
Edited extract from How to not work forever by Natasha Etschmann and Ana Kresina (Wiley $32.95), available at all leading retailers.
- Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.
Expert tips on how to save, invest and make the most of your money delivered to your inbox every Sunday. Sign up for our Real Money newsletter.