Barristers: 6 Traps That Will Stop Your Money Working Hard Enough For You
Barristers: 6 Traps That Will Stop Your Money Working Hard Enough For You.
You work hard and are diligently putting away spare cash into savings and investments but are you wasting your time? If you are making these 6 common mistakes you probably are:
1) Inflation Is Eroding Your Long Term Value
If you have lost faith in stock market investing having been burnt over the past decade you may be of the opinion that “cash is king”. This is true, for the short term, but with inflation figures now above 5% any long term value of your savings is being eroded. In this previous article I demonstrated want savings rates would be need to get a real return after tax and inflation. The figures are eye watering!
Real assets are those that grow in line with inflation and they are typically two types: property (both residential and commercial) and shares (think globally not just UK shares). You will need to have some degree of exposure to both asset classes if your capital is to maintain value in the future.
2) You Buy High & Sell Low
An investing cliche but so many people make this mistake. Human natures forces us to be motivated by fear and greed (when investing) and as a result we get seduced by headlines and articles that are trumpeting stellar investment returns (remember 1999 and the tech bubble?). We become myopic in our view and believe we can earn a quick buck only to realise we were too late and are soon nursing heavy losses. Perhaps news articles such as this suggest a current gold price bubble?
Then, as we see the value of our investments fall we panic and sell them wishing to cut our losses rather than be further exposed. This is perhaps the most critical mistake because a loss is only an actual loss when it is realised. If you are invested in a spread of shares your patience should be rewarded as stock markets rebound again.
To quote the most famous investor of them all, Warren Buffett: “Be fearful when others are greedy and greedy when others are fearful”
3) You Try To Time The Market
You are well aware of trap 2 so you decide to move your capital in and out of the markets so you are buying low and selling high. This is notoriously difficult to do and it is more likely that you miss out on any upside when markets do recover.
We see this regularly with clients who wish to sit in cash waiting for good news which signifies the end of economic and political uncertainty and from which point the investment markets will sky rocket. This does not happen. Think about the doom and gloom we have been subject to since 2009; increasing unemployment, poor economic data, crises in Greece, Ireland and Spain, civil unrest in Egypt. If you had been waiting for the best time to invest you will have missed out on retuns of 42% from the bottom in March 2009 until 17th February 2011.
There is an adage in the investment world: “it is time in the markets, not timing that is important”. If you are investing for the long term you need to accept there will be periods of losses but as long as you are invested in a manner that you are comfortable with you can afford to ride out these periods and make the most of stock market recoveries when they do occur.
4) You Believe What You Hear & Read
It is very easy to get swayed by what we hear and read from ‘trusted’ sources; friends, peers or the weekend press. These sources may be reliable and prove to be correct but their decisions and recommendations are not based on your goals and your circumstances.
What is right for one person is not necessarily the same for everybody. We all have different risk profiles and objectives that require different investment strategies. Some investors can afford/need to take a high degree of risk where others can afford to be more cash heavy in their portfolio. By seeking advice from a qualified and experienced investment professional who takes the time to understand your specific circumstances you can be confident an particular strategy is appropriate to you.
5) Your Asset Allocation Is Inappropriate
We typically save into savings accounts, invest in shares (usually UK companies) or put all our money into buy to let property but there is a whole range of assets in between including:
- Government Gilts
- Overseas Soveriegn Debt
- Corporate Bonds
- International Corporate Bonds
- Commerical & Residential Property
- UK Shares
- North American Shares
- European Shares
- Japanese Shares
- Asia Pacific Shares
- Emerging Market Shares
As you move down the list the volatility increases. That is, investors can expect higher returns over the long term but the risk of loss also increases. A portfolio should therefore be constructed with a percentage in each asset class. This ensures that your portfolio is diversified so that when one asset is falling others are increasing in value. Because, as outlined in trap 3, you can’t time the markets so part of the portfolio will be going up and part will be going down but over time the overall direction should be up.
Not only should you ensure you are partly invested in each asset class you will also need to ensure the asset allocation is appropriate for your risk profile. The more cautious your risk profile the more your portfolio will be made up of assets in the top half of the list and vice versa.
6) You Invest In Something You Don’t Understand
Product providers and investment companies are great at marketing new products, ones that appear to offer attractive upsides with no downside. Unfortunately unfavourable investment conditions can make these investments more risky than they are sold as being (Google ‘KeyData’ and you will see what I mean).
If you don’t understand an investment product or your investment adviser can’t explain it to you simply it is probably inappropriate for you. The simple rule to investing is to accept that assets can go down as well as up and if you can’t afford to lose value on any part of your capital keep it in cash (but remember trap 1).
If you can avoid these investment traps you are more likely to achieve your investment goals.
If you would like to receive help with your investments click here.
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Picture courtesy of mozzercork via Flickr.com