7 mistakes that could cost you dearly

It doesn’t matter if you’re a veteran investor in ASX shares or just starting out, human psychology dictates there are mistakes we’re all bound to make.

These errors could mean significant losses for your portfolio, according to BetaShares executive Annabelle Dickson.

“Some investing mistakes can be obvious very quickly, while others may take years to become apparent – and it may be too late to repair the damage.”

But at least if you are aware of these traps, you have a fighting chance to stop yourself.

Here are the seven common investing mistakes that Dickson warned about:

Not diversifying

An old cliche goes “diversification is the only free lunch in investing”.

So you might be sick of hearing it — but it’s true.

“Diversification is spreading your investments across multiple geographic regions, industry sectors and asset classes,” Dickson said on the Betashares blog.

“By doing so, you spread your investment risk and reduce the impact on your overall portfolio if one part of the portfolio underperforms.”

Not fully taking advantage of compounding

Compounding refers to earnings returns not just on the original investment but on the returns themselves.

Dickson recommended using a dividend reinvestment plan to ensure returns are ploughed back into the portfolio.

“The sooner you start putting your money to work, the more you’ll benefit from the compounding effect and the less you’ll have to save to reach your goals.”

Not investing regularly

One way of removing the uncertainty about whether markets will go up or down is to practise dollar cost averaging, by buying ASX shares at regular intervals at all parts of the cycle.

“The point of dollar cost averaging is not to try and pick whether the market is going to rise or fall, but rather to remove timing from the equation.”

Emotional investing 

Allowing one’s emotions or “feels” to drive buying, holding and selling decisions can lead to devastating financial losses.

“As we enter market upturns, the optimism and excitement of rising values can lead us to think that making gains will be easy,” said Dickson.

“These positive emotions can lead us to increase our level of risk at a time when we should be more cautious.”

Conversely, when markets are having a tough time fear could prevent you from buying stocks, or even encourage you to sell. That’s despite buying stocks for cheap is the best way to achieve returns, and selling while low turns paper losses into actual losses. 

No investment goals

When you start driving your car, you are doing so in order to reach a particular destination. Otherwise you’re just wasting your time and petrol.

Investing is no different.

“Be clear on what you are trying to achieve. For example, are you saving for a deposit on a house? Or are you saving for retirement?” said Dickson.

“It is important to be able to articulate your goals as these will largely direct your strategy and the level of risk you are comfortable taking on to reach these goals.”

Paying excessive fees

If you buy ASX shares for exchange-traded funds or listed investment companies then management fees are worth watching.

Dickson pointed out that while no one has control of whether the market will head up or down, fees are one variable that the investor can influence.

“Small differences in ETF fees may not appear to matter to your overall investment portfolio, but they can have a significant impact on your returns over time.”

Dickson compared $10,000 invested in a hypothetical S&P/ASX 200 Index (ASX: XJO) managed fund that charges 1.2% per annum and $10,000 put into BetaShares Australia 200 ETF (ASX: A200), which slugs 0.04%.

If the two investments came back with the same gross returns of 5% per annum, the end difference is stark.

“Over 40 years, the lower-fee ETF investment would grow to be worth $69,335, compared to the higher-fee managed fund investment value of $44,452,” said Dickson.

“The low-fee option would be worth around $24,900, or 56%, more than the high-fee option.”

Not keeping thorough transaction records

Another way to cop financial losses is through paying more tax than necessary.

In order to pay an accurate amount of tax on your investments, accurate record keeping is imperative.

“Each time you buy or sell an investment, you’ll receive material that you’ll need at tax time to work out your capital gains or losses,” Dickson said.

“Misplacing this material will cause a major headache, so ensure that you keep it in a safe, easy-to-find place.”

The post 7 mistakes that could cost you dearly appeared first on The Motley Fool Australia.

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Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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