Jason, Jamie and Craig get together to talk about four key things to avoid when investing.
The first thing to avoid when investing is not to pile up your cash in a bank. Most of us have cash somewhere where we can get hands on it as soon as we need it. Generally, emergency funds are an obvious reason why you will keep money in cash. But if you’ve got a large chunk of money that will be sitting there for a long time, you’re going to be missing out on any profit.
A client’s savings account the other day showed they were getting literally 0.1% interest. We were speechless. With inflation at around 3%, your money is going to suffer at this rate. It’s not holding its value. If anything, we’re losing money year on year.
It’s definitely worthwhile to have a rainy day fund, but there’s a balance. Everybody has a different opinion on the right amount for an emergency fund. But the one I tend to stick with is three months worth of net salary – this seems about right.
So our message is not that you shouldn’t keep any money in cash. But make sure you keep it for a relevant reason and try to make it as tax efficient as you can. Utilise cash allowances to get the best of both worlds.
2. Chasing Fads
A great example of a fad is cryptocurrency and Bitcoin – or even a possible future currency, Britcoin, as it was dubbed by the government. I see these fads almost every day – people on social media talking about some new cryptocurrency that’s coming and why you should invest in it.
But these people are never financial advisors, and it’s all about them making a personal gain from people investing.
And the thing is the social media platforms, Facebook, Twitters, TikTok etc are not regulated. There’s no governance in terms of checking that these snippets and adverts are real. But people are reassured by these platforms because they’re so familiar with Facebook and they buy other products on it and they trust it. So they think that the source is genuine – and very often it’s not.
Many people don’t know how to look into the stock or its market cap. But they see all these positive figures and think that as ‘everybody else is doing it’ they should get involved.
It’s derived from the start of Bitcoin – where a lot of money was made. But it wasn’t over a short period of time. It was quite a long term investment for the people who saw these returns.
So we need to be careful. So much out there is not true. And if it was, everybody would be millionaires – and they’re not!
3. Putting all your eggs in one basket
This is about diversification. In a nutshell, it is exactly as the analogy points out – don’t invest your nest egg all in one place. It stands a huge risk of plummeting in value and potentially impacting your finances for the long term.
So, you need to look at diversifying your investments and making sure that you’ve got some balance within your portfolio. That way you’re not exposed to unnecessary risks.
This links into the first couple of points. We want to make sure you have a bit of cash to one side if you need it. And in terms of fads, I don’t think any of us would ever stop a client putting a couple of hundred pounds into a random thing they’re interested in.
But it’s all about doing it within your own means. When you look at all the funds and stocks and different areas you can invest in, would it not be better to take a little bit of everything to benefit from the overall gain that the market often gives?
There are so many different investment options, and it can be daunting and confusing for a lot of people. They aren’t the best person to decide if their portfolio is diversified enough.
But many funds that you can pick from, in line with your personal attitude to risk, are already diversified. So it’s all taken care of. Just invest your money and the fund managers will look after the diversification side of things.
4. Don’t wobble
Last, but by no means least, is not to wobble when the markets wobble.
I did this exact thing. We’ve spoken a lot about Bitcoin in the past, and I keep reminding everybody of my experience – where chasing those fads was my mistake. But this point is about the fact that you can see an investment suddenly start to tumble. And your immediate response is ‘I need to get money out of there fast. I need to cut my losses and run’. But that’s not the right thing to do.
It all goes back to having knowledge of the market, and understanding that it’s natural for markets and investments to fluctuate in value. They have to. If they didn’t, your investments wouldn’t make money.
It’s easy to panic, but when you look at the long term progression of any fund within the right portfolio, you need to leave the money where it is. Look at the long term graph – that line will go up and down, but is it showing a steady progression?
When does something become a loss? It’s when you cease to invest. If you don’t pull it out, it’s only a loss on paper. You need to ride the wave, stick with it and remember that you set out on your investments with a long term view.
The value of advice
As financial advisers, we want to try and simplify all this and help people understand it and feel comfortable when they are investing. We’re here to help you choose the investments that match your personal goals.
Always take advice from somebody who is regulated by the Financial Conduct Authority. They will advise you accurately in line with your attitude to risk and explain that investments are always about taking a medium to long term view. Remember, you can’t be guided by past performance with a view to future performance.